Symantec (SYMC) Q4 Earnings Beat, Stock Hit By Inquiry Woes

Symantec Corporation (NASDAQ:SYMC) reported strong fourth-quarter fiscal 2018 results with the top and the bottom line surpassing the Zacks Consensus Estimate as well as the company’s own guidance. Moreover, revenues and earnings marked a significant increase on a year-over-year basis.

Despite this, shares are trading almost 34% down today as the Internet security solution provider revealed that its board’s audit committee is making an internal investigation into concerns voiced by an ex-employee. The company did not divulge details on the nature of the investigation, however, it isn’t related to any security breach or concern regarding products and systems. Symantec said that the matter has been relayed to the Securities and Exchange Commission.

Apart from this, a weaker-than-expected outlook for the first quarter as well as fiscal 2019 made investors skeptical about the company’s near-term prospects.

Notably, the stock has underperformed the industry in a year’s time. The industry, to which it belongs, has gained 34.1% while Symantec has lost 40%.

Let’s discuss quarterly results in details.

Quarter in Detail

On a non-GAAP basis, Symantec generated revenues of $1.234 billion, up 5% on a year-over-year basis. The figure also came ahead of management’s projection of $1.175-$1.205 billion (mid-point $1.190 billion).

Revenues of $1.222 billion on a GAAP basis jumped 10% year over year and surpassed its guidance of $1.164-$1.194 billion (mid-point $1.179 billion).

Moreover, revenues, both on a GAAP and non-GAAP basis, steered past the Zacks Consensus Estimate of $1.194 billion.

Large number of deal wins resulting from increased cross-selling in the Enterprise Security segment and successful integration of the sales force team mainly drove the top line. The number of deals, worth more than $1 million, again topped the 100 mark. The company also noted that it has won a large number of deals worth more than $5 million during the quarter.

Notably, the company is shifting its business model to a more ratable-based one. In the fourth quarter, the company noted that 80% of Enterprise Security segment revenues were ratable. A ratable business model provides better predictability of revenues.

Additionally, contract length improved to 18.5 months during the quarter from 18 months in the preceding quarter. Symantec noted that contract duration has shown drastic improvement in the last four quarters. In the first and second quarters of fiscal 2018, contract duration was 15.5 months and 16.5 months, respectively.

Furthermore, non-GAAP operating income surged 44% year over year to $451 million, while margin expanded 980 basis points (bps) to 36.5%. Moreover, non-GAAP operating margin was above the high end of the company’s guided range of 33-34%. The year-over-year upside was mainly driven by increased operational efficiency, including the completion of net cost reduction and synergy programs.

Non-GAAP net income in the reported quarter came in at $310 million compared with $184 million a year ago.

The company reported non-GAAP earnings of 46 cents per share that surpassed the Zacks Consensus Estimate of 40 cents and increased 64% on a year-over-year basis. The improvement was driven by higher revenues and operating margin.

Symantec Corporation Price, Consensus and EPS Surprise

Balance Sheet & Cash Flow

Symantec exited the fiscal fourth quarter with cash, cash equivalents and short-term investments of $2.162 billion compared with $2.532 billion in the prior quarter. The company ended the fourth quarter with long-term debt of $5.026 billion.

During the fiscal, Symantec generated operating cash flow of $950 million.

Guidance

For fiscal 2019, Symantec expects non-GAAP revenues in the range of $4.760-$4.900 billion (mid-point $4.830 billion). The Zacks Consensus Estimate for revenues is pegged at $4.94 billion. Non-GAAP operating margin is projected in the band of 30-32%.

Non-GAAP earnings per share are projected between $1.50 and $1.65. The Zacks Consensus Estimate is pegged at $1.82.

For the first quarter of fiscal 2019, Symantec anticipates non-GAAP revenues in the range of $1.135-$1.165 billion (mid-point $1.15 billion). The Zacks Consensus Estimate is pegged at $1.19 billion.

Non-GAAP operating margin is projected in the range of 26-28%. Further, management estimates earnings between 31 cents and 35 cents on a non-GAAP basis for the fiscal first quarter. The Zacks Consensus Estimate is pinned at 41 cents.

Zacks Rank & Key Picks

Symantec currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are CoStar Group, Inc. (NASDAQ:CSGP) , Dell Technologies Inc. (NYSE:DVMT) and Science Applications International Corp. (NYSE:SAIC) , all sporting a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected earnings growth rate for CoStar Group, Dell Technologies and Science Applications International are 16.8%, 9.1% and 5%, respectively.

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