Symantec Continues Losing Share to McAfee

FRIDAY, MAY 8, 2009
by Katherine Egbert

Jefferies downgraded security-software firm Symantec to Hold from Buy.

WE ARE DOWNGRADING Symantec to Hold from Buy, as we are concerned that revenue weakness is more than macro-related, and may reflect market-share loss.

March-quarter revenue and pro forma earnings per share of $1.49 billion/38 cents were mixed versus our estimates of $1.51 billion/36 cents estimate and consensus estimate of $1.52 billion/35 cents. Excluding foreign-exchange rates, revenue was $1.5 billion. Revenue was impacted by customers opting to renew maintenance versus buy new licenses. In constant currency, revenue was up 2% year over year (reported revenue was down 4% year over year). Pro forma EPS managed to post upside on the back of good expense management. Sales and marketing was $532 million and 36% of revenue, significantly below our estimate for $590 million and 40% of revenue. These are good cost savings, but we expect they are attributable to lower commissions for significantly lower license sales -- not the ideal way to reduce operating expenditure.

Security and Compliance in particular was very weak -- down 9% year over year. We are concerned about this performance, especially in light of McAfee's (MFE) strong growth in enterprise security. We believe that McAfee continues to take share from Symantec. Consumer business revenue was up a solid 4% year over year and Norton 360 now accounts for 30% of consumer revenue, up 65% year over year. Storage revenue of $539 million was up 1% year over year and services provided the stopgap for revenue, growing 41% year over year to $135 million. Large transactions were significantly impacted in the quarter, with less than $300,000 deals declining 18% to 369 in the quarter and deals over $1 million declining 20% to 85. Cash flow from operations was strong at $677 million (strong account collections and cost cutting) and non-generally accepted accounting principles deferred revenue of $3.08 was up roughly 6% year over year in constant currencies.

Management guided to [first-quarter] non-GAAP revenue/pro forma EPS of $1.45 billion-$1.51 billion/34-36 cents and GAAP revenue/EPS of $1.44 billion-$1.50 billion/9-11 cents. Financial Accounting Standards Board accounting changes for convertible debt will increase noncash interest expense by $100 million or $25 million per quarter in fiscal 2010 -- will be excluded for non-GAAP results. Non-GAAP/GAAP deferred revenue is expected to be $2.85 billion-$2.95 billion/$2.84 billion-$2.94 billion, driving non-GAAP billings of minus-19%.

Approximately $955 million of revenue is expected to come from the balance sheet. This 64% of revenue off the balance sheet is well below McAfee's ambient 80%.

We are adjusting our first-quarter revenue/pro forma EPS estimates move to $1.46 billion/35 cents, from $1.54 billion/38 cents previously. Our 2010 estimates move to $5.69 billion/$1.33, from $6.23 billion/$1.53 previously. We are introducing 2011 estimates of $6.05 billion/$1.49.

If this would continue, Sysmantec would surely be an independent company, unless if it would have shares from other companies too...