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Morningstar | Symantec Reports Middling 2Q of Fiscal 2019; Maintaining our FVE of $19. See Updated Analyst Note from 01 Nov 2018

Symantec reported tepid second-quarter results for its fiscal 2019, producing $1.175 billion in revenue and $0.42 in non-GAAP EPS, in line with our expectations. We maintain our $19 per share fair value estimate and no-moat rating for the firm. Overall, we continue to view shares as fairly valued and believe Symantec’s management team needs to prove itself to shareholders amid the delayed 10-K and previous guidance reductions.

Symantec’s second-quarter revenue was down 5% year over year and the firm posted a loss of $0.01 in GAAP EPS. The firm continues to transition to subscription revenue and contends with the challenge of both growing its enterprise footprint and stabilizing the Norton consumer business that has become less of a necessity in the mobile era. GAAP full-year 2019 EPS was weaker than we expected, with management lowering the guidance range to ($0.08) to $0.02. We think shares are reacting positively to management meeting its quarterly targets and largely getting the internal audit investigation out of the limelight.

As a reminder, Symantec was plagued by an internal audit investigation in its accounting practices that was announced when the firm reported its fourth-quarter 2018 results. Management held a special call to address the issue, but we received no further clarity during the call or the firm’s first quarter of 2019 results. On Sept. 24, a press release revealed the internal audit was completed, with the firm revealing that they do not expect a major restatement (they stated that a $13 million transaction should have had $12 million deferred). Therefore, the fiscal 2018 enterprise security revenue shifted from $2.566 billion to $2.554 billion after the restatement. On Oct. 26, we finally got the fiscal-year 2018 10-K results. While we are satisfied that the 10-K was finally released, and the restatements were not as bad as they could have been, we believe management’s reputation has been tarnished, supporting our Poor stewardship.

With our hands now on the 10-K, we got the opportunity to finally see Symantec’s segment breakout for 2018, a metric they only report annually. LifeLock, which had not been reported separately by Symantec since the acquisition, only produced $776 million in revenue for fiscal 2018, which we view as disappointing in light of the fact that it produced $587 million all the way back in 2015 (Symantec and LifeLock possesses differing fiscal years), its last full year as a public company. We view this as a notable slowdown for a business growing in the double digits prior to the acquisition, especially when Symantec touted its ability to bundle Norton and LifeLock to bolster its consumer business. We would have expected more stronger growth, especially in the aftermath of the Equifax scandal, which created a national crisis around identity protection.

We want to reiterate for investors that numerous stakeholders are now invested in the name. On Aug. 16, activist investor Starboard Value LP took a 5.8% stake in Symantec Corporation. Additionally, we would also note that Appaloosa’s most recent 13F (David Tepper’s company) noted the firm initiated a position in Symantec by acquiring about 3.8 million shares during their second quarter. Given Starboard’s stake, Appaloosa’s involvement, and Silver Lake Partners and Bain Capital’s strategic PIPE investments in Symantec for $1 billion and $750 million, respectively, there are now a multitude of high-profile stakeholders in the name, some of which are activists and likely have differing agendas. Both Silver Lake and Bain have representatives on the firm’s 11-person board of directors. We want to reiterate that while these stakeholders can pull levers in an attempt to create value for shareholders, Symantec is still contending with entrenched competitors on the enterprise side and secular headwinds on the consumer side (Freeware, an inability to monetize endpoint security on mobile and Internet of Things devices, and security measures being automatically implemented into the operating systems and browsers for PC devices). While the revised 10-K is now out and the accounting issue is hopefully behind the firm, the onus is on management to hit its long-term targets.