Symantec gains amid McAfee's pain

Symantec's first quarter results were stronger than the financials from McAfee, which is recovering from a Windows XP update debacle and struggling to get its sales ducks in a row.
Written by Larry Dignan, Contributor

The security industry has two big dogs: Symantec and McAfee. But with No. 2 player McAfee struggling Symantec is showing strength.

The earnings reports tell a tale of rebounding PC demand, distribution partnerships and how they can pay off.

Symantec reported earnings excluding items of 40 cents a share, three cents better than expectations. Revenue excluding deferred revenue from acquisitions was $1.53 billion. Overall, Wall Street was happy with Symantec's results on Wednesday.

Last week, McAfee's earnings missed expectations and shares hit a 52-week low. McAfee reported first quarter earnings of 60 cents a share on revenue of $502.7 million, up 12 percent from a year ago. Analysts were looking for 63 cents a share on revenue of $513.1 million. McAfee had trouble closing deals.

The battle is playing out on multiple fronts.

On the consumer side of the house Symantec reported revenue of $483 million, up 9 percent from a year ago, as the company focused on inking OEM deals. Symantec CEO Enrique Salem said:

We focused on replacing the competition, and structuring positive financial deals for both Symantec and the partner. We entered into significant new partnership with Samsung, shipping Norton Internet security on their netbooks, and Norton online backup on their netbooks and notebooks worldwide. In addition, Fujitsu signed an exclusive agreement to ship Norton products globally on their consumer and commercial PCs. We now have partnerships with nine of the top 10 OEMs with our security products. We continue to expand our partnerships with our online backup offerings, and have partnerships with six of the top 10 OEMs, five of which we signed during the last year.

McAfee's consumer business delivered first quarter revenue of $190 million, up 11 percent from a year ago. McAfee has focused on teaming up with Internet access providers. However, McAfee took a perception hit over the recent Windows XP update debacle.

Ed Bott: McAfee admits "inadequate" quality control caused PC meltdown

McAfee's second quarter earnings will be cut 1 cent to 2 cents a share due to the fallout from that update.

CEO Dave DeWalt said last week on McAfee's earnings conference call:

While responding to a new global threat to Windows PCs that attacks critical operating system components, an error, specifically, the release of a faulty .DAT file, caused some of our customers' computers to be rendered inoperable. As a result, we expect some negative impact resulting from getting our customers back up and running. I'm extremely proud of how the McAfee team responded and contained this issue, and it's largely behind us today.

While we're pleased with the performance in many parts of our business, we are taking measures to correct our execution challenges including aligning our business operations and our cost structure appropriately.

Barclays Capital analyst Israel Hernandez said in a research report:

The primary reasons for the (earnings) miss were execution related, resulting in the delays of several large deals and weakness in the SMB channel. As this represented the second miss in three quarters for McAfee, the results suggest to us that McAfee is struggling to maximize sales efficiencies from its recent string of acquisitions, despite a strengthening macro (economic condition). We believe the broadening portfolio, which is increasingly hardware dependent, is causing digestion pains in both the sales organization and the indirect channel, resulting in contract delays and revenue recognition issues. The miss in the SMB channel also raises questions regarding share shifts and competitive pressures given the relative maturity  of the segment, as McAfee, historically has been a net share gainer.

On the enterprise side of the equation, Symantec's security and compliance business had first quarter revenue of $364 million, roughly flat with a year ago. Storage and server management revenue was $578 million, off 4 percent from a year ago. Overall, Symantec said it continues to land deals topping $1 million since it can sell security and storage bundles.

Indeed, Symantec signed 87 deals in the first quarter worth more than $1 million and is still beefing up with the acquisitions of PGP and GuardianEdge for $370 million. McAfee said it signed 19 deals topping $1 million. McAfee's corporate revenue was $312.5 million in the first quarter, up from $275.9 million a year ago.

What remains to be seen is how long McAfee takes to get its sales mojo back. As Hernandez noted, McAfee is a more complex company these days and it needs to forge hardware partnerships like its alliance with Riverbed to land the big deals.

Another loose thread McAfee needs to clean up has to do with its reputation. The Windows XP update problem affected about 100 enterprise customers. These companies may have long memories the next time McAfee comes up for renewal.

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