Symantec moves to allay concerns about accounting investigation, future outlook

Symantec kicked off its week with an analyst conference call outlining its view for the fiscal years ahead and how its enterprise business is shifting.
Written by Larry Dignan, Contributor

Amid an accounting investigation, Symantec executives outlined their outlook for future quarters and highlighted how the company's products are becoming more subscription based with recurring revenue revolving around 3 year terms.

The word of the day for Symantec was "ratable." In fact, ratable was mentioned 43 times as CEO Greg Clark and CFO Nicholas Noviello talked to analysts during a conference call just 4 days after the last one. Symantec shares were hammered last week after the company disclosed an accounting probe spurred by a former employee.

When Symantec reported earnings last week and disclosed the investigation, executives didn't take questions. On Monday, Symantec fielded questions in a move that may allay some concerns.

Symantec didn't have a lot to say about the beginning of the accounting investigation, but did say it would halt buybacks and freeze executive pay until the issues were resolved. The official line on the investigation is as follows:

The Audit Committee has retained independent counsel and other advisers to assist in its investigation. The company has voluntarily contacted the Securities and Exchange Commission to advise it that an internal investigation is underway, and the Audit Committee intends to provide additional information to the SEC as the investigation proceeds. The investigation is in its early stages, and the company cannot predict the duration or outcome of the investigation. The company's financial results and guidance may be subject to change based on the outcome of the Audit Committee investigation. It is unlikely that the investigation will be completed in time for the company to file its annual report on Form 10-K for the fiscal year ended March 30, 2018, in a timely manner. At this time, the company does not anticipate a material adverse impact on its historical financial statements.

Now the main mission for Clark and Noviello was to highlight how Symantec's outlook is solid. The executives were confident about Symantec's enterprise business, which is moving to as-a-service and recurring revenue based on three year contracts. In other words, Symantec's business model is going to look like most software-as-a-service companies in the future.

Clark noted:

From a business perspective, we are pleased with the success of our Integrated Cyber Defense Platform and our prospects for continued growth. At a high level, we expect that our shift to a more ratable-based Enterprise business will continue into fiscal 2019, providing uswith greater revenue visibility over time. Further, we are seeing the success of our integrated bundled offerings in the Consumer DigitalSafety segments, and we expect to further enhance our bundled offerings in fiscal 2019.

All of that sounds good, but analysts zoomed in on the ratable discussion. Symantec talked about ratables more in terms of billings not revenue. Enter even more confusion. Add it up and Symantec's call, which highlighted a bevy of positive points, also may have just added to the accounting confusion.

Overall, Symantec projected revenue growth in the mid to high single digits for fiscal year 2020. Enterprise security will see sales growth of high single digits to low double digits. Consumer digital safety will see sales growth of low to mid single digits.

The analyst research notes on Tuesday indicated that Symantec's accounting investigation will continue to cast a pall over the company. Simply put, Symantec needs to hit its targets over time to win Wall Street back.

Stifel analyst Gur Talpaz said in a research note:

In our view, despite management's assurance that no material adverse impact to the company's historical financial results stemming from the outcome of the company's internal investigation into claims made by a former employee is currently expected, we are not in the business of speculation, and we lack the necessary color at this time to fully understand the potential financial consequences of this investigation.

Further, in regard to Symantec's enterprise security business, management has yet to prove, in our view, that they have a firm grasp on the pace at which the consumption preference of customers has shifted away from perpetual license contracts to cloud-based subscriptions and, consequently, this trend's impact on the company's operating model. We would like to see management effectively execute against its stated targets in a more consistent manner.

BTIG analyst Joel Fishbein also noted that Symantec took a solid first step, but there are multiple questions surrounding the company. "We appreciate management's decision to host the briefing, but questions still remain surrounding what impact the investigation may have on future financials and guidance," said Fishbein.

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