Sorting Symantec’s Mess

By William Trent, CFA of Stock Market Beat

Symantec (SYMC) this morning paid investors the joint disservice of issuing disappointing guidance and doing so in a difficult to understand press release. Symantec Reports Preliminary Fiscal Third Quarter 2007 Results:

The company anticipates non-GAAP revenue for its fiscal third quarter of $1.30 billion to $1.32 billion compared to prior guidance of $1.325 billion to $1.355 billion and compared to $1.253 billion in the year ago period. The company also anticipates non-GAAP diluted earnings per share of $0.24 to $0.25 as compared to the previous forecast of $0.29 to $0.30 per share and compared to $0.26 per share in the year ago period. For a reconciliation of GAAP to non-GAAP results, please refer to the attached reconciliations.

GAAP deferred revenue is expected to be between $2.42 billion to $2.45 billion. Non-GAAP deferred revenue is expected to be between $2.43 billion to $2.46 billion as of the end of the fiscal third quarter.

“We experienced weaker than expected performance in our Data Center Management business,” said John W. Thompson, Symantec chairman and chief executive officer. “Our recognized revenue for the quarter was also impacted by a greater proportion of enterprise maintenance contracts, which resulted in higher deferrals than we expected. Additionally, with the implementation of our new ERP system, we incurred higher costs than expected.”

March Quarter Forecast
For the March 2007 quarter, GAAP revenue is estimated between $1.24 billion and $1.27 billion. GAAP diluted earnings per share for the March quarter is estimated between $0.04 and $0.06.

Non-GAAP revenue for the March quarter is estimated between $1.25 billion and $1.28 billion. Non-GAAP diluted earnings per share for the March quarter is estimated between $0.18 and $0.20.

Fiscal Year 2007 Forecast
Symantec is adjusting its previously announced guidance for the fiscal year ending March 2007. GAAP revenue is estimated in the range of $5.08 billion to $5.11 billion. GAAP diluted earnings per share for the fiscal year ending March 2007 is estimated between $0.36 and $0.39.

Non-GAAP revenue is estimated in the range of $5.13 billion to $5.16 billion. Non-GAAP diluted earnings per share is estimated between $0.92 and $0.95.

Deferred revenue is estimated to be in the range of $2.60 billion to $2.65 billion as of the end of 2007 compared to prior guidance of $2.4 billion to $2.6 billion and compared to $2.16 billion in fiscal year 2006.

As we have discussed in the past, an increase in deferred revenue simply means the company has taken in cash from customers for services to be delivered in the future. Although recognized as a liability it is generally a good thing as it provides visibility into future revenue.

So we take out the $125 million increase (relative to prior expectations) in deferred revenue at the midpoint of management’s previous and current forecasts. The issue there is only one of timing, not of fundamental performance.

Since consensus was calling for $5.3 billion in FY07 (ends March) revenue, the new guidance of $5.13-5.16 implies a shortfall of $140-$170 million, of which $125 million relates to the timing issue. Given that $1.7 billion in market capitalization has been eliminated on the basis of this $15-45 million in sales, it seems investors are concerned there are more than one cockroach in this kitchen.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; FedEx (FDX) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Starbucks (SBUX) call options; Landstar (LSTR) put options; Ceradyne (CRDN) put options; Dell (DELL) put options; Plantronics (PLT) put options;

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