Shares of Symantec ( SYMC) tumbled more than 15% in trading Thursday after it said sales could be sluggish in the current quarter because of the slowdown in the global economy. The stock fell $2.34, or 15.83%, to $12.47, well below their 52-week high of $22.80, after it posted
mixed second-quarter results Wednesday. While the company's second-quarter profits almost triple on strong sales of storage and server management software, its company's security software business was sluggish. Security software has traditionally been seen as a necessity for companies, even in tough economic times, but the company's second-quarter results suggest that this may be changing. Growth in Symantec's security and compliance software division slowed significantly in the second quarter as revenues rose just 2% compared to the same period last year. By contrast, sales of the company's security and compliance software grew 12% year over year in the first quarter of 2008. Symantec executives blamed "the uncertain economic environment" for the retail slowdown during a conference call late Wednesday. Chief Operating Officer Enrique Salem said that although sales of security software to large enterprises were strong in the second quarter, demand from mid-sized companies was not. "My sense is right now that the mid-market is more impacted by some of the things going on in the macro- environment," he said. "Symantec's quarter clearly raises a question of whether security (software) is starting to experience increased pressure," wrote Todd Weller, an analyst at Stiefel Nicolaus, in a note released Thursday, adding that security software is clearly not immune to the tech spending slowdown.
Doubts also hang over Symantec's consumer business, which grew just 1% year over year in the second quarter. By comparison, the company's consumer sales grew 12% year over year in the first quarter. Consumer revenue was impacted by continued softness in the retail sector, said Salem, noting revenue from retail stores fell 20% year over year. By contrast, Symantec's online sales grew 10% over the same period. Symantec, which competes with EMC ( EMC) and McAfee ( MFE), had to contend with a major fall-off in its overall business in the last weeks of the quarter, which coincided with plummeting financial indices. A slew of delayed deals, in addition to foreign exchange fluctuations, prompted the company to issue third-quarter guidance well below analysts' estimates. "I don't think this is a time for us to be cavalier about our guidance and overly aggressive in forecasting what we think the macro-economic environment might produce," said John Thompson, the Symantec CEO, in the conference call. "We cannot ignore the fact that many of our customers are suffering - as such, that could have some consequences on us." "It is an interesting time to be trying to close business," said he said. "Many of those were deals that were just pushed as opposed to deals that essentially went away or we lost to competition - the question is for how long have they been pushed?" There were, however, plenty of positives in Symantec's second-quarter results. Excluding charges, the company's operating margins for the second quarter were 29.1%, up 390 basis points year over year.
Stifel Nicolaus analyst Todd Weller said Symantec improved its operating margin by controlling its expenses and reducing headcount. Symantec, which announced plans to cut 5% of its workforce last year, is currently in the process of outsourcing its European manufacturing operations from Ireland to the Czech Republic. It is also outsourcing parts of its IT and finance back office operations, said Chief Financial Officer James Beer. "The economic and process improvement benefits of these moves will begin to appear during fiscal year 2010," he said in the conference call. "In the shorter term we are continuing to focus on each line item of our cost structure."