Acquisition Costs Bite Symantec's Profit

But Veritas boosts quarterly revenue.
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Updated from 5:35 p.m. EST

Third-quarter earnings fell at

Symantec

(SYMC) - Get Report

as the company's acquisition of Veritas boosted revenue but also forced higher costs.

In addition, the company said fourth-quarter results would fall short of current analysts' estimates.

Symantec's shares were off 83 cents, or 4.5%, to $17.55 in after-hours trading.

But with Symantec's forecast for the coming fiscal year in line with estimates, analysts during a subsequent conference call began to focus on factors that could affect results over the next month, chief among them

Microsoft's

(SYMBOL)

anticipated entry into the security software market.

Symantec Chairman and CEO John Thompson said the company was "prepared for the battle."

"They're solving yesterday's problems with yesterday's technology," Thompson said. He said Symantec would invest ahead of Microsoft's entry into the market to solidify their leadership in the industry.

"I think he underestimates the seriousness of (Microsoft's) entry into the market," said Andrew Jaquith, a senior analyst with the Yankee Group. "I think they recognize a threat, and in the meantime they are perfectly happy to throw a lot of cold water on questions about Microsoft."

Still, Jaquith said that the company understands the challenge and is mobilizing their resources. He said the merger with Veritas appears to be working well and has allowed Symantec to diversify its revenue stream so they are not solely dependant on security.

The security software maker said after the bell Tuesday that earnings fell to $90.7 million, or 8 cents a share, from $163.6 million, or 22 cents a share a year, earlier. The latest quarter included $166 million of expenses related to amortizing acquired software and intangibles, the amortization of deferred compensation, and integration and restructuring.

Excluding these items, the company earned $282 million, or 26 cents a share, beating Thomson First Call's consensus estimate by a penny.

Revenue rose to $1.15 billion from $695.2 million a year earlier.

On a "non-GAAP" basis, the company posted revenue of $1.25 billion, just shy of First Call's estimate of $1.27 billion.

For the quarter, Symantec's Data Protection segment comprised 26% of revenue and grew 16% on a combined non-GAAP basis year-over-year. Storage management represented 23% of revenue and grew 9% year-over-year. The enterprise security business represented 21% of revenue and grew 7% year-over-year.

Goldman Sachs analyst Sarah Friar said that while revenue looked a little light this quarter, she was more focused on bookings, which were down last quarter by 44%. But this quarter was positive, as they were up 13 % year over year. The company also saw a jump this quarter from its release of Norton 2006, which hit shelves in early November. The area of weakness was the company's enterprise security market, which is more competitive now and has led to pricing pressure, she said. Goldman Sachs regularly does business with Symantec.

Friar said it was also a positive sign to hear the company gave more information about new products that combine the strengths of both Symantec and Veritas.

"I think investors are hungry for signs of what's the value in bringing these companies together," Friar said.

Looking to the fourth quarter, Symantec said it expects non-GAAP revenue of $1.25 billion and $1.28 billion and earnings of 25 cents a share.

First Call was expecting revenue of $1.3 billion and earnings of 26 cents a share.

For the fiscal year ending next quarter, Symantec anticipates non-GAAP revenue of $4.95 billion to $4.98 billion and revenue of 99 cents a share, just shy of analysts' expectations of $1 EPS and revenue of $5.02 billion.

For the company's next fiscal year, it expects non-GAAP revenue of $5.4 billion to $5.6 billion and earnings before items of $1.14 a share.

First Call was expecting earnings of $1.15 a share and revenue of $5.47 billion.

Symantec also announced that its board has approved a $1 billion share repurchase program. Symantec plans to execute an ongoing 10b5-1 plan for $125 million per quarter during fiscal year 2007, which begins in April. The company expects to use the remaining $500 million "opportunistically" starting in the March quarter.

Thompson also downplayed the recent personnel changes at the company and said President Gary Bloom's departure would give other high level executives a chance to "step up." He also introduced a new chief information officer and said the company was in the final round of interviews for a new chief financial officer.