Symantec Corp. on Aug. 8 delivered a fiscal first-quarter earnings beat in step with its announcement that Broadcom Inc. will acquire its enterprise-security business for $10.7 billion in cash, a unit that accounts for 50% of the company's revenue but only about 10% of the company's operating income, Symantec CEO Richard Hill said on a same-day earnings webcast.
The executive acknowledged that the company has had difficulty executing on its sales and marketing goals for its enterprise-solutions business, a result analysts have attributed to the erosion in the company's stock in recent months. Symantec shares were down about 27% from the beginning of the year through Aug. 7 — before reports indicated the company would announce a deal with Broadcom — compared to a 14% gain in the Nasdaq. The Broadcom deal will help solve this problem, Hill said.
"Combining Symantec's technology with Broadcom's reach and proven operational excellence will delight customers and create a powerful force in the market and enable our Enterprise business to grow without us having to invest in fixing our go-to-market model," Hill said.
Considering remaining a pure-play, consumer-focused cybersecurity business, Norton LifeLock generates earnings per share that, when combined with the $12 implied per-share value of its enterprise business generated from the Broadcom transaction, pencils out to a $30 per share valuation for the entire company, after a 13x EPS multiple is applied, Hill said. Symantec shares closed Aug. 8 up 12.3% to $22.92 and were up again about 3% in after-market trading during the call.
The stand-alone consumer business in the long term can grow revenue in the mid-single digits at a 50% margin, driving earnings growth greater than revenue growth, Hill said.
When asked how the company intended to achieve that considering the slow-growth nature of the consumer business over the years, executives said Symantec intends to continue its product cross-selling strategy and expand its international sales effort as well as take advantage of the growth in consumer internet of things devices. With that, CFO Vincent Pilette specified that the company is targeting a revenue growth rate between 3% and 5% in the foreseeable future.
"There's hardly a person on this planet who hasn't had their identity somehow compromised. And so we don't see an end to the growth in LifeLock. In fact, what we see is our opportunity to take the attributes of LifeLock and expand it outside of the United States," Hill said.
Given the predictability of free cash flow for the remaining consumer business, Hill said Symantec intends to increase its shareholder-return program. It plans a $12-per-share special dividend to shareholders after the close of the deal, which represents the total after-tax proceeds from the deal. It will also increase its share repurchase program by $1.6 billion, and it expects to raise the quarterly dividend by 67% to $0.125 after the close of the transaction.
The company will continue to share threat data back and forth with Broadcom in a cross-licensing agreement, Chief Technology Officer Hugh Thompson said on the webcast, allowing the company to continue to leverage its investment in enterprise endpoint security.
On quarterly financials, Symantec reported fiscal first-quarter net income of $26 million, or 4 cents per share, up from a loss of $60 million, or 10 cents per share, in the prior-year quarter. On a non-GAAP adjusted basis, net income was $278 million, or 43 cents per share, up from $232 million, or 35 cents per share, in the comparable 2018 quarter.
The S&P Global Market Intelligence consensus EPS estimate for the just-ended quarter was 33 cents and 2 cents on a normalized and GAAP basis, respectively.
The company reported total quarterly revenue of $1.25 billion, up from $1.16 billion a year ago. Its enterprise segment, which will be acquired by Broadcom upon approval, accounted for $611 million, up from $556 million in the year-ago quarter. Its retained consumer segment saw revenue of $636 million, up from $600 million in the 2018 quarter.