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2001 BW 50

SPRING 2002

SECURITY NET
By Alex Salkever

Symantec Finds Strength in Security
Its antivirus software has long been popular with consumers. Now, the company is proving it can score with business, too


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Symantec (SYMC ) seems to be making all the right moves lately, and investors are starting to take notice. The company's shares rose 36.4% in 2001 on strong earnings that managed to surprise analysts on the upside, going against the general information-technology malaise. Now trading at around $41, Symantec is up an additional 20% or so this year, and it landed at No. 9 in BusinessWeek's ranking of the S&P MidCap 400.

Powering Symantec's performance are strong sales of its cash cow antivirus software. But CEO John Thompson has to pull off some nifty tricks to continue the company's expansion beyond the relatively mature consumer market into the corporate end of the business.

Symantec will have to go head-to-head against entrenched corporate-security leaders such as Network Associates (NET ), firewall dominators Check Point Software (CHKP ) and SonicWall (SNWL ), and intrusion-detection system kings Cisco (CSCO ) and Internet Security Systems (ISSX ). And it will have to sell businesses on the idea of opting for an integrated suite of security products. That's different from companies' current strategy of buying the most suitable products in each security category and stitching them together.

SMASHED EXPECTATIONS.  Thus far, however, Thompson's track record is encouraging. In its most recent earnings period, the third fiscal quarter of 2002 ending December 28, 2001, Symantec posted revenue of $290.2 million, a solid 20% higher than the same period in 2001. It smashed analysts' expectations with earnings of 78 cents per share, 14 cents higher than forecasts.

Even more impressive, Symantec managed to increase net income before special charges from $40.4 million in its fiscal 2001 third quarter to $59.4 million in the 2002 period. "They have phenomenal cash flow, throwing off $60 million each quarter," says Vincent Muscolino, a technology analyst at Cambridge (Mass.) investment manager David L. Babson. Although he trimmed his holdings significantly in December to take some profits, Muscolino remains bullish on the stock.

That's because Symantec's antivirus revenues appear to be growing at a 30% clip, twice as quickly as the sector overall. Thompson, figures Muscolino, must be taking some market share from Network Associates or competitors Trend Micro and Computer Associates (CA ), both of which sell antivirus software. "They have been successful in expanding their corporate market share," agrees Israel Hernandez, a computer-security stock analyst at Lehman Bros.

NO SURPRISE.  That's only one part of Symantec's so-far successful effort to develop a larger corporate customer base. The company claims that sales of intrusion detection software systems -- programs that watch for hacker attacks on company networks -- grew by 39% in the third quarter of fiscal 2002 (ending Dec. 28, 2001), as compared to the same quarter in fiscal 2001. That also outpaces the overall IDS market, which is expanding at a 25% to 30% compound annual rate.

And in the hypercompetitive firewall market, Symantec has managed to upgrade the product it acquired with its 2001 purchase of Axent Technologies. That has put Symantec at least close to matching the offerings of rivals Cisco, Check Point, and Sonic Wall. The progress is no surprise, since Symantec spends a healthy 15% of sales on research and development.

Finally, it's working to gain traction with security appliances that incorporate firewall, virtual private network, antivirus, and system vulnerability-assessment programs all in a single box. Appliances are a hot area and growing fast, at 25% to 30% a year. Though Symantec doesn't yet have significant market share, Muscolino notes that "there is a tendency for companies to want security in a box, and Symantec is trying to provide that."

SHORT INTEREST.  All this hard work is paying off. Symantec says it managed to pull 64% of its revenues from business customers in fiscal 2001. More evidence came in the third fiscal quarter of 2002, when Symantec logged a company-record number of deals worth over $100,000.

But Symantec's path still could prove bumpy. For one thing, short interest in the company's stock has climbed in the past few months, rising from 10.4 million shares in December, 2001, to 12.2 million in January, 2002 -- a sizeable 8.6% chunk of Symantec's total float. And that 17.3% jump ranked as the ninth-largest short increase during that period.

Do the shorts know something the rest of the Street doesn't? Maybe. Its stock run-up, say bears, has made Symantec more of a downside risk. Many bulls, such as Hernandez, admit that the shares are close to fully priced at current levels. Finally, some analysts fear that corporate spending on security software will prove lower than expected in the second half of 2002. "The end of this quarter is what scares me," says Allan House, an analyst at Federated Investments in Pittsburgh.

Symantec has plenty of cash, with $1.5 billion of assets and $1.2 billion in liabilities as of the end of 2001. Some investors worry that a large chunk of the liabilities stemming from a $600 million convertible debt offering in October, 2001, could dilute shareholders' equity, but most analysts don't seem concerned.

And a nasty virus attack, should one come before yearend, could send sales soaring. "The bet on Symantec is a bet on whether we'll have a major virus outbreak between now and the end of 2002," says House. "I would almost guarantee that we will. We had four in 2001." For Symantec, another such outbreak in 2002 would mean money in the bank.


MARCH 27, 2002



Salkever covers computer security issues twice a month in his Security Net column, only on BusinessWeek Online
Edited By Thane Peterson

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