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APRIL 16, 2004
By Alex Salkever Can Symantec Keep Cooking? Its long-term prospects are sound, but even a slight mishap could be overly disappointing to investors used to its hot growth John Thompson, the CEO of computer security software and services company Symantec, is an avid amateur chef who one day hopes to open a restaurant with his children. Thompson likes to draw analogies between running a restaurant and the computer-security business. Both can be messy, complicated, and hard to make a living from. But, he adds, they don't have to be. His recipe for Symantec's growth: making security easier and cheaper without sacrificing quality. Symantec (SYMC ) has been sizzling. During a period when few technology stocks have sustained significant gains following the bursting of the Internet bubble and the broader tech downturn, its shares have risen more than 800% under Thompson's five-year watch, from the $5 range in late April, 1999, to $47 as of Apr. 15. He took the most established brand in the business and turned it into a revenue powerhouse with gross revenues forecasted to hit $1.84 billion for fiscal 2004, ending Mar. 31, up 30.5% year-over-year. All this helped put Symantec on BusinessWeek's latest list of America's 50 top-performing companies at No. 15. With gross margins holding steady in the 85% range, Symantec is highly profitable and rapidly accumulating cash. It posted net revenue of $494 million for its latest quarter ended Dec. 31, 2003. That represents a 31% hop over the same quarter's results in 2002. Operating expenses fell as a percentage of revenue in the quarter to 51%, down from 56% in the same quarter last year. RELIABLE STREAM. It didn't hurt that 2003 and 2004 both saw significant worm and virus outbreaks which sent computer customers scurrying for a safe meal at Chez Symantec. Its Norton Antivirus product line has become the most popular consumer antivirus and security software. Symantec has also made inroads over the past three years into the market for corporate antivirus products, snaring market share from competitors Network Associates (NET ) and Trend Micro (TMIC ). But keeping that growth going year after year in both revenues and share price starts to become more like preparing a perfect soufflé every time. The odds keep getting tougher. For Symantec, which is generally beloved by investors, the risk of a big downfall is small. The highly regarded Thompson has deftly redirected its revenue stream from box purchases to subscriptions, a more reliable income mechanism that Wall Street adores. Deferred revenues increased to $864 million in the last quarter, up $331 million, or 61%, from the same period in the previous year. Symantec has also managed to boost consumer subscription prices each year without any pushback from customers. However, Symantec has warned that revenue growth will likely slow in 2005, to 19%, and earnings growth will dial back to 15%. The question is simple: Has its lofty stock price anticipated unattainable revenue goals? Symantec is in a quiet period and declined to comment for this article. CORPORATE HESITATION. Most of Wall Street, though, thinks Symantec still looks like a good buy. "I still think this is one of the cheaper companies you can find on the technology side. It's showing tremendous growth year-after-year in a tough market," says New York-based Nitsan Hargil, a senior technology analyst with Friedman Billings Ramsey, an investment bank in Arlington, Va. (He owns no shares in Symantec, and his company has no other dealings with it.) Still, Symantec has found it tough going in getting the corporate sector to buy products beyond antivirus software. In the latest quarter, it derived 49% of its revenues from the consumer sector. That was up 7% from the same quarter a year previous, reflecting stellar growth in the consumer antivirus business. But it also reveals slower growth in the corporate markets, where Symantec wants to sell all-in-one security appliances that provide integrated antivirus, firewall, intrusion-detection, and security-management tools on a single box. Thompson has argued that such an arrangement makes it much easier to manage network security and keep hackers out. LURKING GIANT. While Symantec has done well selling these appliances to small and midsize businesses, larger corporations have mostly demurred. "What you're doing is protecting your enterprise or computer from attack, and you don't want to feel like you're going with the cheapest, easiest solution," says Hargil. At the same time, Symantec's foray into the managed-security business has yielded some growth but scant profits. Thus far, Symantec derives only 2% of its annual revenues from managed security, which involves companies outsourcing their network security. Symantec is the largest provider in this market, but it faces price pressure from startups that will endure losses to gain customers. Then there's the lurking Microsoft (MSFT ) issue. Stung by criticism resulting from myriad security holes found in the giant's consumer software, Microsoft is poised to add free antivirus and firewall products directly into the operating system. That could raise antitrust concerns, but even the Justice Dept. and the states might not want to fault Microsoft for trying to improve security on the Internet. CHALLENGING RATIO. "My contacts at Microsoft say they're going to have a killer product. It could take a bite out of Symantec," says Richard Williams, director and senior software analyst at NextGeneration Equity Research. Williams calculates that Symantec's antivirus sales might begin to slow in the coming year -- perhaps one reason for the company' growth warning. The risk is that investors are ignoring Symantec's cautions and relying too much on the experience of the past four years, when virus attacks drove sales skyward, easily beating conservative company forecasts. "Symantec is getting big. It's hard to grow revenues for any business moving into the billions of dollars in sales range because of the law of large numbers," says Williams. Standard & Poor's Jonathan Rudy agrees. "At the valuation levels Symantec has hit, the risk-to-reward ratio for shareholders gets more challenging." He has an accumulate rating on the shares and worries that even if Symantec managed a stunning 45% year-over-year growth in sales of consumer antivirus products, it "could be a disappointment to the market." (S&P's research division owns no stock and provides no investment-banking services to Symantec, although other units of S&P might.) OVERSEAS GROWTH. Investors have little to fear about a nosedive in Symantec shares. The company remains one of the best managed in the info-tech sector, and it continues to grow smartly in Europe and Asia, where antivirus penetration still lags behind the U.S. What's more, virus writers have sent out a steady stream of nasty pathogens in late 2003 and early 2004, offering further impetus for anyone without virus protection to get it or with expired antivirus software to update their licenses. IT security remains one of the top spending priorities of corporations large and small. Even the Microsoft threat could be overblown. "At no point do I see [Microsoft] trying to take over the security function," says Hargil. Still, Symantec's chances of living up to lofty Wall Street expectations could be a stretch considering how far it has risen already.  Salkever is technology editor for BusinessWeek Online Edited by Beth Belton
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