What Does A Cloud Transition Mean For Symantec?

Fiscal second-quarter results for security software developer Symantec ( SYMC ) were disappointing, with revenues standing at $1.64 billion. This was below the lower end of the guidance of $1.65 billion provided during with the first quarter earnings release. The company's management attributed this shortfall in top line sales to the in-house restructuring initiatives undertaken during fiscal 2014. However, macroeconomic factors such as the lack-luster global IT market and the ongoing cloud migration have negatively impacted sales for the Symantec for the past few quarters.

Divisionally, Symantec has been facing pressure from weak PC sales globally, which has impacted its User Productivity and Protection segment. The division, primarily consisting of various consumer security products, generated sales totalling approximately $719 million during Q2FY14, compared to $743 million from a prior year period. In addition to weakening consumer product sales, Symantec's Information Security and Information Management businesses have been struggling due to the migration from on-premise software solutions to on-demand solutions from corporates. Revenues from both these divisions stood at $316 million and $602 million respectively during the quarter, compared to $324 and $632 million from a year prior quarter.

In this present note, we look at various trends shaping the on-demand software industry and present our take on Symantec's position in the cloud software market.

See our complete analysis of Symantec

Exponential Expansion In Global Data Drives Demand

According to technology market research firm IDC, data generated globally is expected to double in size every two years, from 2.8 trillion gigabytes in 2012 to 4.2 trillion gigabytes in 2013 and exceed 40 trillion gigabytes by 2020. This represents a 105% annualized growth rate in data generation globally. Coat-tailing this hyper-charged growth in global data are the data storage and security markets.

Storage Management Software: Expanding data requires additional storage space for enterprises and individuals alike, and many storage players are cashing in on this big data opportunity. However, weak macroeconomic environment in 2013 and continued weakness in global IT spending has negatively impacted the storage software market. Segment wise, data backup and recovery software witnessed the highest growth in 2013 driven by expanding data volumes.

Benefiting from the growth in data backup software market, Symantec's sales for its hybrid backup appliance NetBackup have bolstered revenues from the Storage Management division. However, its on-premise data backup and recovery offerings such as Backup Exec and Backup have witnessed tepid take-off from customers caused by weak execution in later launches of the Backup Exec product. Recently, the company announced that it would discontinue its cloud backup offering Backup due to a shift in consumer interest towards cloud storage offerings that feature services such as sync and mobility. However, we believe that the product discontinuation is a move to better position the company's portfolio.

We believe that large enterprises remain cautious in considering a shift to on-demand data management services because of the risk attached in moving their data backup copies to the cloud. An on-premise backup product promises more robust security features for large enterprises requiring terabytes of data backup. Going forward, we expect on-premise software and hybrid appliance products such as NetBackup and Backup Exec to support the company's growth in the Storage Management division in the short term as demand for cloud data management products continues to remain weak due to inherent security concerns with the offering.

Security Software: The growth in global data is fueling growth in the security market as well. Market research firm IDC estimates that 35% of data required data protection in 2012. This puts the amount of data requiring protection at approximately 1 trillion gigabytes. However, 0.56 trillion gigabytes of data actually had protective security software. Moreover, the amount of data requiring protection is expected to expand to 40% of global data generated by 2020 according to IDC. This means that an absolute size of 16 trillion gigabytes would be requiring security protection software, guarding them against potential cyber attacks in 2020 and represents a huge opportunity for security software manufacturers.

Security management service providers are expected to see strong growth patterns by expanding their on-demand offerings, supported by the global cloud security market that is expected to reach $6 billion in revenues by 2016. Additionally, mobile security sales are estimated to amount to one-third the total sales. The shift to cloud is of particular significance to a security software developer such as Symantec because of the risks attached to on-demand offerings. In recent times, large IT enterprises have started offering their applications and other products as a service. Both small and large enterprises are expanding their investments into Enterprise Mobility, which is expected to continue to fuel growth in the Mobile Security market.

Despite the presence of cloud security products such as Web and Endpoint, the company's large presence in On-premise offerings, combined with the recent bifurcation of its sales team, resulted in weak revenue recognition for the quarter. We believe that Symantec's lack of sufficient cloud offerings would continue to negatively impact the Information Security division going forward. The company's adoption to cloud continues to remain pivotal for growth in the Enterprise Security division going forward, given that cloud offerings are on the rise and data center security needs would expand in the future. For CY2013, we expect a decline in revenues from the Enterprise Security division due to the company's delayed cloud adoption.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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