As Symantec (SYMC) pitches its products at the foremost computer security conference in San Francisco, the company is fending off questions from investors who say an attempt to expand its portfolio has hampered growth.
Shareholders' beef is with the results of Symantec's acquisition of Veritas, a seller of data storage. To date, the deal hasn't lived up to expectations, and Symantec Chief Executive John Thompson is on the defensive.
He says a cornerstone of that defense is Symantec's revamped sales compensation structure, which could brighten financials soon. Symantec is almost a year into a new method that's designed to improve sales of Veritas software, and the results are just now showing up in the company's bottom line, Thompson says. He spoke to BusinessWeek.com at the RSA Conference in San Francisco. If the plan bears fruit, it could lift disappointing sales of products from Veritas, which Symantec bought for $10.3 billion in 2005.
Just in time. Symantec engineered the Veritas deal in an attempt to manage companies' data storage policies in tandem with their data-center and desktop security. But the acquisition hasn't worked out as planned. Sales in Symantec's data-center management unit—which includes Veritas products—fell 8%, to $343 million, in the third quarter ended Dec. 29. Earnings came in below initial forecasts, and Symantec cut its earnings and revenue outlook for the fourth quarter, which ends Mar. 30.
Thompson says a turnaround plan for the unit that compensates sales staff for moving product upgrades, services, and renewals of annual support contracts—instead of rewarding them solely for new license sales—should improve financial results during the next two to three quarters. Under the old model, sales staff would discount annual software maintenance agreements and other products to help hit their numbers for sales of new Veritas licenses, Thompson says. The company introduced the new compensation structure last April. "I'd rather have our team focus on total opportunities than a scorched-earth, new-license sales model," Thompson says. "You're essentially mortgaging your future in having your team focus solely on new license sales."
Results in coming quarters could also benefit from increased sales of consulting services, according to Thompson. Those contracts create deferred software license revenue that will show up on the books in the future. Symantec's services revenue grew 8% in the third quarter, to $52.8 million. "The company is healthier in the long term than may be reflected in its period revenue results," he says.
Thompson also acknowledges that the No. 1 maker of computer security software has to step up efforts to counter a tail-off in IT spending growth. "We have to manage it better—make no mistake about that," he says. U.S. IT spending is forecast to grow 6% this year, to $467 billion, the same pace as for the past two years, according to market researcher IDC. But IDC expects chief information officers to spend less in the coming year, with growth slowing to 5.5% next year and 4.5% in 2009.
Symantec's bet is that the definition of computer security is broadening. Keeping servers and PCs patched with software updates helps keep attacks at bay. That drove the Jan. 29 acquisition of PC management software company Altiris for $830 million. Altiris makes products that keep machines up to corporate policy snuff, and the deal is also designed to help Symantec diversify as Microsoft (MSFT), IBM (IBM), and EMC (EMC) encroach on its turf. All have taken share from Symantec (see BusinessWeek.com, 1/29/07,
>"Symantec's Deal to Secure Its Future"). "The notion of separating security from managing a device—in today's world, that just doesn't make any sense," Thompson says.
The buying spree may not be over. Thompson held out the potential for more acquisitions in the coming quarters, of vendors that could help companies "mitigate risk" in IT. Meanwhile IBM, EMC, and Oracle (ORCL)—which have long track records of selling to companies' IT departments—are sniffing the same ground. "On one hand, they're getting squeezed by Microsoft, and on the other hand, they're getting squeezed by the likes of IBM and EMC. That's not a great place to be," says Murray Beach, president of Boston Corporate Finance, an investment bank that advises business software companies on mergers and acquisitions. "They have to get the earnings from their acquisitions to pay off, and that hasn't really been proven yet."
IBM on Oct. 31 completed its $1.3 billion acquisition of Internet Security Systems and closed its $1.6 billion purchase of content management software company FileNet on Oct. 12. Storage systems vendor EMC last September created a new security software division by buying data encryption company RSA Security for $2.1 billion and Network Intelligence, whose software analyzes network traffic for the causes of security problems, for $175 million. And Oracle two years ago bought security vendor Oblix.
Help from Consumers
Expanding its scope could also help Symantec avoid a broadside from Microsoft, which is moving into the security market with its consumer Windows Live OneCare and corporate Forefront products. In a report issued Jan. 27, Morgan Stanley (MS) Vice-President and research analyst Peter Kuper said Microsoft could be poised to gain a greater share of the business security market. According to a company-sponsored survey of 125 IT executives in the U.S. and Europe fielded last fall, Microsoft could pick up nearly 2% of CIOs' overall software spending over the next two years. And 44% of respondents report they're more likely to make a "meaningful investment" in Microsoft's desktop security products than they were in the past.
Symantec's consumer software is doing better. Third-quarter revenue from consumer products grew 24%, compared with a 1% drop in sales of business software. On Feb. 7, Symantec announced a deal with eBay (EBAY) unit Skype, in which the Internet phone service will point its users to a cobranded Web site where they can download Symantec's Norton products.
Thompson maintains that Symantec has brought "a raft of new technologies" to market the past two years, and is out-innovating Microsoft and others. He points to a firewall designed not to bother users, and new Norton technology that can sniff out more characteristics of viruses' behavior to stop them before researchers publish official antidotes. At the Demo 07 conference in Palm Desert, Calif., Jan. 31, Symantec showed prototype software for providing PC users with virtual credentials they can use to prove their identities to Web sites. Symantec plans to release some of the technology in its next wave of Norton consumer products this summer or fall, Thompson says. Still he adds, "We know the history of Microsoft. They are relentless. We can't rest on our laurels of past successes."
True to form, Microsoft has a counterweight to Thompson's identity software plan. In a speech at the RSA Conference Feb. 6, Microsoft Chairman Bill Gates said the company will enhance online credentials technology, called CardSpace, in its new Windows Vista operating system with software that can prove users' identities across blogging and social-networking sites.
As Symantec pushes its sales staff to right its Veritas unit, staves off competition from Redmond, and tries to dodge IBM and others, Thompson says analysts should take the long view. "My job as the CEO of Symantec is to worry about the long-term health and viability of our company," he says. Wall Street, he says, will "just have to watch our results."