Thursday, March 28, 2024

Despite billions in fresh cash, Symantec will cut costs and go into debt

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Symantec Inc. just completed the sale of its Veritas storage business for $5.3 billion in after-tax proceeds, following a late discount. On Thursday, the security-software company also announced a fresh investment of $500 million from Silver Lake Partners.

This company appears to be rolling in gold like Scrooge McDuck, so how does it celebrate? By cutting costs, including potential future staff changes, and going into debt.

Huh?

Basically, Symantec SYMC, -0.52% will push all of the proceeds from the Veritas sale back to investors, with plans for an immediate special dividend of $4 a share — costing $2.7 billion — and $2.3 billion in share buybacks, which adds to $2.1 billion in stock repurchases executed since April 2014. Because some of the proceeds of the Veritas deal are overseas, Symantec will use Silver Lake’s $500 million — which will get the investment firm a board seat — as well as raise debt to pay off its total $5.5 billion shareholder-return plan, the company confirmed Thursday.

Meanwhile, Symantec will look to cut $400 million in costs from its business during the next two years, a process that could eventually include layoffs.

“Over a two-year time period, we will achieve most of the cost savings in a few ways — removing stranded costs from the Veritas sale, continuing to modernize our infrastructure, simplifying our processes and managing our portfolio,” a Symantec spokesperson said. “These efforts may change the way we work and, in some cases, change the need for, or scope of, certain roles.”

The cash return to investors can be seen as payback for believing in Symantec during a rough few years, as the company struggled to succeed with Veritas — which it agreed to buy in 2004 for nearly twice what it agreed to sell it for in 2015 — and saw young startups capitalize on businesses’ growing security needs while Symantec focused on a shrinking consumer business.

Symantec Chief Executive Michael Brown has refocused the business on enterprise sales, but revenue and profit continue to shrink. Quarterly results released Thursday showed sales dropped 6% from the same quarter a year ago, and net income fell 23%. Through three quarters of its fiscal year, Symantec sales have fallen 11% against the year before, while profit has declined 37%.

“Overall, growth remains a challenge for Symantec, but cost cutting is exactly what the doctor ordered and investors will like this news,” FBR Capital Markets analyst Daniel Ives said Thursday afternoon, adding that the Silver Lake investment will also be welcomed by the Street.

Investors’ payback comes with a big cost, however: Symantec’s war chest for potential acquisitions.

As the company rebuilds its business with a focus on selling to companies instead of consumers, a necessity as attackers have increasingly moved to large-scale attacks against corporate networks, it could have shopped for fresh talent among the gaggle of security startups in Silicon Valley and beyond. Startup valuations appear to be adjusting to a point where acquisitions would be more palatable for established companies like Symantec, but the type of move that could make a significant difference will be difficult without cash to close the deal.

Brown said the capital-return program won’t limit flexibility for acquisitions, but admitted that recent small acquisitions were the model for future moves.

“We’re going to continue to be very judicious as we think about, ‘What are the right assets?’” Brown said on Thursday’s conference call. “They need to be tightly aligned with the strategy and they need to make financial sense.”

Going into debt while bringing in nearly $6 billion doesn’t seem to make financial sense, but investors jumped at the short-term rewards Symantec promised Thursday, pushing the stock 9% higher in after-hours trading. That move takes only a small bite out of Symantec’s 25.1% drop over the past year, however, and the security firm will still have to figure out its long-term growth issues without the financial ammunition its latest deals could have provided.
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