Symantec Corporation: Financial Performance and Projection

Symantec Corporation is a famous American technological company that is situated in Mountain View in Los Angeles, California. Symantec Corporation develops and sells their software created for cyber security, data backup and information storage purposes. The company provides highly professional services for the instant support of its own technologies. Gary Hendrix founded Symantec in 1982 by utilizing grants that he received from the National Science Foundation. At the beginning stages of its growth, Symantec was more focused on the projects that elated to AI and database technologies. It is then, in 2014, the company had to separate into 2 autonomous entities. Symantec focused on market segment concerned data and cyber security, developing product lines, like Norton Security, as well as other antivirus applications for computers. But this research will dwell on the evaluation of the financial performance of Symantec Corporation using time-series, financial ratio analysis and financial projections.

Financial Statements

This section presents the financial statements of Symantec for the three recent years (2016, 2015, and 2014) with delta changes to indicate increases and decreases. Positive delta changes imply increases, while negative delta changes imply decreases.

Income statement

SYMANTEC INCOME STATEMENT

 

 

 

 

 

March. USD in millions

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Revenue

3600

-2908

6508

-168

6676

Cost of revenue

615

-538

1153

4

1149

Gross profit

2985

-2370

5355

-172

5527

Operating expenses

 

 

 

 

 

Research and development

748

-396

1144

106

1038

Sales, General and administrative

1587

-1115

2702

-178

2880

Restructuring, merger and acquisition

136

-116

252

-18

270

Other operating expenses

57

-51

108

-48

156

Total operating expenses

2528

-1678

4206

-138

4344

Operating income

457

-692

1149

-34

1183

Interest Expense

75

-4

79

-5

84

Other income (expense)

10

-13

23

-34

57

Income before taxes

392

-701

1093

-63

1156

Provision for income taxes

1213

998

215

-43

258

Net income from continuing operations

-821

-1699

878

-20

898

Net income from discontinuing ops

3309

 

 

 

 

Net income

2488

1610

878

-20

898

Looking at the Symantec’s income statement, revenues have decreased significantly in 2015 and 2016 as shown by the delta changes. This revenue trend is also experienced in gross profits and operating income –key sources of data for profitability ratio indicators. The net income could have followed the same trend were it not for the profit earned from the discontinuing operations in 2016.

Balance Sheet

SYMANTEC CORP BALANCE SHEET

 

 

 

 

 

Million USD

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Cash and cash equivalents

5983

3109

2874

-833

3707

Short-term investments

42

-975

1017

640

377

Total cash

6025

2134

3891

-193

4084

Receivables

556

-437

993

-14

1007

Inventories

 

 

 

-14

14

Deferred income taxes

 

 

152

10

142

Other current assets

378

-8

386

-19

405

Total current assets

6959

1537

5422

-230

5652

Gross property, plant and equipment

1962

-317

2279

-660

2939

Accumulated Depreciation

-1005

69

-1074

749

-1823

Net property, plant and equipment

957

-248

1205

89

1116

Equity and other investments

157

 

 

 

 

Goodwill

3148

-2699

5847

-11

5858

Intangible assets

443

-185

628

-140

768

Other long-term assets

103

-28

131

-14

145

Total non-current assets

4808

-3003

7811

-76

7887

Total assets

11767

-1466

13233

-306

13539

Short-term debt

 

-350

350

350

 

Accounts payable

175

-38

213

-69

282

Taxes payable

941

941

 

 

 

Accrued liabilities

219

-179

398

33

365

Deferred revenues

2279

-830

3109

-213

3322

Other current liabilities

419

36

383

46

337

Total current liabilities

4033

-420

4453

147

4306

Non-current liabilities

 

 

 

 

 

Long-term debt

2207

461

1746

-349

2095

Deferred taxes liabilities

1235

927

308

-117

425

Deferred revenues

359

-196

555

-26

581

Minority interest

 

 

 

 

 

Other long-term liabilities

257

21

236

-99

335

Total non-current liabilities

4058

1213

2845

-591

3436

Total liabilities

8091

793

7298

-444

7742

Stockholders' equity

 

 

 

 

 

Common stock

4309

4302

7

0

7

Additional paid-in capital

 

-6094

6094

-650

6744

Retained earnings

-655

-385

-270

878

-1148

Accumulated other comprehensive income

22

-82

104

-90

194

Total stockholders' equity

3676

-2259

5935

138

5797

Total liabilities and stockholders' equity

11767

-1466

13233

-306

13539

The delta changes of the balance sheet line items provide an overview of how the company performed in terms of liquidity and leverage. The total current assets decline significantly in 2015, but then increased in 2016 by a greater margin. On the other hand, the total current liabilities declined in 2015 and 2016 and this implies that the liquidity level of the company also increased. The total debt of the company increased by greater proportion in 2016 in relation to the total assets and total equity – implying an increased in the financial leverage, which is an indication of increase in debt burden and risks.

CASH Flow Statement

SYMANTEC CORP Statement of CASH FLOW

 

 

 

 

 

March. USD in millions

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Cash Flows From Operating Activities

 

 

 

 

 

Net income

2488

1610

878

-20

898

Depreciation & amortization

299

-140

439

-52

491

Amortization of debt discount/

5

1

4

-3

7

Investment/asset impairment charges

 

 

 

 

 

Investments losses (gains)

 

 

 

32

-32

Deferred income taxes

1082

1105

-23

-70

47

(Gain) Loss from discontinued operations

-3309

 

 

 

 

Stock based compensation

161

-34

195

39

156

Accounts receivable

38

76

-38

-68

30

Inventory

 

0

 

-10

10

Accounts payable

-69

-4

-65

10

-75

Accrued liabilities

-7

-56

49

107

-58

Income taxes payable

693

884

-191

-198

7

Other working capital

68

4

64

255

-191

Other non-cash items

-653

-653

 

9

-9

Net cash provided by operating activities

796

-516

1312

31

1281

Cash Flows From Investing Activities

 

 

 

 

 

Investments in property, plant, and equipment

-272

109

-381

-121

-260

Acquisitions, net

6531

6570

-39

-22

-17

Purchases of investments

-378

1380

-1758

-1266

-492

Sales/Maturities of investments

1355

331

1024

838

186

Other investing activities

-63

 

 

 

 

Net cash used for investing activities

7173

8327

-1154

-571

-583

Cash Flows From Financing Activities

 

 

 

 

 

Debt issued

500

 

 

 

 

Debt repayment

-368

-347

-21

1168

-1189

Common stock issued

65

-51

116

116

 

Common stock repurchased

-1868

-1368

-500

0

-500

Excess tax benefit from stock based compensation

6

-4

10

-7

17

Dividend paid

-3030

-2617

-413

5

-418

Other financing activities

-69

-66

-3

-381

378

Net cash provided by (used for) financing activities

-4764

-3953

-811

901

-1712

Effect of exchange rate changes

-96

84

-180

-216

36

Net change in cash

3109

3942

-833

145

-978

Cash at beginning of period

2874

-833

3707

-978

4685

Cash at end of period

5983

3109

2874

-833

3707

Reviewing the cash flow statement delta changes on the key cash flow indicators, there are several observations that can be made. First, operating cash flow increased by $31 million in 2015, but decreased by $510 million. It can also be noted that the investing cash flow reduced by $571 million in 2015, but increased by $8327 million.

Financial Ratios

Financial ratio analysis is a commonly used technique for evaluating the financial performance of a company. The financial ratios are based on four main indicators of financial performance: profitability indicator, liquidity indicator, efficiency indicator, and leverage indicator.

Profitability ratios

Without profit generation, almost all business ventures would not survive on their own in the long-term due to cash flow, insolvency and bankruptcy problems. There is no direct measurement of profitability and Symantec’s profitability performance is gauged through a number financial ratios (Bull, 2008).

Profitability ratios

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Gross Margin

82.92%

0.63%

82.28%

-0.51%

82.79%

Operating Margin

12.69%

-4.96%

17.66%

-0.06%

17.72%

Net Profit Margin

69.11%

55.62%

13.49%

0.04%

13.45%

Return on Assets

21.14%

14.51%

6.63%

0.00%

6.63%

Return on Equity

67.68%

52.89%

14.79%

-0.70%

15.49%

As indicated by the profitability analysis, Symantec Corporation has a surprisingly high gross margin of 82.70 on average, but its trend reveals something else. In 2015, the gross margin declined by 0.51% and then increased by 0.63% in 2016 despite the decrease in revenues and gross profit in the dame year. Operating margin declined in 2015 and 2016 implying a consistent decrease in the company’s operational efficiency. On the other hand , net profit margin depicts increases in 2015 and 2016 and this gives an impression of increased profitability, bearing in mind the net income from discontinuing operations. The profit from discontinuing activities affected other ratios, such ROA and ROE.

Liquidity

In business context, liquidity refers to the situation in which company is able to settle its short-term debts through current asset disposal. Liquidity is measured by current and quick ratios. A current ratio of 2.0 or above and a quick ratio of 1.0 or above are recommended. The following are formulas for current and quick radios (Bull, 2008):

Liquidity

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Current ratios

1.73

0.51

1.22

(0.09)

1.31

Quick ratios

1.73

0.54

1.18

(0.09)

1.28

As indicated by liquidity analysis, current and quick ratios are almost equal due to presence of insignificant illiquid current assets, such as inventory and prepaid expenses. the quick ratio has been higher than the recommended level implying that current assets has been sufficient enough to cover for the current financial obligations. The two ratios decline in 2015 and then increased in 2016 significantly – an indication strengthened liquidity position of the company.

Efficiency ratios

The efficiency ratios or asset management ratios are designed to evaluate how efficiency the company is utilizing its assets in the generation of sales revenue (Bull, 2008). The efficiency ratios pertinent to Symantec Corporation include:

Efficiency Ratios

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Receivable turnover

6.47

2.85

3.63

0.05

3.57

Assets Turnover

0.31

0.03

0.27

0.01

0.27

Payable turnover

3.51

0.63

2.89

0.71

2.18

The analysis of efficiency ratios indicates that receivable turnover, assets turnover, and payable turnover increased in 2015 and 2016 and this implies that the company’s efficiency in asset utilization has also increased.

Leverage ratios

Leverage ratios evaluate the proportion of company’s debt in relation to its assets and equity. The main purpose is to evaluate the debt burden of the company and the possibility of risks, such as insolvency and bankruptcy (Bull, 2008). The leverage ratios are as follows:

Leverage Ratios

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Debt ratios

0.69

0.14

0.55

(0.02)

0.57

Debt to equity ratio

2.20

0.97

1.23

(0.11)

1.34

Interest coverage

6.09

(8.45)

14.54

0.46

14.08

The analysis of leverage ratios indicates the debt ratio and debt to equity of the company slightly reduced in 2015, but then increased in 2016. On the other hand, the interest coverage increased in 2015, but then declined in 2016. The trends of the leverage ratios indicate that Symantec has higher financial leverage and reduced ability to settle the interest expense.

Cash flow ratios

Cash flow ratios

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Operating cash flow Ratio

0.20

(0.13)

0.33

0.01

0.32

Cash flow margin

22.11%

-14.33%

36.44%

0.86%

35.58%

Alternative Strategies

Merger & Acquisition strategy

One of the strategies, Symantec Corporation could employ to improve its financial performance is through merger and acquisition strategy. Many companies combine to improve their competitive edge over others by gaining a bigger market share (revenue base), economies of scale (improve profitability), operational efficiency (Dringoli, 2016). The rationale for proposing this strategy is that Symantec’s revenue reduced by almost by 50% an outcome that can be reverted through mergers and acquisition. The company has also been faced with controversy over the hacking of its security products (antivirus). Through this strategy, I would propose the acquisition of LifeLock.

The main advantages of Mergers & Acquisition strategy include cost efficiency, increased market share, and improved value generation (Gomes, 2011). As far as cost efficiency is concerned, the combination of two companies brings about the economies of scale that helps in reducing costs due to mass production of products/services. The cost efficiency increases profit margins. The company also benefits in terms of administrative synergies due to the acquisition of skilled personnel. Additionally, the company is also to achieve an optimum financial leveraging. On the other hand, mergers and acquisition lead o higher prices for consumer, loss of jobs, possible diseconomies of scale due to increased firm size, and probable loss of control needed for operating a bigger company.

Product development strategy

As it has been seen since 2012, Symantec has suffered in a great way through the hacking of computers installed with Norton antivirus software. The revenues have dwindled due to lack of confidence among the consumers on the effectiveness of Symantec products. The company should concentrate on developing Cloud Security Software due to its huge market worldwide. According to Trefis Team (2015), the global market for cloud computing is estimated to grow by 70% by 2021 due to increased popularity in software-as-a-service, platform-as-a-service, and infrastructure-as-a-service. These services will need very robust security systems. One of the main advantage of this strategy is that Symantec will achieve its business objectives by entering emerging markets and gaining market share and ultimately, increasing its revenues and profitability. However, disadvantages of this strategy include the possibility of product failure, product rejection, unforeseen competition, and huge capital outlay because of research and development.

Pro Forma Financial Statements

Pro Forma Income statement

It is expected that the financial performance would improve once the company adopt these strategies. The revenues and cost of sales are expected to grow by 45% in the first year, 20% in the second year, and 25% in the third year due to the growth of the global market for cloud computing security systems. The first year growth is partly attributed to the mergers and acquisition strategy, while the subsequent growth rates due to product development strategy. Due to increased operational efficiency, the operating expenses will increase by 35% in the first year, 15% in the second year, and 20% in the third year. The financial cost is expected to grow by 50% to increase in financing in the first year and10% in the second and third year. Without these strategies, the sales revenues will continue to decline 20% in the first year, 15 % in the second year and 10% in the third year.

March. USD in millions

2017

 

2018

 

2019

 

 

Strategy

Without

Strategy

Without

Strategy

Without

Revenue

5,220

2,880

6,264

2,448

7,830

2,203

Cost of revenue

892

492

1,070

418

1,338

376

Gross profit

6,112

3,372

7,334

2,866

9,168

2,580

Operating expenses

 

 

 

 

 

 

R &d

1,010

598

1,161

509

1,394

458

Sales, General & administrative

2,142

1,270

2,464

1,079

2,957

971

Restructuring, M& A

184

109

211

92

253

83

Other operating expenses

77

46

88

39

106

35

Total operating expenses

3,413

2,022

3,925

1,719

4,710

1,547

Operating income

2,699

1,350

3,409

1,147

4,458

1,032

Interest Expense

113

70

124

65

136

60

Other income (expense)

15

5

17

5

18

5

Income before taxes

2,571

1,275

3,269

1,077

4,304

967

Provision for income taxes

1,213

1,213

1,213

1,213

1,213

1,213

Net income

1,358

62

2,056

(136)

3,091

(246)

Balance sheet

It is expected that the financial performance would improve once the company adopt these strategies. The current assets are projected to increase by 40% due to M & A and produce development strategy in the first year, 15% in the second year, and 20% in the third year. The non-current assets are set to increase by 35% due to M & A, after which it would grow by 15% in the second and third year. The current liabilities are set to increase by 30% due to M & A in the first year of projection, after which it would increase by 10% and 15 % in the subsequent years. The non-current liabilities are set to increase by 60% in the first year due to the financing of the strategies, and 15% increase in the subsequent years. The equity is set to increase by 45% in the first year and then increase by 10% in the subsequent years. Without the strategy, the current assets are set to increase by 20% due to income from discontinuing operations, after which it will start declining by 15%. The non-current assets are also set to decline by 15% in the first year, after which it would decrease by 10% per year. The current liabilities will increase by 10%, 15%, and 20% for year 2017, 2018 and 2019, respectively. The long-term liabilities would decrease by 5%, 10%, and 15 % for the years under projections due to lack of confidence among the financers.

Million USD

2017

 

2018

 

2019

 

 

Strategy

Without

Strategy

Without

Strategy

Without

Cash and cash equivalents

8,675

6,581

9,977

5,265

11,972

4,739

Short-term investments

61

46

70

37

84

33

Total cash

8,736

6,628

10,047

5,302

12,056

4,772

Receivables

806

612

927

489

1,113

440

Other current assets

548

416

630

333

756

299

Total current assets

10,091

7,655

11,604

6,124

13,925

5,512

Gross property, plant and equipment

2,845

1,177

3,272

1,059

3,926

1,007

Accumulated Depreciation

(1,457)

(603)

(1,676)

(543)

(2,011)

(516)

Net property, plant and equipment

1,388

574

1,596

517

1,915

491

Equity and other investments

228

94

262

85

314

81

Goodwill

4,565

1,889

5,249

1,700

6,299

1,615

Intangible assets

642

266

739

239

886

227

Other long-term assets

149

62

172

56

206

53

Total non-current assets

6,972

2,885

8,017

2,596

9,621

2,467

Total assets

17,062

10,540

19,621

8,720

23,546

7,978

Short-term debt

-

-

-

-

 

 

Accounts payable

254

210

292

231

350

229

Taxes payable

1,364

1,129

1,569

1,242

1,883

1,230

Accrued liabilities

318

263

365

289

438

286

Deferred revenues

3,305

2,735

3,800

3,008

4,560

2,978

Other current liabilities

608

503

699

553

838

548

Total current liabilities

5,848

4,840

6,725

5,324

8,070

5,270

Non-current liabilities

-

 

 

 

 

 

Long-term debt

3,531

1,101

3,794

661

4,553

264

Deferred taxes liabilities

1,976

616

2,123

370

2,548

148

Deferred revenues

574

179

617

107

741

43

Minority interest

-

-

-

-

-

-

Other long-term liabilities

411

128

442

77

530

31

Total non-current liabilities

6,493

2,025

6,977

992

8,372

486

Total liabilities

12,341

6,864

13,702

6,316

16,442

5,756

Stockholders' equity

-

 

 

 

 

 

Common stock

6,033

4,309

6,937

2,801

8,325

2,521

Additional paid-in capital

-

-

-

-

-

-

Retained earnings

(917)

(655)

(1,055)

(426)

(1,265)

(383)

Accumulated other comprehensive income

31

22

35

14

43

13

Total stockholders' equity

5,146

3,676

5,918

2,389

7,102

2,150

Total liabilities and stockholders' equity

17,487

10,540

19,621

8,720

23,546

7,978

Cash flows

March. USD in millions

2017

 

2018

 

2019

 

Cash Flows From Operating Activities

Strategy

Without

Strategy

Without

Strategy

Without

Net income

2,737

2,239

3,229

1,791

3,714

1,433

Depreciation & amortization

329

269

388

215

446

172

Amortization of debt discount/

6

5

6

4

7

3

Investment/asset impairment charges

-

-

-

-

-

-

Investments losses (gains)

-

-

-

-

-

-

Deferred income taxes

1,190

974

1,404

779

1,615

623

(Gain) Loss from discontinued operations

(3,640)

(2,978)

(4,295)

(2,382)

(4,939)

(1,906)

Stock based compensation

177

145

209

116

240

93

Accounts receivable

42

34

49

27

57

22

Inventory

-

-

-

-

-

-

Accounts payable

(76)

(62)

(90)

(50)

(103)

(40)

Accrued liabilities

(8)

(6)

(9)

(5)

(10)

(4)

Income taxes payable

762

624

900

499

1,034

399

Other working capital

75

61

88

49

102

39

Other non-cash items

(718)

(588)

(848)

(470)

(975)

(376)

Net cash provided by operating activities

876

716

1,033

573

1,188

458

Cash Flows From Investing Activities

-

-

-

-

-

-

Investments in property, plant, and equipment

(299)

(245)

(353)

(196)

(406)

(157)

Acquisitions, net

7,184

5,878

8,477

4,702

9,749

3,762

Purchases of investments

(416)

(340)

(491)

(272)

(564)

(218)

Sales/Maturities of investments

1,491

1,220

1,759

976

2,023

780

Other investing activities

(69)

(57)

(82)

(45)

(94)

(36)

Net cash used for investing activities

7,890

6,456

9,311

5,165

10,707

4,132

Cash Flows From Financing Activities

-

-

-

-

-

-

Debt issued

550

450

649

360

746

288

Debt repayment

(405)

(331)

(478)

(265)

(549)

(212)

Common stock issued

72

59

84

47

97

37

Common stock repurchased

(2,055)

(1,681)

(2,425)

(1,345)

(2,788)

(1,076)

Excess tax benefit from stock based compensation

7

5

8

4

9

3

Dividend paid

(3,333)

(2,727)

(3,933)

(2,182)

(4,523)

(1,745)

Other financing activities

(76)

(62)

(90)

(50)

(103)

(40)

Net cash provided by (used for) financing activities

(5,240)

(4,288)

(6,184)

(3,430)

(7,111)

(2,744)

Effect of exchange rate changes

(106)

(86)

(125)

(69)

(143)

(55)

Net change in cash

3,420

2,798

4,035

2,238

4,641

1,791

Cash at beginning of period

3,161

2,587

3,730

2,069

4,290

1,655

Cash at end of period

6,581

5,385

7,766

4,308

8,931

3,446

Pro Forma Ratios

2017

 

2018

 

2019

 

Profitability ratios

Strategy

Without

Strategy

Without

Strategy

Without

Gross Margin

82.92%

82.92%

82.92%

82.92%

82.92%

82.92%

Operating Margin

51.70%

46.86%

54.43%

46.86%

56.93%

46.86%

Net Profit Margin

26.02%

2.14%

32.82%

-5.55%

39.47%

-11.15%

Return on Assets

7.96%

0.36%

12.05%

-0.80%

18.11%

-1.44%

Return on Equity

26.40%

1.20%

39.95%

-2.64%

60.06%

-4.77%

2017

 

2018

 

2019

 

Liquidity

Strategy

Without

Strategy

Without

Strategy

Without

Current ratios

1.73

1.58

1.73

1.15

1.73

1.05

Quick ratios

1.73

1.58

1.73

1.15

1.73

1.05

2017

 

2018

 

2019

 

Efficiency Ratios

Strategy

Without

Strategy

Without

Strategy

Without

Receivable turnover

6.47

8.53

5.63

10.67

4.69

11.85

Assets Turnover

0.31

0.50

0.27

0.60

0.22

0.65

Payable turnover

3.51

4.25

3.06

3.86

2.55

3.90

 

2017

 

2018

 

2019

 

Leverage Ratios

Strategy

Without

Strategy

Without

Strategy

Without

Debt ratios

0.72

0.65

0.70

0.72

0.70

0.72

Debt to equity ratio

2.40

1.87

2.32

2.64

2.32

2.68

Interest coverage

23.99

23.99

23.99

23.99

23.99

23.99

Cash flow ratios

2016-03

2016 ∆s

2015-03

2015 ∆s

2014-03

Operating cash flow Ratio

0.15

(0.03)

0.18

(0.03)

0.20

Cash flow margin

16.77%

-3.02%

19.79%

-2.97%

22.76%

Net Present Value analysis

In this analysis, the interest rate is estimated to be 3.5% calculated from interest rates and interest-bearing loans in the last two years. The cash flow cf(0) = $3,109 million, which is the initial cost of investment in this case. The cash flows for year1, 2 and 3 of financial projections taken into consideration. The following is the analysis of net present value of cash flow to be generated:

Year

Cash flows

Discount factor (3.5%)

Discounted cash flow

 

(3,109)

-

-

...