Symantec Impresses Street, but Big Questions Remain

Symantec shares were up in after-hours trading tonight, presumably because the company’s first-quarter results and guidance were better than expected.

The results are a matter of statistical record, but the company’s guidance is just a forecast of how it thinks it will perform in quarters ahead. Since Symantec has offered dubious guidance before, investors would be wise to treat this latest instance with enough salt to cover the rims of their margarita glasses.

Symantec’s revenue numbers, which seem to show a soaring top line compared to those in its corresponding quarter last year, are somewhat deceptive. Revenue for the three-month period ended June 30 jumped to $1.26 billion from $699.9 million in the year-earlier period. While that looks good, keep in mind that revenue would have increased from $1.26 billion to $1.28 billion if it had included Veritas’ revenue from the same period.

Yes, Veritas. It’s like a shadow Symantec CEO John Thompson cannot escape. The storage-software company that Symantec acquired for $10.2 billion in July 2005, Veritas impaired Symantec’s profit in this past quarter and will inhibit revenue growth in future quarters. At least, though, the Veritas storage-software business is likely to continue to be profitable, with sustainable margins, well into the foreseeable future. The same perhaps could not be said for Symantec’s core business of anti-virus software.

So, Veritas can be seen as a symptom of a disease rather than the malady itself. The fact is, Symantec had to acquire a software company that wasn’t necessarily involved in security but one that would benefit from the addition of Symantec’s security pedigree. It chose Veritas, but it could have chosen any of a number of companies.

Irrespective of its choice, Symantec had to do what it did. It recognized that Microsoft’s gathering advance into security software — something Microsoft should have done, for business and obligatory reasons, much earlier — will put permanent pressure on antivirus margins and cut into Symantec’s market share. There’s no way it can be otherwise, especially when one considers the customer-friendly pricing Microsoft is bringing to the market.

That left Symantec with a need to diversify beyond its security staple and into either emerging security markets and technologies or into adjoining markets where it believed it could leverage its brand and its installed base.

Heading into today’s quarterly earnings report, investment funds and market analysts were restive. They wanted Symantec to show tangible results from its Veritas acquisition, and they wanted it to demonstrate that it has a coherent strategy other than getting out of the way of a looming security juggernaut coming down the Pacific coast from Redmond.

Symantec has put an excellent spin on his quarter’s results, and it has gilded the lily enough with its guidance to buy some time and some latitude to do another acquisition or two. It has painted an attractive facade, but it hasn’t’ built a solid foundation for growth — not yet, anyway, and not on the basis of these results.

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YouTube’s Yearning for Independence Tempered by Reality

As a member of a panel titled "How Far Will Consumer-Generated Media Go?"at the AlwaysOn Stanford Summit 2006, YouTube CEO Chad Hurley stated that his company’s aim is to remain independent while "developing the next platform to deliver digital media worldwide," according to a fact-filled report by Dan Farber of CNET.

YouTube patrons won’t pay for their video amusement, which will continue to feature amateur "user-generated content" (UGC) as well as professional (copyrighted) material. The advertising will not be intercut with the videos or played as "bumpers," at the beginning and end of the video content, but will take the form of banners, sponsorships, and promotional contests. Not everybody believes that will suffice, however, with some speculating that YouTube eventually will be compelled to intersperse video advertising within and among its video clips. I suspect that will happen, too.

The company says 60 percent of video streaming in the USA originates from its site, and it says it has no plans to compete with television and films. YouTube will stick to video clips of 10 minutes or less, so it sees itself as offering a different experience from that offered by television.

That’s all well and good, but YouTube must recognize that it is competing with television, as well as other types of consumer entertainment. It is competing for the time of consumers, a finite resource that is of tremendous interest and value to advertisers. If people are online watching video clips rather than watching television, you can be sure the networks view online video as competition to their franchises.

I don’t know the current ratio, but I have heard it said, and seen it written, the vast majority of downloads from YouTube’s site involve copyrighted professional content. YouTube believes it is protected by patent infringement lawsuits currently by the DMCA, contending that its users — and not YouTube itself — are responsible for uploading material to the company’s servers.

YouTube is said to be serving 100-million videos per day to its visitors. Not only is that an extraordinary amount of video content, but it also must account for an enormous amount of bandwidth, perhaps costing more than the $1-million monthly charge it was paying earlier this year.

I hear what Hurley is saying about remaining independent and growing his company into a video content-distribution powerhouse. I also recognize that YouTube faces risk factors — exposure to copyright litigation, potentially uneasy relationships with the ultimate founts of the most popular content on its servers, an advertising approach likely to be modified and tweaked over time, and mounting operational costs continuing to outstrip revenues — that will cause its investors and board members to carefully consider acquisition overtures. 

Besides, nobody expected him to come out and say he wants he wants to sell the company. That wouldn’t be clever gamesmanship, would it?