Executives also disclosed yesterday, as they reported the company’s quarterly financial results, that they expect to see gross margins squeezed in the otherwise healthy consumer security market, as PC makers seek out a greater share of revenue.
Chief executive John Thompson said in a conference call with analysts that Symantec plans to reduce its employee cost base by 5%. It’s not clear whether this would directly translate to 875 jobs — 5% of the 17,500 people Symantec currently employs.
Job cuts will come in corporate functions that do not have a direct product development, sales or support role, Thompson said. There will be a miminal hit to engineering and customer facing jobs, he said.
In addition to the probable layoffs, the company said it has frozen hiring, except in R&D functions in India and China, where such skilled labor comes cheap. Symantec still plans on growing its workforce in those countries.
The bad news came as Symantec reported net income for the third fiscal quarter ending December 29 up 25% at $114m, on revenue that was up 6% at $1.313bn.
While the company is obviously still growing respectably, the results were not as good as executives or analysts had been hoping. A week ago, the company did its share price a disservice by announcing it would miss its previous goal of revenue between $1.315bn and $1.345bn.
The slowness was mainly in the data center management business, which is mainly comprised of software Symantec acquired when it bought Veritas Software in a controversial $13.5bn merger two years ago.
Instead of selling a lot of new licenses, where revenue can be recognized all at once, the company sold a larger proportion of maintenance contract renewals, where accounting practices dictate it has to put the cash on the deferred revenue line of the balance sheet and recognize it over many quarters.
Elaborating slightly on his comments from last week, Thompson indicated that Symantec chose delayed revenue gratification over the quick fix of meeting short-term sales targets.
Thompson gave an example of a transaction for new licenses, coupled with a multi-year maintenance renewal, where we chose to offer installation payment terms, as an alternative to deeper discounting of the important annuity revenue streams associated with the renewal of maintenance.
He said there was no particularly weak product in that business: There wasn’t a product that was hot and one that was not, it was an across the board decline.
The data center management business was down 8% compared to the same period in 2005, ending up at 26% of total revenue. That compares to a 24% increase in consumer software revenues, a 3% increase in enterprise security software, and an 8% increase in services revenue.
The consumer business, comprised mainly of the Norton Internet Security suite, now represents 31% of total revenue. The main fear for that business over the last year or so has been the impact that Microsoft Corp’s entry into the market could produce.
But Thompson seemed to think Microsoft’s OneCare was a non-factor, and said that Symantec would stop offering price cuts when users signed up for multi-year subscriptions. That strategy was designed to provide a level of customer loyalty or lock-in.
Instead, the company has turned on an auto-renewal feature, where Norton buyers will be automatically rebilled for a new year of anti-virus updates when their subscriptions elapse.
We offered an attractively priced multi-year subscription to our consumers, with the expectation of ensuring their loyalty in the face of new competition, Thompson said. Based on changes in the competitive arena, including OneCare being a non-factor in the market, it became clear that we no longer needed to offer such attractive prices for multi-year subscriptions… the auto-renewal implementation should be a more significant factor in the loyalty equation.
Thompson and CFO James Beer also disclosed that they expect gross margins in the consumer security business to be squeezed by the increase cost of getting onto PC makers’ default configurations.
That’s an important channel for antivirus makers. Most major PC makers bundle a free security software trial with new boxes, which often convert to billing relationships. Desktop real estate is therefore highly sought.
They would like a larger share of the revenue generated by us and others on their platforms, Thompson said. And because that’s an important source of customer capture, we think have to continue to play in that space, and hence will have to adjust our expectations around gross margin.
