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The black lining to Symantec's silver cloud

CEO John Thompson has tried to make the security software company less dependent on the volatile consumer market and more reliant on stable corporate revenue. The proof will be in the fourth-quarter results this week.

The good news is that a series of worms, viruses and other security headaches has been a windfall for Symantec. That's also the bad news.

Since arriving in 1999, Symantec CEO John Thompson has tried to transform the security software maker, to make it less dependent on the volatile consumer market and more reliant on stable corporate revenue. Thompson made some headway in 2002 and 2003, but the recent rash of viruses threatens to undo that limited success, as analysts forecast that the consumer businesses will end the fiscal year as Symantec's chief revenue source.

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"The company has been told many times by Wall Street it was not growing its enterprise business fast enough. It has been showing some growth, but not to the degree people had hoped for," said Tom Berquist, a Smith Barney Citigroup analyst. "There is risk in relying heavily on consumer sales. If virus attacks slow down and people have bought all the protection they need, then Symantec's growth will slow down to the rate of IT as a whole. They need to step up their enterprise security business that is not tied to antivirus, in case consumer antivirus slows."

Symantec, which reports fourth-quarter results on Wednesday, represents the business side of the rampant security threats facing all PC owners. Through its Norton products--such as Internet Security, Personal Firewall, SystemWorks and AntiVirus--it is one of the companies able to turn bad news into profit. But should fickle consumers decide they've got enough protection or turn to other products, Symantec will need to have its enterprise business pulling in more revenue.

The Cupertino, Calif.-based software maker is aware of the risk. In a filing with the Securities and Exchange Commission, it noted: "We believe that a significant portion of the growth in consumer revenue during the nine months ended Dec. 31, 2003, was attributable to the numerous security threat outbreaks that occurred in August 2003 and may not be sustainable."

In its fiscal third quarter, which ended in December, Symantec posted a 55 percent year-over-year increase in consumer sales for a total of $242.4 million, which represented 49 percent of overall revenue. Enterprise security, which rose 17 percent to $186.7 million, accounted for 38 percent of revenue.

Much of the enterprise growth came from antivirus software, as opposed to intrusion detection, security management and firewall protection products.

Consumer sales, meanwhile, got a boost from both Norton AntiVirus and Norton Internet Security products.

The reason? Viruses such as , MyDoom, Bagle and Netsky, which struck last year.

"Symantec got swept up in something bigger than themselves," Smith Barney's Berquist said. "It pulled them off their plans they laid out over the past several years to build a balanced business."

Symantec declined to comment, citing the so-called quiet period prior to its earnings announcement.

Business plan
Enterprise administration software represents another strand of Symantec's business, but that segment has languished for a number of years. The third quarter was no different, in that revenue from those products increased a slight 2 percent to $53.3 million and accounted for 11 percent of total revenue.

"Two years ago, the message from Symantec was they were working hard on their enterprise profile," said Daniel Cummins, an analyst with UBS. "They did a number of acquisitions and their (financial) numbers were good on their organic business. But as the acquisitions got folded in, we've seen a much softer growth rate."

Cummins noted he recently cut his stock recommendation on the company to "neutral" from "buy," in part because of anticipated weakness in the portion of Symantec's business that is not tied to antivirus software.

Over the next two or three years, the software maker wants to bundle its security products with system management technology, analysts said. "Symantec wants to go beyond detection by offering remediation to fix problems," Berquist said.

The company also faces the challenge of getting customers who purchased products to sign up for its updates service, once the complementary subscription that came with the software expires. Berquist, for example, estimates 60 percent to 70 percent of home and small-business customers don't renew their subscriptions once they expire.

"Whenever we think (Symantec's) enterprise business is ready for prime time, it's been a disappointment."
-- Tom Berquist, analyst,
Smith Barney Citigroup

Consumers cite a number of reasons for letting those subscriptions lapse: laziness, a sense of outrage for having to pay out money every year, and a feeling of being able to handle worms and viruses without assistance.

Ari Chaim, an IT administrator in San Francisco, fits into that last category.

"I bought a Dell (PC) two years ago, and it came with Norton AntiVirus, but I haven't renewed my subscription. I deal with viruses every day at work, so I know what to avoid," Chaim said.

To address the laziness factor, Symantec recently teamed up with Internet service provider EarthLink to offer antivirus and firewall subscription renewals that could be paid for on an EarthLink user's monthly bill.

Some industry analysts already believe the percentage of consumers who renew their subscriptions is on the rise.

"In the old days, people either bought the antivirus software, or it came on their machines, and they didn't renew. That sort of worked because viruses were infrequent," said Norma Schroder, a principal analyst with research firm Gartner. "But the (antivirus vendors) have made it easier to renew. There are automatic delivery updates--whereas in the old days you had to go to their site to download--and people have gotten used to paying for renewals, over the last year or two."

If Symantec begins to see a drop in its consumer business, that could start to balance out the scales with its enterprise segment. But most companies prefer to achieve that balance through growth in their business units, rather than through a decline in sales in a division.

It all adds up to uncertainty about whether Symantec has made the progress it planned to make toward becoming more of a corporate software company.

"The jury's out on whether (Thompson) will be successful in getting the company back on track. He has been able to show great ability in managing the business for what it is. But whenever we think its enterprise business is ready for prime time, it's been a disappointment," Berquist said. "Every time the company has tried to focus on the enterprise and pull off of consumer, there's another big virus attack and their direction shifts."