July 1, 2005 3:47 PM PDT

What's key to early days of Symantec-Veritas

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Big contracts will be key to gauging how well Symantec's planned integration with Veritas Storage is going, analysts said, as the megamerger gets set to close on Saturday.

Symantec, which has lost a third of its share price since its merger plans with the storage maker became public in December, is about to enter a crucial six-month phase. It's a period in which the bulk of the "heavy lifting" for the integration effort will be done, Symantec CEO John Thompson said at a special shareholder meeting earlier this month to approve the deal.

"A key milestone is how many large deals Symantec will now be able to make, compared to their previous level," said Peter Kuper, a Morgan Stanley analyst. "They need to show they can get more dollars per client, and that will demonstrate how smart their thinking was that customers want fewer vendors."

Security provider Symantec racked up 510 contracts--each worth more than $100,000--and 22 worth more than $1 million, in the quarter ended in March, according to Morgan Stanley and company reports. During the same period, Veritas, which sells data storage technology to large companies such as Sony Music Entertainment, landed 298 deals in the $100,000-plus segment and 26 topping $1 million.

Going by the drop in share price, Symantec's investors are somewhat leery of the $10.5 billion merger that marries two disparate industries with vastly different growth rates. Wall Street has noted a rapid rise in the security industry's growth rate, compared with the more mature storage industry.

There are several key areas other than deal size that investors should look at to gauge the success of Symantec's integration progress, analysts said. Customer satisfaction and retention, integration of the combined companies' sales teams, and the ability to hit previously forecasted revenue numbers and product deliveries are among these.

"Veritas has a flagship product called NetBackup that's due for a new release in the first half of next year. There's little risk to that project, since most of that effort is complete," said Walter Pritchard, an SG Cowen & Co. analyst. "Symantec rolls out new upgrades for its consumer products every fall, and I would expect them to keep that pace."

During the first six months of the merger, Symantec will loosely tie the two companies' existing products together, CEO Thompson said during a speech at JP Morgan's technology conference in May.

"Tying our content filtering technologies with Veritas' intelligent archiving and indexing capabilities is a capability that should be delivered on Day 1 (of the merger) and executed on Day 1 in the marketplace," Thompson said.

For example, the companies will have to tie Symantec's "Deep Sight" vulnerability and incident alert service to Veritas' command central technologies, he noted.

After the first six months, Symantec expects to begin offering fully integrated products, followed by new technologies from the combined companies one to two years out, Thompson said in his speech.

On sales
Wall Street also expects Symantec to make sizable progress on integrating the two companies' disparate sales teams toward the end of the first six months.

"How quickly both organizations can have their sales teams cross-trained to sell each other's products will be important," JMP Securities analyst Amy Feng said. "By nine months or so, the sales people should be cross-trained."

The housing of the sales teams depends on which facilities of the companies are consolidated, Genevieve Haldeman, a Symantec spokeswoman, said. Veritas is headquartered in Mountain View, Calif., but once it is a part of Symantec, its lead operations will shift to the security company's corporate headquarters down the road in Cupertino.

Symantec, which has been able to meet or exceed analysts projections for at least eight consecutive quarters, will need to maintain that record after the merger, analysts said.

"One of the most important things is they need to make the revenue numbers that they have laid out there," SG Cowan's Pritchard said. "They have said they expect to grow revenues 18 percent, but that was assuming a close (of the merger) in April. It's been delayed about two months, so the growth will be a little less."

The security giant had previously forecasted ending fiscal 2006 as a $5 billion company. However, it will revise that figure after it reports its second-quarter results on July 28. During its last fiscal year, Symantec generated $2.6 billion, a 38 percent increase over the previous year, and Veritas raised $2 billion, a 17 percent increase.

Analysts said they will look at revenue figures to come for signs that Symantec and Veritas have been able to retain their existing customers and land larger deals. They noted the best gauge is to look at the quarter that ends in December, which is typically the strongest for both companies and the tech industry.

Maintaining Symantec's business momentum is one of Thompson's top four priorities as the integration process goes through its paces, he said at the May investor conference.

"Priority No. 1 was making sure we didn't break something. In other words, sustain the business momentum of each of the two companies as we bring them together," Thompson said.

Other priorities include a projected $100 million in cost-savings via reductions in facilities and employees, and retaining the ability to let customers and employees know what products are being developed and when they will be delivered, Thompson said. A fourth priority is to cross-sell both companies' products to customers.

"In the end, are people going to buy more products from the combined company than the two were able to sell as separate companies?" Feng asked. "That was the whole point of the merger."

 

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