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Will Symantec fluff up its storage and archive cloud with M&A?

Analyst: Henry Baltazar
Date: 13 Jul 2009
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Under the watch of former CEO and current chairman of the board John Thompson, Symantec's (Nasdaq: SYMC) annual revenue grew from $600m to $6.2bn in the span of 10 years. The company now has a market cap of $12.73bn and $1.99bn in cash that it can leverage for M&A. Since being appointed CEO three months ago, Enrique Salem has stated his intention to grow Symantec's enterprise IT security business, while updating and fortifying the extensive storage management portfolio that it acquired in its merger with Veritas in 2005. Salem has also vowed that within three years, software as a service (SaaS) will represent 15-20% of the vendor's revenue, making it a $1bn-plus business – a feat that could require inorganic growth. In this report, we will focus on potential companies Symantec could target to enhance its arsenal of storage management and service offerings.

Context

Cupertino, California-based Symantec has grown rapidly through aggressive acquisitions, the most significant being its $13.5bn merger with Veritas, which brought together Symantec's security software with Veritas' industry-leading data protection and management tools. In the fourth quarter of fiscal year 2009 (ending April 3), the company reported revenue of $1.47bn with a net loss of $249m, compared with a profit of $186m and revenue of $1.54bn during the same quarter last year. For FY 2009, Symantec reported revenue of $6.15bn with a net loss of $6.73bn, compared with revenue of $5.87bn and a profit of $463m during the prior year. Symantec's massive net loss can be attributed to a goodwill impairment charge of $7.4bn in FY 2009 to write down assets on its books; however, the vendor claims that no particular buyout was responsible for the large write-down.

In Q4 2009, the company's storage and server management segment represented 36% of total revenue ($539m), while its consumer ($431m) and security and compliance ($370m) groups contributed 30% and 25% of revenue, respectively. The vendor's share of services revenue ($127m) came in at 9% and managed to grow 27% compared to the same period a year ago, when it had revenue of $106m; Symantec attributed this to having a full quarter of revenue from its November 2008 acquisition of MessageLabs, which could whet its appetite for additional SaaS and cloud pickups.

Strategy

During Symantec's Q4 2009 financial call, Salem stated that despite the goodwill impairments, Symantec would continue to make purchases – though he is confident that his engineers can provide internal innovation, especially in the security market, where the company is less likely to make a buy. Salem went on to say that Symantec was looking for M&A opportunities in the next-generation data protection market and in the data categorization space, but is in no rush to make a deal. He added that it is not planning any future divestitures.

A key aspect of Symantec's SaaS and data management strategy going forward is the vendor's 'Stop Buying Storage' marketing campaign, which the firm hopes will drive customers to invest in its software and service offerings to increase storage utilization. The campaign will focus on Symantec's intelligent archiving and provisioning, storage resource management and data de-duplication technologies and how these products can minimize storage hardware-related capital expenditures.

The company has announced a number of product enhancements over the past year to push archiving capabilities from its Enterprise Vault platform into its popular SMB-class Backup Exec software, which caters to markets that typically do not have the financial resources to purchase separate backup and archive platforms. Furthermore, Symantec is also making its PureDisk de-dupe engine, which was the core of its remote office-oriented PureDisk backup offering, available to both its enterprise-class NetBackup and Backup Exec platforms. As a result of these product development moves along with Symantec's stated desire to stay out of the storage hardware market, we believe it is highly unlikely that the vendor would make a move to acquire a de-dupe hardware provider such as Sepaton or Exagrid Systems. Likewise, Symantec would also probably not be in the market for an additional on-premises archive firm such as Mimosa Systems or Atempo, since Enterprise Vault already has a large market presence and the company made the aforementioned move to enhance Backup Exec with basic archiving capabilities.

Although Symantec has stated that it is intrigued by the idea of selling its backup and archive technology in an appliance format, it will push that strategy through partners such as Dell (Nasdaq: DELL), whose PowerVault DL2000 disk-backup appliance is available preloaded with Symantec's Backup Exec software. As such, we do not foresee Symantec making a deal to acquire a hardware player, at least in the US market. In the Chinese market, Symantec owns 49% of its Huawei-Symantec joint venture, which also sells integrated hardware/software appliances.

Potential targets

Even with de-dupe and on-premises archiving off the table, there are still a number of areas where Symantec could look to make an acquisition. In the data categorization space that Salem highlighted, Symantec could target a vendor such as Kazeon, which recently added analysis, review and legal hold capabilities to cater to the e-discovery market. Kazeon is already a Symantec partner, and its products have the ability to push content into Enterprise Vault. Another player in this segment is StoredIQ, which recently raised $8m in funding to boost its total to $28m, and has a partnership with EMC (NYSE: EMC), whereby StoredIQ's technology is re-branded as EMC's SourceOne Discovery Collector. Data classification appliance specialist Index Engines could also be a potential target, since its products can help Symantec's NetBackup and Backup Exec customers extract and index data from large tape repositories. Overall, data classification is a logical area for Symantec to make an investment since it is difficult for customers to efficiently archive information if they cannot accurately classify and assess the value of the data sitting on the vendor's storage systems.

Although we have argued against the purchase of an additional on-premises archive offering, this does not apply to the emerging cloud archiving market, where Symantec could potentially increase its service revenue. Cloud archiving is an attractive sector since it allows the company to reach out to SMBs that have tight budgets but need to meet regulatory compliance requirements, such as email retention and preservation for C-level executives. Cloud archives can also be used as remote repositories for retaining information long term, similar to how tape is currently used, but far more useful since it gives customers nearly instantaneous access to the information they export to the cloud. While Symantec's $695m acquisition of MessageLabs did add a low-end, cloud-based email archiving service to its portfolio, this offering is actually based on technology from Fortiva, which was acquired by email security specialist ProofPoint in June 2008. Should Symantec decide to buy a cloud archive of its own, LiveOffice, whose CEO Nick Mehta was the former general manager of Symantec's Enterprise Vault team, would appear to be a viable target. LiveOffice is profitable and currently has more than 8,500 customers, mostly in the SMB space. It also claims to have $23m in revenue. Email management and archiving service provider Mimecast could also potentially be a target for Symantec.

At this point, it does not appear likely that Symantec will buy a stand-alone cloud storage-capacity service such as Nirvanix or Zetta, or a cloud storage enabler such as CleverSafe or ParaScale. The company's engineers have developed a scalable clustered file system running on commodity hardware internally referred to as 'S4' to serve as the storage back end for services such as its SwapDrive online backup offering, which effectively eliminates its need for that technology. Symantec plans to license a commercial version of this technology in 2010 to end users, Web-based customers and OEM partners, and could sell it in an appliance format through the Huawei-Symantec joint venture.

Disaster recovery and business continuity are two additional markets where Symantec could make some moves. Earlier this year, Symantec inked an OEM agreement with Continuity Software, whose software scans customer environments for disaster recovery vulnerabilities. Should sales of its re-branded Veritas CommandCentral Disaster Recovery Advisor product take off, an acquisition could occur. In the business continuity space, it is also possible that Symantec might buy a vendor such as InMage Systems or Double-Take Software (Nasdaq: DBTK), replication providers that have added automated application failover capabilities to their software. Although Symantec's Replication Exec product plays in this segment, the offering is a bit long in the tooth and does not support non-Windows platforms or provide automated application failover.

Competition

Symantec has no shortage of rivals in the various markets that it competes in. In the data protection and archiving sectors, Symantec's largest competitors are IBM (NYSE: IBM), EMC, Hewlett-Packard (NYSE: HPQ) and CA Inc (NYSE: CA). With the exception of CA, which focuses on software sales, Symantec's 'Stop Buying Storage' message is a direct threat to the storage hardware businesses of these players. Although Microsoft (Nasdaq: MSFT) currently does not have an on-premises archive platform, it is still a potential player with its SMB-oriented Data Protection Manager backup platform and the Microsoft Exchange Hosted archiving service. In the security space, it is notable that Symantec's rival McAfee (NYSE: MFE) has aligned itself with EMC (whose Mozy backup service is now being resold by McAfee) and CommVault (Nasdaq: CVLT), which forged a strategic partnership with McAfee last November with the goal of attacking their common enemy Symantec.

Although vendors such as CommVault, Atempo and BakBone Software all have or are developing comprehensive data protection and archiving product portfolios, Symantec does not fear any of these rivals since it believes it can beat them with the vast scale of its marketing and sales teams.

As higher-margin cloud services such as archiving develop, Symantec will also wind up contending with cloud storage players such as Nirvanix and Zetta. When it is commercially released, Symantec's 'S4' scale-out file system technology will vie with a number of different vendors such as EMC's Atmos, ParaScale, Caringo, CleverSafe, NetApp (Nasdaq: NTAP), IBM, DataDirect Networks and Isilon Systems (Nasdaq: ISLN) – which all have scale-out offerings for storing unstructured data.

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