Symantec's Annual Shareholder Meeting (2009)

I attended Symantec’s annual shareholder meeting on September 23, 2009. The company offered shareholders a goodies bag that included a complimentary copy of Norton Online Backup; a zip-up notebook; a nice pen; and a small padlock (symbolizing Symantec’s security focus). Approximately thirty attendees were treated to coffee, juice, and pastries.

I was looking forward to this meeting for two reasons: one, the Investor Suffrage Movement asked me to move Proposal No. 3 on behalf of another shareholder; and two, this would be new CEO Enrique Salem’s first year handling the annual meeting.

Chairman and former CEO John Thompson opened the meeting and introduced various Board and executive team members. After Mr. Thompson was done, Executive VP and General Counsel Scott Taylor allowed me to move Proposal No. 3 (sponsoring shareholder: Kenneth Steiner) and to provide a short explanation of the proposal. I’ve been to many shareholder meetings, but this was my first time moving a proposal. I delivered a short summary about the proposal and then sat down.

One quick aside: I attended Symantec’s meeting last year and was very impressed with then-CEO John Thompson. I was looking forward to seeing him again this year, but had forgotten that corporations tend to despise outside shareholder proposals. Responding to such proposals takes up attorney time and internal resources. The usual corporate attitude is that if shareholders don’t like the way the executives run the company, they can sell their shares. So perhaps I should not have been surprised that while I was reading the presentation, Chairman John Thompson, seated only several feet from me, was staring at me with a “Make My Day” expression. (To his credit, Mr. Salem recognized me from last year and skipped the stare-down.) Thankfully, after the meeting, Mr. Thompson was his usual charismatic self, entertaining various attendees with some stories. Mr. Thompson appears to be in great shape and has lost some weight since last year.

After I moved the proposal and delivered the short summary, Mr. Taylor closed the polls and announced preliminary results. Proposal No. 3 passed. After Symantec takes additional steps--such as amending its bylaws--the threshold for calling special meetings will be 10% ownership, down from 25% ownership.

Mr. Taylor then introduced President and CEO Salem, who delivered a brief presentation about Symantec’s accomplishments. I’ve listed what I consider to be the most interesting information below:

1. 120 million consumers use Symantec’s software.

2. Symantec’s customer base is 30% consumer, 70% enterprise.

3. Symantec wants to “commoditize infrastructure,” which means driving costs out of the environment (I asked Mr. Salem to clarify this term after the meeting. He gave me an example of a consumer choosing between two hard drives--Symantec wants to give the consumer the same capabilities in each product so the consumer can choose based on price. For more information, see page 3 of the Annual Report, under “Enable our customers to simplify their heterogeneous environments and reduce costs...”)

4. Symantec is growing its data loss prevention and “online backup” business. Symantec anticipates a lot of growth from its “online backup” business.

5. Symantec’s growth comes from both “organic innovation and acquisitions.” For example, Symantec is testing “reputation-based” analytics (i.e., should this software run on my computer?) and has an impressive R&D budget. (Note: Symantec's reputation-based analytics feature is live in Norton's 2010 products.)

After the informal presentation, Mr. Salem opened the meeting to questions. A shareholder made several comments about Proposal No. 3, which he opposed. He said that labor unions hated Mr. Robert Miller (who was singled out several times in the proposal) because he was a tough CEO. He said American corporations are being “denigrated” by activists.

Mr. Salem, like most corporate executives, is no fan of outside shareholder proposals. He could have taken the bait and criticized the proposal; instead, he showed admirable diplomatic skills. He indicated he would work with Symantec’s largest shareholders, and he was committed to shareholder success. I immediately realized Symantec had chosen a CEO with excellent PR skills, which is important for any service-oriented company.

Another shareholder, Tony Mazzapelle, questioned a large goodwill writedown. Mr. Salem acknowledged the unusually large writedown of approximately $7.4 billion and explained that at one point, the dislocation of the stock market had caused Symantec’s goodwill to be valued more than the corporation itself. The company recognized the issue and complied with SEC rules to resolve the matter. He also clarified that the large goodwill was the result of several acquisitions, not just one.

Mr. Mazzapelle then raised an issue dear to my heart, which is non-GAAP vs. GAAP accounting. Personally, I hate non-GAAP results. Even though it’s legal and common to use them, non-GAAP numbers allow accountants too much leeway. Here, for example, using non-GAAP numbers allowed Symantec to report operating income of approximately $1.88 billion for Fiscal Year 2009. During the same time period, however, using GAAP, Symantec reported an operating loss of approximately $6.5 billion. Slight difference, no?

Mr. Mazzapelle rightfully complained that publishing both sets of numbers was confusing, and he asked whether the company would continue to publish both sets of numbers. Mr. Salem responded that Symantec would be using both GAAP and non-GAAP methodologies in the future. He said if shareholders wanted a clear vision of the company’s finances, they need only to review Symantec’s cash flow, which is approximately $1.5 billion annually. His response left even a skeptic like me satisfied.

Another shareholder questioned Symantec’s marketing costs. Mr. Salem indicated the company was aware of the issue and was focused on growth (which naturally entails significant marketing costs).

Was Symantec gaining or losing market share against McAfee (MFE)? Mr. Salem said Symantec was gaining in the large enterprise segment, but not in the small business segment. He also said, the “quality of our products has never been better.”

I asked my usual question: what is Symantec’s competitive advantage in the marketplace? Mr. Salem said that Symantec’s software could run on almost any platform (Linux, etc.) and protected consumers “against the widest range of threats.”

Overall, I was very pleased with Mr. Salem’s demeanor, knowledge, and delivery. Prior to the meeting, I was concerned that after having a CEO as charismatic as Mr. Thompson, Symantec’s next CEO would have difficulty measuring up. My concerns were clearly misplaced.

As I mentioned earlier, this is my second year attending a Symantec annual meeting. Once again, Symantec ran its annual meeting professionally. It deserves kudos for delivering a pleasing shareholder experience. Its ability to run a great meeting is especially notable because its local competitor, McAfee, doesn’t seem to emphasize its annual meetings. For example, in recent years, McAfee (MFE) hasn’t bothered with an informal slide presentation. To make matters worse, when I last attended McAfee’s annual meeting, shareholder relations staff treated me like an intruder (I appeared to be the only non-employee shareholder there, which might have bothered them). Although McAfee's stock has done better than Symantec's recently, once Symantec digests its massive (and perhaps ill-timed) acquisitions, it may outperform McAfee. In the meantime, long-term, patient shareholders may want to consider buying Symantec stock.

Disclosure: I own an insignificant number of SYMC shares. If I do add shares, I expect to hold them for several years. Also, I provided a copy of this article to Symantec prior to publication. Consequently, I incorporated some minor changes in my sole discretion. Almost all the changes related to correcting numerical values, such as changing $7.7 billion to $7.4 billion (I originally wrote $7.7 billion because that's the number I heard the shareholder say).

Symantec Corporation (SYMC) Shareholder Meeting

Symantec Corporation (SYMC) held its annual shareholder meeting today at its Cupertino, CA headquarters. Available food included a small spread of Starbucks coffee and untoasted bagels, with some juice drinks on ice. Shareholders received a free copy of Norton 360 Version 2.0 and a zip-up notebook with a pen and calculator inside.

There appeared to be about 25 employees attending, plus around 4 to 10 non-employee shareholders. Helyn Corcos, VP Investor Relations, was in charge of the logistics of the meeting. Ms. Corcos seems very detail-oriented and asked me to rewrite my full name on the sign-in sheet (my handwriting is usually illegible), and then noticed I held my shares in street name, i.e., through a broker. She referred me to another person, Mr. Wilcox, who indicated I could not vote at the meeting, because I had not requested a legal proxy. Later, Mr. Wilcox accepted my legal proxy and politely explained the process of converting the street proxy into a legal proxy. (A shareholder should mark on the ballot that s/he will be voting in person, and then mail his/her voting ballot back to the brokerage, after which it will send a legal proxy. I knew all this, but sometimes the ballot comes in the mail too late to mail it back and receive a legal proxy in time.)

Symantec's CEO and Chairman, John Thompson, led the entire presentation, starting with the formal part and then moving to the informal presentation. A link to Mr. Thompson's background is below:

http://www.symantec.com/about/profile/management/executives/bio.jsp?bioid=john_thompson

Mr. Thompson's informal presentation started with some company background. After explaining that Symantec helps consumers and corporations manage digital content, he pointed to four focus areas: control (handling your digital environment); security (adding that "keeping good things in is as important as keeping bad things out"); compliance (legal requirements); and availability (accessibility of your information). He mentioned Walt Mossberg's glowing review of Symantec's latest Norton Internet Security program:

http://ptech.allthingsd.com/20080917/symantec-rewrites-its-security-suite-to-curb-nuisances/

Mr. Thompson said "the number one issue is managing complexity," and Symantec's overall strategy was to "secure and manage" digital content. More specifically, Mr. Thompson identified five strategic areas:

1. Growing core franchises (security, etc.)
2. Scaling high growth businesses (data loss prevention, etc)
3. Seeding longer term growth (e.g., virtualization)
4. Going international
5. M&A

Symantec is in a good business. Data loss prevention is experiencing a 93% growth rate as more people buy computers and are willing to pay for online security. Symantec is ranked first in multiple categories in terms of market position and has a 58% market share in the fast-growing data loss prevention business.

Mr. Thompson said the company would use 1/2 of CFFO (cash flow from operations) for share buybacks, a very good sign.

The Q&A session started. I asked how Symantec differed from McAfee. I asked this same question from McAfee's CEO, who initially gave a confusing answer. Mr. Thompson's answer was clear and concise. He said McAfee focuses primarily on security, whereas Symantec has a dual focus of giving customers security as well as recovery tools. Mr. Thompson implied McAfee doesn't focus on helping its customers beyond avoiding disastrous online attacks.

Another shareholder asked about the Veritas acquisition. (Symantec bought Veritas and its large enterprise storage business in late 2005.) While seemingly a natural fit--Symantec does data protection for large enterprises, and Veritas handles storage for large enterprises--the acquisition ran into problems that have weighed down Symantec's share price. Symantec's shares were trading around $30 prior to the acquisition and now trade around $19, up from a 52-week low of $14.54.

This is where Mr. Thompson shined. Some CEOs will attempt to duck and dodge bad news, like MGM's CEO, who made overly optimistic comments at his most recent shareholder meeting. Other CEOs get upset at bad news or hard questions, like Enron's former CEO. But Mr. Thompson immediately took responsibility and didn't try to blow any smoke. He said that the execution of the Veritas acquisition has not been stellar, but has improved over the last twelve months. His answer was just the right length and with the perfect tone. I left thinking he knew exactly what the problem was and was on top of it.

Another shareholder asked about Mr. Thompson's thoughts on the recent financial turmoil (e.g., Lehman Bros and Merrill Lynch). Mr. Thompson said the underlying dynamics of his business have not changed--only the identity of the buyers/customers might change. He also indicated that financial companies cannot avoid online security compliance. He then turned the question over to the CFO, James Beer, who confirmed that 98% of Symantec's $2 billion were in banks (cash) or money market funds, not risky or illiquid instruments [such as auction rate securities].

I asked whether Symantec was working with VMware (WMV). Mr. Thompson said that Symantec was working with VMware and had demonstrated the "best backup capability" and very strong endpoint virtualization. He said Symantec might compete directly with VMware in the endpoint market rather than partner with it, because the nature of the software business fostered competition. (This can't be good news for VMware.)

Another shareholder asked a general question about phishing, and COO Enrique Salem said Symantec was working on numerous anti-phishing defenses, including "trustmarks." The meeting ended shortly thereafter.

After the meeting, I got a chance to hear Mr. Thompson speak informally with several people. Mr. Thompson has a gift when it comes to storytelling. He talked about a recent salmon fishing trip, which took place in an exclusive area. From a small story about fishing, he expanded into bears, even detailing an age range in which young male bears are the most dangerous. He expressed more interesting tidbits, like how you shouldn't get between a mother sow (pig) and her young offspring. He talked about silver salmon (after returning to their spawning stream, their coloring changes from pink to pale grey) and why you wanted to catch them right before or after they hit freshwater (they are used to saltwater, so when they hit freshwater, their skin "degenerates"--goes from pink to silver). When I was done listening, I came away thinking this is a man who notices the details and is a natural-born leader. I realized right then and there that Mr. Thompson is one of the most charismatic CEOs in Silicon Valley.

So much of enterprise security sales is about sales ability--the underlying software products aren't yet so different that technology is the primary differentiator. Having a CEO like Mr. Thompson provides Symantec with a clear advantage over competitors, because he is someone you want to listen to and have a drink with. Contrast this with McAfee's CEO, who, while certainly a nice man, doesn't inspire confidence and seems to throw out terms he doesn't fully understand to impress an audience. His offhand, irrelevant mention of the Basel II Accord still rings painfully in my head. I don't claim to understand it 100% either, but even the Dallas Federal Reserve Bank president declined to answer a question about Basel II publicly in a recent Commonwealth Club speech, saying it was too complex for a short answer and the questioner should speak with him privately.

It's worth noting that Symantec's meeting was very well-run--everyone knew what they had to do and adapted when necessary. When there was some static at Mr. Thompson's microphone, several people jumped and tried to fix it without interfering with the presentation. In contrast, during McAfee's shareholder meeting, I got the feeling that no one had spent substantial time planning the meeting in advance. In fact, one of McAfee's employees seemed upset non-employee shareholders had come to the meeting. Here, Mr. Thompson recognized a shareholder from last year and said hello.

If you're ever in a room with Mr. Thompson, go hear him speak. He's charismatic, dignified, and prepared. Mr. Thompson didn't just talk about salmon fishing after the meeting. He also briefly discussed politics. Not surprisingly for a man who has a preternatural ability to put people at ease, he said he supported Barack Obama because he was dismayed at how the country was becoming divided. He said we needed to work together, and he favored "statesmanship rather than brinksmanship." Regardless of your political beliefs, Mr. Thompson's natural leadership ability is exactly what shareholders should value in a CEO whose business involves sales. Between McAfee and Symantec, there is no question that Symantec appears to have a more professional management team. However, both McAfee and Symantec lack true diversity--there are no Asians/Indians on their Boards or in top management positions, which is an unforgivable oversight when some of the fastest growing markets are India, China, and possibly Vietnam. In time, I hope this oversight will change, but when the main problems with your company are diversifying upper management and finalizing an acquisition--neither of which directly impacts your underlying business--that's a good sign.

Disclosure: as of September 22, 2008, I own less than 20 shares of SYMC.