Business context and reporting period
NortonLifeLock Inc. filed this unaudited Form 10-Q for the 13-week quarter ended July 1, 2022, the first quarter of fiscal 2023. The company provides consumer cybersecurity, identity-protection and online-privacy products. The filing reports the company under the NortonLifeLock name.
Key financial metrics
| Metric | Quarter ended July 1, 2022 | Prior-year quarter |
|---|---|---|
| Revenue | $707 million | $686 million |
| Gross profit / margin | $605 million / 86% | $584 million / 85% |
| Operating income / margin | $261 million / 37% | $287 million / 42% |
| Net income | $200 million | $181 million |
| Diluted EPS | $0.33 | $0.31 |
| Operating cash flow | $215 million | $258 million |
Revenue increased 3% year over year. Identity and information-protection revenue was $294 million, up from $274 million; consumer-security revenue was $413 million, versus $412 million. Foreign exchange reduced reported revenue by $27 million. Direct customer count was 23.3 million at quarter-end, compared with 23.1 million; direct ARPU was $8.82, versus $8.84.
Cash and cash equivalents were $1.291 billion at July 1, down from $1.887 billion at April 1; there were no short-term investments at quarter-end. Cash from operations was $215 million, investing activities provided $4 million, and financing activities used $807 million. Financing outflows included $410 million of debt repayments, $300 million of share repurchases and $81 million of dividends paid.
Debt principal totaled $3.336 billion ($3.328 billion net carrying value), including $1.703 billion in term loans, $1.1 billion in senior notes and $525 million in convertible notes. The company had an undrawn $1 billion revolving facility and reported compliance with its debt covenants. Current debt was $614 million, including $525 million of convertible notes due August 2022; the company stated it intended to settle principal and conversion rights in cash at maturity.
Contract liabilities totaled $1.220 billion, including $1.183 billion current. Remaining performance obligations were $783 million, excluding $437 million of customer-deposit liabilities; approximately 94% of the $783 million was expected to be recognized as revenue within 12 months.
Material changes versus the prior comparable period
- Net income rose $19 million despite lower operating income, primarily because income-tax expense fell to $29 million from $71 million; the effective tax rate declined to 13% from 28%.
- Operating expenses increased 16% to $344 million. General and administrative expense rose $59 million to $104 million, primarily reflecting a $52 million increase in legal accruals and related costs, including $45 million of prejudgment interest on a patent case.
- Operating income declined $26 million, and operating margin fell about five percentage points, chiefly reflecting higher general and administrative expense.
- Operating cash flow fell $43 million year over year, which management attributed primarily to lower accounts payable and a decrease in contract liabilities.
- Cash and short-term investments fell $600 million from April 1, mainly because of the $400 million senior-note repayment and $300 million of repurchases. The company repurchased 12 million shares at an average $24.35 per share.
Outlook, risks, contingencies and unusual items
Management said existing cash, operating cash generation and available credit were expected to meet working-capital needs and support ongoing operations for at least 12 months, as well as known long-term contractual obligations. The filing provides no specific numerical revenue or earnings guidance.
The proposed Avast acquisition was estimated at $8.1–$8.6 billion, depending on shareholder elections, and was expected to be financed with cash, operating cash generation and new debt. As of the filing, final U.K. Competition and Markets Authority approval remained pending; the CMA provisionally cleared the deal on August 3, after quarter-end. Closing was anticipated between mid-September and early October 2022, subject to remaining approvals and conditions. Failure to obtain approval could trigger a break fee of up to $200 million. The acquisition would materially increase financing needs and debt.
In a patent-infringement case, a jury awarded Columbia University $185 million and found willful infringement. NortonLifeLock accrued an estimated low-end loss of approximately $230 million, including prejudgment interest, and intended to appeal and cease using the technology found to infringe. The award could be enhanced; the company said additional loss was reasonably possible but not reasonably estimable.
In the long-running GSA contract litigation, the company accrued an estimated low-end loss of $50 million, including settlements with Florida and New York. The court had not yet issued judgment following trial; the company said a greater loss was reasonably possible but not estimable. Separately, the SEC staff informed the company in April 2022 that it had concluded its investigation and did not intend to recommend enforcement action.
Management reported that easing pandemic restrictions were associated with decreasing market demand and increased competition. It warned that recessionary conditions could reduce demand or customer retention, as the products are discretionary purchases. Other disclosed risks include foreign-exchange exposure, cyberattacks and privacy regulation, dependence on certain Broadcom-provided services, variable-rate debt and the transition from LIBOR, acquisition integration and financing, and unresolved tax positions. Long-term income taxes payable included $556 million for uncertain tax positions; timing and ultimate settlement amounts were uncertain.
Important facts for investors to verify
- Current status, final cost, financing terms and integration progress of the Avast transaction, including any regulatory conditions.
- Outcome and potential exposure in the Columbia patent case and GSA litigation, compared with the amounts accrued.
- Cash generation, debt maturities and refinancing needs, particularly the August 2022 convertible-note maturity and acquisition-related borrowing.
- Whether revenue, customer retention and ARPU trends hold up after accounting for foreign-exchange effects and changing market demand.
- How much of the quarter’s net-income growth reflected the lower tax rate, and whether that tax benefit is repeatable.