Business context and reporting period
This is NortonLifeLock Inc.’s Form 10-Q for the second quarter and first six months of fiscal 2022, ended October 1, 2021 (13 and 26 weeks, respectively). The company provides consumer cybersecurity, identity and information-protection solutions and reports one operating segment. The filing predates the company’s later name, Gen Digital Inc.
Key financial results
| Metric | Quarter ended Oct. 1, 2021 | Prior-year quarter | Six months ended Oct. 1, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $692 million | $626 million | $1.378 billion | $1.240 billion |
| Gross profit / margin | $592 million / 86% | $536 million / 86% | $1.176 billion / 85% | $1.064 billion / 86% |
| Operating income / margin | $287 million / 41% | $230 million / 37% | $574 million / 42% | $350 million / 28% |
| Continuing-operations income | $333 million | $166 million | $514 million | $315 million |
| Net income | $333 million | $64 million | $514 million | $182 million |
| Diluted EPS | $0.56 | $0.11 | $0.87 | $0.30 |
| Operating cash flow | $60 million | $(113) million | $318 million | $57 million |
Quarterly revenue grew 11%: consumer security revenue was $415 million, up from $370 million, and identity and information-protection revenue was $277 million, up from $256 million. Management attributed growth to a higher direct-customer count and Avira revenue. Direct customer count at quarter-end was 23.3 million versus 20.7 million; monthly direct ARPU was $8.85 versus $9.10.
Quarterly net income included a $175 million gain on the Mountain View property sale. The filing does not provide a separate adjusted earnings measure. The prior-year comparison also included discontinued-operation losses of $102 million for the quarter and $133 million for the six-month period; there was no discontinued-operation activity in the current periods.
Liquidity, debt and capital allocation
- At October 1, cash, cash equivalents and short-term investments were $1.541 billion, up from $951 million at April 2. Six-month operating, investing and financing cash flows were $318 million, $313 million and $(33) million, respectively. Investing cash flow included $355 million of net proceeds from the Mountain View property sale.
- Total debt principal was $3.866 billion ($3.852 billion carrying value); $1.073 billion was classified as current. The company had no revolver borrowings and $1 billion available under its existing revolving facility. It reported compliance with debt covenants.
- The company paid $157 million in dividends and equivalents during the first six months. The board declared a further $0.125-per-share dividend for December 2021. No shares were repurchased in the six-month period; $1.774 billion remained authorized.
- Management said existing cash, operating cash generation and available credit were expected to meet working-capital and known obligations for at least 12 months.
Material changes, outlook and risks
- Operating income improved year over year, with higher revenue, lower restructuring costs and ongoing G&A efficiencies; increased advertising spending partly offset those benefits. The prior-year six-month period included $141 million of continuing-operations restructuring and other costs, compared with $12 million in the current period.
- The July sale of Mountain View land and buildings generated $355 million net cash proceeds and a $175 million gain; the company leased back part of the property for seven years, with a five-year extension option.
- The proposed Avast acquisition was valued at approximately $8.1–$8.6 billion, depending on shareholder elections, and was expected to close by mid-calendar 2022 subject to Avast shareholder, regulatory and other approvals. Planned funding included cash, operating cash generation and new debt; interim financing facilities were arranged. A termination break fee of $100–$300 million could apply in specified circumstances. No specific financial guidance was provided.
- The company reported no meaningful COVID-19 impact to date on customer success, sales and marketing, or employee productivity, but warned that a prolonged recession could reduce demand and retention for its discretionary subscription products.
- Key contingencies include the GSA contract litigation: NortonLifeLock accrued $50 million as the low end of probable losses, including a $0.5 million Florida settlement, but said additional loss was reasonably possible. Trial was scheduled for February 28, 2022. A proposed $70 million securities-class-action settlement had preliminary court approval; $67.1 million was covered by insurance, with final approval and further opt-outs pending. The company could not estimate potential loss from the ongoing SEC investigation.
- Other disclosed risks include execution and integration of Avast and Avira, competition and customer retention, cyberattacks and privacy regulation, reliance on Broadcom-provided engineering and threat-response services, tax uncertainties, and refinancing, variable-rate and LIBOR-transition risks.
Important facts for investors to verify
- How much of revenue and customer growth is organic versus attributable to Avira, and whether direct ARPU stabilizes or continues to decline.
- The sustainability of earnings and cash generation excluding the $175 million property-sale gain and the effect of lower restructuring costs.
- Avast transaction approvals, final consideration mix, financing terms, expected synergies and integration costs.
- Potential outcomes and cash exposure from the GSA litigation, securities settlement, derivative suits and SEC investigation.
- Debt maturities and refinancing needs, particularly the $1.073 billion current debt classification, alongside planned dividends and repurchase authorization.