Business context and reporting period
This is Symantec Corporation’s Form 10-Q for the first quarter of fiscal 2020, ended July 5, 2019—not a filing under the later Gen Digital name. Symantec reported Enterprise Security and Consumer Cyber Safety businesses. The quarter contained 14 weeks versus 13 weeks in the comparable prior-year quarter, affecting year-over-year comparisons.
Financial results and liquidity
| Metric | Quarter ended July 5, 2019 | Comparable 2018 quarter |
|---|---|---|
| Revenue | $1.247 billion | $1.156 billion |
| Gross profit / margin | $975 million / 78% | $907 million / 78% |
| Operating income | $157 million | $2 million |
| Net income (loss) | $26 million | $(60) million |
| Diluted EPS | $0.04 | $(0.10) |
| Cash from operations | $325 million | $331 million |
- Operating margin was 13%, compared with approximately 0% in the prior-year quarter. Revenue increased 8%; management attributed about $81 million of revenue growth to the extra week, as well as higher Enterprise Security revenue from services recognized over time.
- Enterprise Security revenue was $611 million, up 10%, while operating income fell to $39 million from $56 million. Consumer Cyber Safety revenue was $636 million, up 6%, and operating income rose to $336 million from $263 million.
- Operating cash flow was nearly flat year over year. Investing activities provided $38 million; financing activities used $625 million, including $559 million of share repurchases. Capital expenditures were $49 million.
- Cash and cash equivalents were $1.532 billion; short-term investments were $162 million, for combined cash, cash equivalents and investments of $1.694 billion, down from $2.043 billion at March 29, 2019. Current assets were $2.561 billion and current liabilities $3.608 billion.
- Total debt principal was $4.5 billion, with $494 million classified as current debt. The company had no revolving-credit borrowings and $1.0 billion available under its facility through May 2021; it reported compliance with debt covenants.
- Contract liabilities were $2.899 billion, down from $3.056 billion at fiscal year-end. Remaining performance obligations were $2.506 billion, excluding approximately $416 million of Consumer Cyber Safety customer deposits.
Material changes, outlook and risks
- Operating income improved substantially, mainly reflecting the additional week and lower restructuring and transition costs (down to $25 million from $96 million) and lower stock-based compensation. The extra week also contributed to higher costs, so reported growth is not directly like-for-like.
- Income tax expense was $82 million, a 76% effective rate. This included a cumulative $62 million charge following a Ninth Circuit decision in the Altera tax case; rehearing or further appeal was possible, and the final outcome remained uncertain.
- After quarter-end, Symantec agreed to sell its Enterprise Security assets to Broadcom for $10.7 billion in cash plus assumption of certain liabilities. Closing was expected before the end of calendar 2019, subject to approvals and other conditions. Estimated U.S. and foreign income taxes payable from the transaction were $2.3–$2.7 billion. The sale would leave future operations focused on Consumer Cyber Safety.
- Also after quarter-end, the board approved a restructuring targeting an approximately 7% reduction in net global headcount and facility/data-center actions, with estimated costs of $100 million. The board raised the share-repurchase authorization to $1.6 billion. No specific company revenue or earnings guidance is provided in the filing text.
- Contingencies include an ongoing SEC investigation, securities and derivative litigation, and a government GSA-contract matter. Symantec accrued $25 million for the GSA matter but said additional loss was reasonably possible and the high end could not be estimated. Purchase obligations were $1.107 billion; the filing also reports $703 million of deemed-repatriation tax payable in installments.
- Key risks include failure or delay of the Broadcom sale and disruption to customers, employees or operations while pending; dependence on the remaining consumer business after closing; competition, renewals and technology execution; cybersecurity, privacy and service-continuity risks; tax uncertainty; and substantial debt and legal exposures.
Most important facts for investors to verify
- Whether the Broadcom transaction closed on expected terms and how taxes, liabilities, separation costs and sale proceeds affected subsequent financial statements.
- Underlying revenue, margins and cash generation excluding the extra reporting week, particularly Enterprise Security performance and Consumer Cyber Safety customer trends.
- The final outcome and potential financial effects of the Altera tax dispute, SEC investigation, securities litigation and GSA matter.
- Debt repayment plans, liquidity after the sale and tax payments, and the scale and execution costs of the announced restructuring and buybacks.