Filing summary
Company and period: The filing is by NortonLifeLock Inc. (ticker NLOK), a consumer cybersecurity and identity-protection provider—not a filing under the name Gen Digital Inc. It reports fiscal 2021 first-quarter results for the 13 weeks ended July 3, 2020, compared with the 14 weeks ended July 5, 2019. The company’s fiscal year ends near March 31.
Financial performance and liquidity
| Metric | Quarter ended July 3, 2020 | Comparable quarter |
|---|---|---|
| Revenue | $614 million | $650 million |
| Gross profit / margin | $528 million / 86% | $554 million / 85% |
| Operating income / margin | $120 million / 20% | $140 million / 22% |
| Continuing-operations income | $149 million | $38 million |
| Net income / diluted EPS | $118 million / $0.19 | $26 million / $0.04 |
| Operating cash flow | $170 million | $325 million |
- Revenue declined 6%; management attributed the decrease primarily to approximately $44 million of revenue from the extra week in the prior-year quarter. Direct customer count at quarter-end rose to 20.6 million from 20.1 million; direct ARPU was $9.03 versus $8.83, with the prior-year ARPU adjusted to exclude the extra week.
- Net income included a $50 million income tax benefit and a $31 million loss from discontinued operations. The effective tax rate on continuing operations was negative 51%, primarily reflecting a favorable tax ruling and other tax benefits.
- Cash, cash equivalents and short-term investments were $1.131 billion at quarter-end, down from $2.263 billion at April 3. Total debt principal was $3.625 billion; cash and investments less debt principal implies net debt of approximately $2.494 billion. The company had an undrawn $1 billion revolving credit facility and was compliant with debt covenants.
- Current assets were $1.950 billion and current liabilities $2.548 billion. Contract liabilities totaled $1.058 billion. Remaining performance obligations were $758 million, excluding $299 million of customer deposits; the company expected to recognize approximately 96% of those obligations over the next 12 months.
Changes, outlook and notable items
- Operating expenses were $408 million, nearly flat year over year, but restructuring and other costs increased to $127 million from $13 million. The current quarter included $48 million of contract cancellation charges, $55 million of asset write-offs and impairments, and $7 million of stock-based compensation related to restructuring.
- Cost-reduction initiatives lowered sales and marketing, research and development, and general and administrative expenses. Management reported operating income fell $20 million, primarily due to lower revenue and higher restructuring costs.
- Cash flow from operations decreased to $170 million from $325 million. Financing cash outflow was $1.305 billion, primarily reflecting $1.179 billion paid to settle the principal and conversion rights of $625 million of convertible notes, plus $105 million in dividends and dividend equivalents. The settlement generated a $20 million gain on debt extinguishment.
- The November 2019 restructuring plan was estimated to cost $550 million, excluding stock-based compensation; $463 million had been incurred by quarter-end. Actions affecting approximately 3,100 employees were expected to be substantially complete by September 2020.
- No formal earnings or revenue guidance is provided in the supplied filing text. The company planned to borrow under a $750 million delayed-draw term loan in fiscal Q2 to repay its $750 million 4.2% notes due September 2020. It declared a $0.125-per-share dividend for payment in September, subject to the stated terms.
- The company said it had not yet experienced a material increase in cancellations or material decline in retention due to COVID-19, but warned that a prolonged downturn could weaken demand and retention. It also cited work-from-home, operational, employee productivity, and partner risks.
- After quarter-end, the company completed the sale of certain assets for $120 million cash on July 27, 2020. It estimated $73 million of additional fiscal 2021 income taxes arising from the Broadcom enterprise-security sale.
Risks and contingencies
- The GSA-related litigation remained unresolved. The company accrued $25 million as the low end of its probable loss estimate and disclosed a reasonable possibility of loss above that accrual. Potential exposure could be significant; no final amount was established in the filing.
- The company continued to cooperate with an SEC investigation and faced securities class-action and derivative litigation. It said it could not assess whether a material loss was reasonably possible or estimate a range for these matters.
- The company identified dependence on Broadcom for certain critical engineering and threat-response services, alongside risks from employee departures and reduced resources following the enterprise-security divestiture.
- Other financial risks include substantial debt and refinancing needs, uncertain tax positions, COVID-19 effects, competition, cybersecurity and privacy exposures, and execution of restructuring and business transitions.
Important facts for investors to verify
- Confirm the issuer and reporting-period mapping: this is NortonLifeLock Inc.’s fiscal Q1 2021 filing, not a filing presented under the Gen Digital Inc. name.
- Assess the sustainability of earnings given the large tax benefit, restructuring charges, impairments, and discontinued-operation loss.
- Review cash generation and liquidity against debt maturities, including the planned refinancing of the September 2020 notes and the company’s dividend commitments.
- Track customer count, ARPU, cancellations and retention, particularly as pandemic-related economic conditions evolve.
- Monitor outcomes and potential financial exposure from the GSA matter, SEC investigation, and securities litigation.