Business context and reporting period
This filing is Symantec Corporation’s Form 10-Q for the quarter ended October 2, 2015, the second quarter of fiscal 2016. The filing is not identified as a Gen Digital Inc. filing; investors should verify the entity and period. Symantec reported Consumer Security, Enterprise Security, and Information Management segments.
Financial results and key metrics
| Metric | Three months ended Oct. 2, 2015 | Prior-year quarter | Six months ended Oct. 2, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1.498 billion | $1.617 billion | $2.997 billion | $3.352 billion |
| Gross profit / margin | $1.234 billion / 82% | $1.339 billion / 83% | $2.479 billion / 83% | $2.765 billion / 82% |
| Operating income / margin | $203 million / 14% | $348 million / 22% | $404 million / 13% | $670 million / 20% |
| Net income | $156 million | $244 million | $273 million | $480 million |
| Diluted EPS | $0.23 | $0.35 | $0.40 | $0.69 |
| Operating cash flow | Not presented separately for the quarter | $434 million | $466 million |
For the quarter, revenue fell 7% year over year and net income fell about 36%. For the six months, revenue fell 11% and net income fell about 43%; the prior-year six-month period included an additional week. Quarterly gross margin was broadly stable, while operating margin declined substantially, chiefly reflecting lower revenue and higher restructuring, separation, and transition costs.
- Cash and cash equivalents were $3.097 billion and short-term investments were $260 million at October 2, 2015. The company reported total liquidity of approximately $4.4 billion, including an undrawn $1.0 billion revolving credit facility.
- Total debt was $1.740 billion, down from $2.096 billion at April 3, 2015. Symantec repaid $350 million of notes that matured during the quarter; no revolving-credit-facility borrowings were outstanding, and the company said it was in covenant compliance.
- Six-month investing cash flow was a $615 million inflow, primarily from investment maturities and sales; financing cash flow was an $814 million outflow, including debt repayment, $250 million of share repurchases, and $210 million of dividends and dividend equivalents.
- Deferred revenue was $3.271 billion, down from $3.417 billion a year earlier; management attributed much of the decrease to unfavorable currency movements.
Material changes and segment trends
- Revenue declines reflected U.S. dollar strength, weakness in Consumer Security, the exit from unprofitable retail arrangements, and changes to renewal practices. NetBackup performance partly offset declines.
- Consumer Security revenue declined 13% in the quarter and operating income declined 10%. Enterprise Security revenue declined 5% and operating income declined 41%, including increased research and development investment. Information Management revenue declined 5%, but operating income increased 14%, mainly from lower sales and marketing and headcount costs.
- International revenue was down 15% in the quarter; management estimated currency reduced international revenue by approximately $99 million. Management expected foreign exchange rates to continue affecting results.
- Quarterly restructuring, separation, and transition expense was $111 million, versus $30 million a year earlier; six-month expense was $235 million, versus $50 million. Remaining restructuring and separation costs were estimated at $50 million to $100 million, excluding tax effects and potential advisor fees.
Outlook, transaction, risks, and contingencies
- Symantec agreed to sell its Information Management business to Carlyle for approximately $8.0 billion in cash, plus assumption of certain liabilities and subject to adjustments. Closing was expected by the end of fiscal Q3 2016, subject to regulatory approvals and other conditions, including operational separation. The company estimated transaction-related U.S. and foreign income taxes payable at $1.3 billion to $1.7 billion; the final gain and tax expense had not been determined. Management expected the business to be presented as discontinued operations beginning in fiscal Q3 2016.
- Management said existing cash and investments, the credit facility, debt-market access, and operating cash flow should cover working capital, capital expenditures, dividends, debt service, and repurchases for at least the next 12 months. It planned to return approximately 50% of free cash flow to shareholders over time. The board authorized a new $1.5 billion repurchase program; in November, it authorized a $500 million accelerated share repurchase expected in fiscal Q3.
- The company reported no specific revenue or earnings guidance in the provided filing text. It cautioned that operating margins and operating cash flow may fluctuate, and that results are exposed to foreign exchange, execution and separation costs, and changes in business performance.
- In the GSA contract investigation and related False Claims Act litigation, Symantec accrued $25 million as the low end of its probable loss estimate. The government’s potential damages exposure had increased, and the company could not estimate the high end of the loss range; the matter could materially affect results or cash flows.
- Symantec accrued $30 million for an EDS/NDI class-action settlement; court approval and payment occurred after quarter-end. An $8 million patent-damages verdict in the Intellectual Ventures matter remained subject to the company’s post-trial effort to overturn it; Symantec had not accrued a loss.
Important facts for investors to verify
- Confirm the filing issuer and reporting period: the document is for Symantec Corporation, fiscal Q2 2016, not a filing labeled Gen Digital Inc. or calendar 2015 Q2.
- Track the Carlyle divestiture’s closing conditions, final proceeds and adjustments, tax cost, and discontinued-operations presentation.
- Assess whether recurring revenue and segment performance stabilize, particularly in Consumer Security and Enterprise Security, and separate currency effects from underlying trends.
- Monitor restructuring and separation spending, the $50 million to $100 million remaining cost estimate, and the resulting effect on operating margins and cash generation.
- Follow the GSA litigation exposure beyond the $25 million accrual, the EDS/NDI settlement, and the remaining patent matter.
- Review shareholder returns against cash generation and liquidity, including the planned accelerated share repurchase and dividend approvals.