Business context and reporting period
The filing is for Symantec Corporation, a cybersecurity company, for the quarter ended December 29, 2017 (Q3 FY2018) and the nine months then ended. The filing identifies Symantec as the registrant; the request metadata names Gen Digital Inc. Symantec reported Enterprise Security and Consumer Digital Safety. On October 31, 2017, it sold its website security and public key infrastructure businesses to DigiCert, retaining an approximately 28% equity interest.
Financial results
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $1,209 | $1,041 | $3,624 | $2,904 |
| Gross profit / margin | $960 / 79.4% | $806 / 77.4% | $2,856 / 78.8% | $2,310 / 79.5% |
| Operating income (loss) / margin | $96 / 7.9% | $(16) / (1.5)% | $43 / 1.2% | $78 / 2.7% |
| Net income | $1,342 | $46 | $1,197 | $37 |
| Diluted net income per share | $2.01 | $0.07 | $1.80 | $0.06 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $684 | $(564) |
- Segment results: Q3 Enterprise Security revenue was $625 million, down 3%; Consumer Digital Safety revenue was $584 million, up 47%. Nine-month segment revenue was $1,957 million and $1,667 million, respectively.
- Cash and liquidity: At December 29, 2017, cash and cash equivalents were $2.142 billion and short-term investments were $390 million. An unused $1.0 billion credit facility was available through May 2021.
- Debt: Outstanding principal was $5.670 billion, down from $8.310 billion at March 31, 2017, following $2.6 billion of repayments. Reported long-term debt, net of discounts and issuance costs, was $5.587 billion.
- Other: Deferred revenue was $2.730 billion, including $2.151 billion current. The company declared a $0.075-per-share quarterly dividend. Nine-month stock-based compensation was $448 million.
Material changes versus the prior comparable period
- Q3 revenue increased 16%, driven largely by LifeLock, acquired in February 2017. Nine-month revenue rose 25%, reflecting the contributions of Blue Coat and LifeLock, partly offset by the DigiCert divestiture.
- Q3 gross margin improved by about 2 percentage points, while nine-month gross margin declined by about 1 percentage point, primarily due to higher amortization of acquired intangible assets.
- Q3 operating income improved from a loss to $96 million. Nine-month operating income declined to $43 million from $78 million, as higher stock compensation, advertising and promotion, and amortization offset cost-reduction savings.
- Net income and earnings per share were substantially affected by unusual items: the Q3 and nine-month results include a $658 million pretax gain on the DigiCert divestiture and an $810 million provisional tax benefit from the Tax Cuts and Jobs Act. The tax benefit included a $1.6 billion benefit from remeasuring deferred tax balances, partly offset by $821 million of transition-tax expense. These items make reported net income a poor standalone measure of underlying operating performance.
- Nine-month operating cash flow improved from an outflow of $564 million to an inflow of $684 million. The filing attributes the change in part to tax-related effects and higher deferred revenue; cash fell by $2.105 billion over the period, mainly reflecting debt repayments and other uses.
Outlook, risks and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided. Management expected the shift toward cloud, subscription, and virtual-appliance products with ratable revenue recognition to continue at least through Q4 FY2018, deferring more revenue to future periods.
- The company expected $70 million to $90 million of additional costs under its restructuring plan, primarily severance and facility exit costs; completion was expected in the first half of fiscal 2019.
- The accounting for the Tax Cuts and Jobs Act was provisional and incomplete. The transition-tax estimate, deferred-tax measurements, and treatment of certain new international tax provisions could change. Management noted that tax-rate changes, jurisdictional income mix, audits, and tax disputes could materially affect results.
- Symantec had accrued $25 million for the GSA contract and related False Claims Act matter, but said potential losses could exceed the accrual and the high end could not be estimated. In the Finjan patent case, an appellate ruling reduced or vacated all but $8 million of the prior $40 million judgment and remanded one damages issue.
- The WSS/PKI divestiture generated approximately $960 million in cash and a DigiCert equity interest valued at $160 million; transaction adjustments could apply. Symantec also had $1.6 billion of cash, cash equivalents, and short-term investments held by foreign subsidiaries.
Important facts for investors to verify
- Confirm the issuer and requested entity: this filing is for Symantec Corporation, notwithstanding the Gen Digital Inc. metadata.
- Assess earnings excluding the divestiture gain and unusually large tax benefit, and review the finalization of the company’s provisional tax accounting.
- Track organic segment performance, especially Enterprise Security revenue after the WSS/PKI sale and Consumer Digital Safety performance excluding LifeLock’s acquisition contribution.
- Monitor cash generation, deferred-revenue growth, debt repayment, and the availability and location of cash balances.
- Follow the GSA and Finjan proceedings, restructuring costs, and the timing and effects of the revenue-recognition transition.