Gen Digital Inc. quarterly report, Q1 FY2018

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Business context and reporting period

Symantec Corporation, a global cybersecurity company, filed this Form 10-Q for the 13 weeks ended June 30, 2017 (Q1 fiscal 2018), compared with the 13 weeks ended July 1, 2016. The filing is Symantec’s—not Gen Digital’s. Blue Coat, acquired in August 2016, and LifeLock, acquired in February 2017, are included in the current-period results; the former Veritas business is reported as discontinued operations.

Financial performance and position

  • Revenue: $1.175 billion, up 33% from $884 million, primarily reflecting the Blue Coat and LifeLock acquisitions. The company excluded $53 million of revenue due to acquisition-date deferred-revenue fair-value adjustments.
  • Profit and margins: Gross profit was $918 million; gross margin was approximately 78%, down about five percentage points year over year. Continuing-operations operating loss was $44 million versus operating income of $106 million; operating margin was approximately negative 4% versus positive 12%. Continuing-operations net loss was $110 million, or $0.18 per diluted share. Including discontinued operations, net loss was $133 million, or $0.22 per diluted share.
  • Segments: Enterprise Security revenue was $646 million, up 34%, and segment operating income was $94 million versus $28 million. Consumer Digital Safety revenue was $529 million, up 31%, while segment operating income was $230 million versus $225 million. Acquisition-related revenue drove much of the growth; Norton product revenue continued to decline, though subscription sales and combined packaging moderated the decline.
  • Cash flow: Continuing operating activities provided $251 million, compared with $740 million used in the prior-year quarter; management attributed the improvement mainly to $914 million lower income-tax payments, as the prior period included a tax payment related to the Veritas divestiture. Investing activities used $54 million and financing activities used $2.126 billion, including $2.010 billion of debt repayments. Cash and cash equivalents declined by $1.941 billion to $2.306 billion.
  • Liquidity and debt: Cash, cash equivalents and short-term investments totaled approximately $2.3 billion, with a $1.0 billion unused credit facility and stated liquidity of approximately $3.3 billion. Debt principal was $6.3 billion, down from $8.31 billion at March 31, after $1.2 billion of Term Loan A-5 prepayments, $200 million of Term Loan A-1 prepayments, and repayment at maturity of $600 million of notes. Current liabilities exceeded current assets by $52 million.
  • Other metrics: The company declared a $0.075 per-share dividend, unchanged year over year. Stock-based compensation expense increased to $147 million from $49 million.

Material changes versus the prior comparable period

  • Revenue rose substantially with the acquired businesses, but acquisition-related deferred-revenue adjustments reduced reported revenue by $53 million.
  • Operating results shifted from profit to loss. Management cited higher stock-based compensation and acquired-intangible amortization, as well as restructuring and acquisition costs. Consolidated operating expenses were $962 million versus $629 million.
  • Interest expense increased by $57 million, primarily reflecting borrowings following Q1FY17; debt repayments in the current quarter substantially reduced period-end debt.
  • Discontinued operations contributed a $23 million loss, compared with $69 million of income in the prior-year quarter. Current-period discontinued operations included $19 million of revenue and $41 million of tax expense.

Outlook, risks and unusual items

  • Cost actions: The fiscal 2017 restructuring plan is expected to cost $430 million–$480 million in total and be completed in fiscal 2018. The company expected $195 million–$245 million of expenses in the remaining fiscal 2018 quarters and $235 million–$270 million of remaining cash payments. It expects the plan and acquisition synergies to support its commitment to $580 million of cost savings, including synergies from Blue Coat and LifeLock.
  • Subsequent transactions: Fireglass and Skycure acquisitions closed after quarter-end for approximately $225 million and $205 million, respectively, primarily in cash. Symantec agreed to sell its website security and related public-key-infrastructure business for approximately $950 million upfront cash plus an approximately 30% equity interest; proceeds net of expected taxes and expenses were expected to be used to repay debt. The sale was subject to customary closing conditions.
  • Legal contingencies: In the GSA-related matter, Symantec accrued $25 million as the low end of its probable loss estimate but said it could not estimate the high end; potential exposure could be material. A $40 million Finjan patent verdict and related interest had been accrued and was being appealed. The EDS/NDI settlement matter was closed after the appeal period expired.
  • Other risks: International revenue is exposed to currency movements; foreign-exchange movements adversely affected current-quarter international revenue by approximately $11 million year over year. Interest on $2.3 billion of variable-rate borrowings is exposed to rate changes. Tax-audit outcomes and changes in geographic earnings mix may affect tax expense. Management reported effective disclosure controls and no material change in internal control over financial reporting.
  • The filing provides no specific revenue or earnings guidance for the full fiscal year and cautions that quarterly results are not necessarily indicative of full-year results.

Important facts for investors to verify

  1. How much of revenue growth and segment performance is organic versus attributable to Blue Coat and LifeLock, and how acquisition-related deferred-revenue adjustments affect comparability.
  2. Whether the expected restructuring savings and acquisition synergies are achieved, relative to remaining costs and cash payments.
  3. Debt reduction plans, variable-rate exposure, and the final net proceeds and use of proceeds from the planned website-security business sale.
  4. Developments in the GSA and Finjan matters, including potential exposure beyond accrued amounts.
  5. Trends in Norton revenue, cash generation, and the effect of subsequent acquisitions and the website-security divestiture on continuing operations.