Business context and reporting period
Symantec Corporation’s Form 10-Q covers its fiscal first quarter ended July 4, 2014. The quarter comprised 14 weeks, versus 13 weeks in the prior-year quarter ended June 28, 2013, limiting year-over-year comparability. Symantec provided security, backup, and availability products and services through three reporting segments: User Productivity & Protection, Information Security, and Information Management. All dollar figures below are in millions unless stated otherwise.
Financial and operating results
- Revenue: $1,735, up $26 (2%). Content, subscription, and maintenance revenue rose 4% to $1,574; license revenue fell 15% to $161. Management attributed much of the recurring-revenue increase to the extra fiscal week, while lower license revenue reflected prior-year sales incentives and sales-force transition.
- Profit and margins: Gross profit was $1,426, with an 82% gross margin, unchanged year over year. Operating income rose to $322 from $224; operating margin was approximately 18.6%, versus 13.1%. Net income was $236, up from $157; diluted EPS was $0.34, versus $0.22. The effective tax rate was 23%, versus 29%, including $17 of tax benefits in the current quarter.
- Segments: User Productivity & Protection revenue was $740 and operating income $270 (36% margin). Information Security revenue was $345 and operating income $68 (20% margin). Information Management revenue was $650 and operating income $89 (14% margin). Information Management operating income declined $59, primarily due to increased marketing and R&D spending; its revenue included NetBackup appliance growth offset by Backup Exec weakness.
- Cash flow: Operating cash flow was $293, versus $312. Investing cash outflow was $724, principally due to $712 of short-term investment purchases and $92 of capital expenditures, partly offset by investment maturities and sales. Financing cash outflow was $216, including $125 of buybacks and $104 of dividends. Cash and cash equivalents decreased $640 to $3,067; this decrease largely reflects investment purchases and should be viewed alongside short-term investments.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled about $4.0 billion; the company also had an unused $1.0 billion revolving facility. Long-term debt was $2,095, with no revolving-facility borrowings; Symantec reported covenant compliance. Approximately $2.5 billion of cash and cash equivalents was held by foreign subsidiaries.
- Balance sheet and capital returns: Total assets were $13,164 and total liabilities $7,326. Current assets were $5,288 versus current liabilities of $3,979. Symantec repurchased 6 million shares for $125 at an average $20.71 per share; $533 remained authorized. It paid a $0.15-per-share dividend and declared the same amount for payment in September 2014.
Material changes versus the prior comparable period
- Revenue growth was modest and partly reflected the extra week; license revenue declined despite growth in subscription-related revenue.
- Operating expenses fell $81 to $1,104. The largest reductions were restructuring and transition costs (down $61) and intangible amortization (down $42); R&D increased $46.
- Net income improved despite lower other income: the prior-year quarter included a $16 gain on investment sales. Current-quarter operating cash flow was lower, including a $104 IRS tax deposit/payment and declines in deferred revenue and accrued compensation.
- Geographically, EMEA revenue increased 5%, including a favorable $24 foreign-currency effect; Americas rose 1%, while Asia Pacific/Japan fell 2%. International revenue was 52% of the total.
Outlook, commentary, risks, and unusual items
- Management gave no specific revenue or earnings guidance in the supplied filing text. It said existing cash and investments, the credit facility, debt-issuance capacity, and operating cash flow should fund needs for at least the next 12 months and the foreseeable future.
- Fiscal 2015 priorities included optimizing margins, investing in growth opportunities, reducing costs and improving efficiency, strengthening the executive team, and returning cash to shareholders. The company expected over time to return approximately 50% of free cash flow to stockholders through dividends and repurchases.
- GSA contract litigation: The U.S. government was investigating contract-compliance matters and intervened in a sealed civil lawsuit in July 2014. The government’s stated potential damages analysis had increased from an initial approximately $145 estimate for direct government sales; potential claims involving state and reseller sales could increase exposure materially. Symantec accrued $25 as its estimated low end but could not determine a precise loss range. The company warned the matter could materially affect results and cash flows.
- Tax matters: Symantec had $126 on deposit with the IRS for fiscal 2009–2012 audit matters, including a $104 deposit during the quarter. It said unrecognized tax benefits could decrease by $30–$120 over the next 12 months; an estimated $15–$65 could affect the tax provision, depending on resolution.
- The quarter included ongoing restructuring activity; plan costs incurred since inception were $236, and the plan was substantially complete by March 28, 2014. The company also reported a $19 net cash payment for acquisitions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing said there were no material changes to the risk factors described in the prior annual report.
Important facts for investors to verify
- Assess underlying revenue trends excluding the 14th week and favorable EMEA currency effects, particularly the continuing decline in license revenue and regional weakness in Asia Pacific/Japan.
- Track Information Management profitability and whether higher investment in NetBackup appliances translates into sustainable revenue and margins.
- Review developments in the GSA False Claims Act matter, including potential claims beyond direct federal sales, settlement terms, and whether the $25 accrual remains adequate.
- Monitor cash generation after tax payments, capital expenditures, dividends, and repurchases; distinguish cash balances from the short-term investment portfolio.
- Evaluate the timing and outcome of IRS and other tax audits, including potential changes to the effective tax rate and the treatment of foreign-held cash.
- Consider that year-over-year comparisons are affected by unequal quarter lengths and that the reported tax rate benefited from discrete tax items.