Symantec Corporation (identified in request as Gen Digital Inc.) — Form 10-Q summary
Reporting period: Quarter and six months ended September 29, 2017 (Q2 and YTD fiscal 2018). The filing registrant is Symantec Corporation. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and key financial results
Symantec reported two segments: Enterprise Security and Consumer Digital Safety. Results include Blue Coat, acquired in August 2016, and LifeLock, acquired in February 2017; their contributions significantly affect year-over-year comparisons. The WSS and PKI business was classified as held for sale during the quarter.
| Metric | Q2 FY18 | Q2 FY17 | YTD FY18 | YTD FY17 |
|---|---|---|---|---|
| Revenue | $1,240 million | $979 million | $2,415 million | $1,863 million |
| Gross profit / margin | $978 million / 78.9% | $769 million / 78.5% | $1,896 million / 78.5% | $1,504 million / 80.7% |
| Operating income (loss) | $(9) million | $(12) million | $(53) million | $94 million |
| Net income (loss) | $(12) million | $(144) million | $(145) million | $(9) million |
| Diluted net loss per share | $(0.02) | $(0.23) | $(0.24) | $(0.01) |
Q2 revenue rose 27% year over year; YTD revenue rose 30%. Segment revenue was $686 million for Enterprise Security and $554 million for Consumer Digital Safety in Q2. Segment operating income was $147 million and $252 million, respectively, before corporate-level costs and other reconciling items. Consolidated operating results remained near breakeven for Q2, while YTD operating income fell to a loss, principally reflecting higher stock compensation, acquired-intangible amortization, advertising, and restructuring and transition costs.
Cash flow, debt, and liquidity
- For the six months, continuing operating activities generated $421 million, versus a $559 million use in the prior-year period. Total operating cash flow, including discontinued operations, was $390 million versus a $712 million use.
- Capital expenditures were $72 million. Continuing operating cash flow less capital expenditures was approximately $349 million, a derived measure not presented as such by the company.
- Cash and cash equivalents were $1.826 billion and short-term investments were $200 million at September 29, 2017. The company reported approximately $3.0 billion of liquidity including its unused $1.0 billion credit facility; $1.4 billion of cash and investments was held by foreign subsidiaries.
- Debt principal was $6.3 billion (reported debt carrying value $6.209 billion). The company repaid $2.0 billion of debt during the half-year. Approximately $2.3 billion of variable-rate borrowings were exposed to interest-rate changes.
- Cash dividends paid, including dividend equivalents, were $114 million for the six months. A $0.075-per-share dividend was declared for payment in December 2017.
Material changes and unusual items
- Q2 segment revenue growth reflected acquisitions: Enterprise Security revenue increased 20% and Consumer Digital Safety increased 37%. Norton-branded product revenue continued to decline, although subscription contracts and bundled products moderated the decline.
- Acquisition-related deferred-revenue fair-value adjustments reduced revenue otherwise recognizable by $15 million in Enterprise Security and $21 million in Consumer Digital Safety during Q2; YTD reductions were $15 million and $50 million, respectively.
- Q2 cost of revenue increased $52 million, including $26 million of higher acquired-intangible amortization. YTD cost of revenue rose $160 million, including $75 million of higher amortization. YTD gross margin declined about two percentage points.
- YTD operating expenses included $323 million of stock-based compensation, versus $134 million a year earlier. Restructuring, transition, and other costs were $185 million YTD, including $120 million of transition costs.
- Fireglass and Skycure were acquired in July for aggregate consideration of $345 million, net of cash acquired. Total cash consideration for acquisitions during the half-year was $361 million.
- On October 31, 2017, after quarter-end, Symantec completed the WSS and PKI sale for approximately $960 million in cash and a roughly 27% equity interest in DigiCert. Proceeds, net of taxes and costs, were expected to be used primarily to repay debt; the sale gain was expected to be recorded in Q3 FY18.
- Symantec paid $74 million to settle a LifeLock shareholder appraisal claim against a $68 million recorded liability; the additional $6 million was charged to general and administrative expense.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance for the fiscal year is provided in the supplied filing text. Management expects operating margins to fluctuate with results and expense timing.
- The company expected to incur a further $165 million to $200 million of costs under its Fiscal 2017 restructuring plan, with completion expected in FY18. Remaining restructuring cash payments were estimated at $185 million to $220 million, primarily in the third and fourth quarters. Management cited a commitment to realize $580 million of cost savings, including acquisition synergies; timing and realization remain uncertain.
- The company said net proceeds from the WSS and PKI divestiture were expected to be used primarily for debt repayment. It also prepaid an additional $380 million of term-loan principal in October 2017.
- For the GSA investigation and related False Claims Act litigation, Symantec accrued $25 million as the low end of its probable loss estimate, but could not determine the high end; the government’s potential claims could be materially higher.
- For the Finjan patent case, the company reported an accrued estimated loss and interest of $40 million and said it was appealing the judgment.
- Management reported no material change to the risk factors in its latest 10-K. Disclosure controls were considered effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported growth and segment profitability is attributable to Blue Coat and LifeLock, and how the acquired businesses perform organically.
- Whether Norton revenue declines moderate, and whether consumer subscription and bundling trends offset them.
- Progress toward the $580 million savings commitment, restructuring costs and cash outlays, and their effect on operating margins.
- Use of DigiCert sale proceeds, the value and accounting of the retained equity interest, and subsequent debt reduction.
- Potential outcomes and additional exposure from the GSA matter and Finjan litigation beyond recorded accruals.
- Cash availability, foreign-held funds, variable-rate debt exposure, and the company’s ability to sustain dividends while deleveraging.