Gen Digital Inc. quarterly report, Q2 FY2012

Business context and reporting period

This is Symantec Corporation’s Form 10-Q for fiscal 2012’s second quarter, the three months ended September 30, 2011, with six-month comparisons to October 1, 2010. The filing identifies Symantec—not Gen Digital—as the registrant. Symantec provides security, storage, and systems-management software and services.

Financial performance and position

Unless noted otherwise, amounts are in millions of U.S. dollars.

• Revenue grew 14% in both the quarter and six-month period. Content, subscription, and maintenance revenue rose 15%; license revenue rose 5% for the quarter.
• Quarterly growth was strongest in Security and Compliance (+27% revenue) and Consumer (+13%); Storage and Server Management rose 9%. Services revenue declined 16% as the company continued shifting consulting toward partners.
• Six-month operating cash flow was $811, versus $645 a year earlier. Capital spending was $124, implying operating cash flow less capital spending of $687. Investing activities used $520 and financing activities used $1,007.
• At September 30, cash and cash equivalents were $2,215 and short-term investments were $38. Long-term debt was $2,012; there was no current debt balance reported. The $1 billion revolving credit facility was undrawn, and the company reported compliance with its covenants. Management described net liquidity, including unused facility availability, as approximately $3.2 billion.
• Current assets were $3,433 and current liabilities $3,895. Deferred revenue totaled $3,452, including $2,962 current. Cash declined $735 from the fiscal year-end balance.

Material changes versus the prior comparable period

• Quarterly net income attributable to shareholders increased to $182 from $136; diluted EPS rose to $0.24 from $0.17. Operating income rose 31%, outpacing revenue growth.
• Growth included a favorable foreign-exchange contribution to revenue of approximately $63 for the quarter and $150 for six months, and acquisition-related revenue. Management attributed approximately $69 of quarterly content/subscription/maintenance revenue to fiscal 2011 acquisitions; the VeriSign authentication business contributed $69 to Security and Compliance revenue.
• Operating expenses increased, notably sales and marketing (+14% for the quarter) and R&D (+19%), reflecting higher compensation, acquisition-related employees, advertising, and unfavorable currency effects. Restructuring and transition expense fell to $8 from $28 for the quarter.
• Storage and Server Management quarterly operating income declined to $259 from $275 despite higher revenue; management cited increased sales and marketing, Clearwell-related staffing, appliance costs, and technical support costs. Clearwell contributed approximately $20 of revenue in the quarter and six-month period.
• Quarterly interest expense fell to $28 from $36 following debt repayments. The remaining $600 of 0.75% convertible notes matured and was repaid in cash in June 2011. The company also repurchased $473 of shares during the six months.

Outlook, commentary, risks, and unusual items

• Management stated that cash, investments, borrowing capacity, and operating cash generation should be sufficient for working capital and capital spending needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
• Management expected transition costs to continue in coming quarters during implementation of a new ERP system. The company was also continuing partner-led consulting transition efforts.
• In adopting updated goodwill-impairment guidance, Symantec recorded a $19 goodwill impairment for the Services reporting unit as a cumulative-effect adjustment to opening accumulated deficit—not as a current-period operating charge. Services goodwill was reduced to zero.
• The June 2011 Clearwell acquisition had total consideration of $392, including $364 cash net of cash acquired, assumed options, and $268 of goodwill. Goodwill was not tax deductible.
• The company contested $80 of IRS assessments, plus all penalties, relating to Veritas tax years 2002–2005; the matter remained in IRS Appeals with no scheduled completion date. Symantec said a reduction of up to $100 in unrecognized-tax-benefit reserves was reasonably possible within 12 months, but timing and outcome were uncertain.
• International sales expose results to currency movements; favorable exchange effects boosted reported revenue in the period, while exchange movements also increased expenses. The company noted the U.S. federal R&D tax credit was set to expire December 31, 2011.
• Symantec reported no material change in the risk factors from its prior Form 10-K, no significant change in market-risk exposures, and effective disclosure controls at period-end. It said other pending proceedings were not expected to have a material adverse effect, while noting losses in individual cases could not be estimated.

Important facts for investors to verify

• How much of reported revenue growth reflects underlying demand versus acquisitions and favorable foreign exchange, and whether these drivers persist.
• Whether deferred-revenue declines and the cash-flow contribution from receivable collections affect the sustainability of operating cash generation.
• Clearwell integration, revenue contribution, acquisition-related costs, and goodwill assumptions; also monitor the Services unit after its goodwill impairment.
• Resolution, timing, and potential financial-statement impact of the contested IRS assessment and possible reserve changes.
• Debt maturities and covenants, foreign-held cash and its availability for U.S. needs, and the pace of share repurchases relative to liquidity.