Gen Digital Inc. (then NortonLifeLock Inc.) — Form 10-Q Summary
Reporting period: Fiscal second quarter ended October 4, 2019, with six-month comparisons to the period ended September 28, 2018. The company changed its name from Symantec Corporation to NortonLifeLock Inc. on November 4, 2019; the filing predates its later Gen Digital name. Amounts below are in U.S. dollars, generally millions except per-share data.
Business context
The filing presents the Enterprise Security business as discontinued operations following the agreement to sell certain assets to Broadcom. The sale closed on November 4, 2019, after quarter-end, for a stated purchase price of $10.7 billion. Continuing operations therefore primarily reflect the consumer business, and the company reported one segment. Historical results were reclassified to reflect the discontinued-operations presentation.
Financial performance and liquidity
| Metric | Quarter ended Oct. 4, 2019 | Prior-year quarter | Six months ended Oct. 4, 2019 | Prior-year six months |
|---|---|---|---|---|
| Continuing-operations revenue | $608 | $612 | $1,258 | $1,224 |
| Gross profit / gross margin | $508 / 83.6% | $496 / 81.0% | $1,058 / 84.1% | $998 / 81.5% |
| Operating income / margin | $103 / 16.9% | $43 / 7.0% | $237 / 18.8% | $14 / 1.1% |
| Continuing-operations net income (loss) | $35 | $(62) | $70 | $(134) |
| Income from discontinued operations, net of tax | $750 | $54 | $741 | $66 |
| Consolidated net income (loss) | $785 | $(8) | $811 | $(68) |
| Diluted EPS | $1.22 | $(0.01) | $1.26 | $(0.11) |
- Quarterly revenue declined 1%. Management attributed the near-flat result to a lower average direct customer count, partly offset by higher average revenue per user (ARPU). Direct customer count averaged 20.1 million versus 20.8 million; ARPU was $8.88 versus $8.72.
- Six-month revenue rose 3%, but included an additional fiscal week that contributed approximately $44 million. The comparison period had 26 weeks versus 27 weeks in fiscal 2020.
- Six-month operating cash flow was $506, down from $571. Investing activities provided $39 versus a $20 use; financing activities used $634 versus $157, including $559 of stock repurchases and $98 of dividends paid.
- At October 4, cash, cash equivalents and short-term investments totaled $1.831 billion, down from $2.043 billion at March 29. Cash and cash equivalents alone were $1.697 billion. The balance sheet also classified $7.047 billion of assets and $1.932 billion of liabilities as discontinued operations/held for sale; these amounts materially affect reported current assets and liabilities.
- Total debt principal was $4.5 billion, against $1.831 billion of cash, cash equivalents and short-term investments. The revolving facility had no borrowings, and the company reported compliance with its debt covenants. The current portion of debt was $1.245 billion. Contractual obligations totaled $6.923 billion, including debt, interest, purchase obligations, transition taxes and leases.
- Contract liabilities were $1.016 billion, compared with $1.059 billion at March 29. Remaining performance obligations were $626 million, excluding $390 million of customer deposits; the company expected to recognize approximately 96% of those deposits as revenue over the next 12 months.
Material changes, outlook and unusual items
- Operating income improved as operating expenses fell, particularly restructuring and transition costs. Quarterly restructuring, transition and other costs were $17 versus $52; the prior-year period included substantial transition-project costs. Sales and marketing rose $14, primarily reflecting a $30 increase in advertising and promotion, partly offset by lower stock compensation.
- Discontinued-operations income included a $665 tax benefit from remeasuring Irish intellectual-property deferred tax assets after the expected recovery shifted from ordinary operations to a sale taxed at a higher Irish capital-gains rate. This non-recurring tax item substantially boosted reported net income; consolidated earnings should not be read as underlying continuing-business performance.
- The company had agreed to sell the Enterprise Security assets to Broadcom for $10.7 billion and completed the transaction on November 4. It expected $2.2–$2.6 billion of related income-tax payments, $35–$40 million of direct transaction costs and a $2–$3 billion after-tax gain. Management expected to return net proceeds through a special dividend in fiscal Q4 2020; the filing also describes a $12-per-share special dividend commitment. These were forward-looking estimates, not results recorded in this quarter.
- After quarter-end, the company received $378 million from selling its DigiCert equity investment and expected approximately $55 million in associated income taxes and a $310–$320 million after-tax gain.
- An August 2019 restructuring plan targeted approximately 7% net headcount reduction and facility/data-center actions, with estimated costs of $100 million; $49 million had been incurred by October 4. A further plan approved November 5 targeted approximately 3,100 employees and estimated $800 million of costs, including about $350 million in cash severance and termination expenditures, expected to be completed within 12 months.
- No specific revenue or earnings guidance is provided in the filing. Management described a strategic shift to the consumer business. It also warned that future results would differ materially from historical results because Enterprise Security generated approximately 49% of fiscal 2019 revenue.
- Other subsequent events included a new credit agreement, a $1.0 billion revolving facility through October 2024, a $500 million term loan and a delayed-draw $750 million term-loan commitment. The company stated it planned to use the delayed-draw loan to repay $750 million of 4.2% notes due in September 2020.
Risks and contingencies
- Transition and separation execution risks include reliance on Broadcom for certain engineering services and threat-intelligence support, potential employee attrition, disruption, and higher-than-expected transition costs.
- Legal matters include an ongoing SEC investigation, securities and derivative litigation, a remanded LifeLock securities action, and a government/state False Claims Act matter concerning GSA contract compliance. For the GSA matter, the company accrued $25 million as the low end of its probable loss range, while stating that additional loss was reasonably possible and the high end could not be estimated.
- Unrecognized tax benefits totaled $526 million. A $62 million tax expense was recorded related to the Ninth Circuit’s Altera decision; the outcome remained uncertain, and reversal could result in a future tax benefit. The company also disclosed $431 million of long-term uncertain tax positions excluded from its contractual-obligations schedule.
- Other key exposures include consumer customer retention and competition, privacy and cybersecurity obligations, product reliability, regulatory changes, substantial debt and refinancing needs, foreign exchange and interest-rate risks, and the possibility that restructuring savings or divestiture benefits will not be realized.
Most important facts for investors to verify
- Whether the Broadcom sale proceeds, expected taxes, after-tax gain and special-dividend plans were ultimately realized on the terms and timing described.
- Underlying consumer-business trends: customer counts, ARPU, renewals and revenue growth, particularly after the Enterprise Security divestiture.
- Cash generation, debt maturities and refinancing plans, including the effect of the post-quarter credit agreement and planned special dividend on leverage and liquidity.
- Actual costs, timing and operational effects of both restructuring plans, including whether expected savings offset charges.
- Developments in the SEC, GSA and shareholder litigation matters, and tax outcomes related to Altera and other uncertain tax positions.
- How reported earnings are affected by discontinued-operations accounting and the large, unusual tax benefit; assess continuing operations separately.