Business context and reporting period
The filing is Symantec Corporation’s Form 10-Q for the quarter ended September 27, 2013 (fiscal 2014 second quarter), with comparative results for the quarter ended September 28, 2012 and the six-month periods. The filing identifies the registrant as Symantec Corporation, not Gen Digital Inc. Symantec described its business as security, backup and availability products and services, organized into User Productivity & Protection, Information Security, and Information Management segments.
Financial performance and position
Amounts are in millions of dollars except per-share data. Quarter and six-month results compare fiscal 2014 with the corresponding prior-year periods.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $1,637 vs. $1,699 (down 4%) | $3,346 vs. $3,367 (down 1%) |
| Gross profit / gross margin | $1,353; 83% vs. $1,415; 83% | $2,762; 83% vs. $2,799; 83% |
| Operating income | $248 vs. $297 | $472 vs. $547 |
| Net income / diluted EPS | $241 / $0.34 vs. $189 / $0.27 | $398 / $0.56 vs. $349 / $0.49 |
| Operating cash flow | Not separately presented in the filing | $503 vs. $518 |
- Quarterly operating margin was approximately 15% versus 17%; six-month margin was approximately 14% versus 16%. Net income rose despite lower operating income, helped by a lower tax provision and improved non-operating results.
- Revenue mix shifted toward recurring content, subscription and maintenance: $1,499 million for the quarter, essentially flat, and $3,019 million for six months, up 2%. License revenue fell 31% to $138 million for the quarter and 17% to $327 million for six months.
- Segment revenue and operating income for the quarter: User Productivity & Protection $719 million and $257 million; Information Security $316 million and $49 million; Information Management $602 million and $145 million. Information Management operating income declined 19%; Information Security operating income improved from $14 million.
- Cash, cash equivalents and short-term investments were $3.8 billion at September 27, 2013, down from $4.7 billion in cash and equivalents at March 29. The company also reported an undrawn $1.0 billion revolving facility and total liquidity of approximately $4.8 billion. Long-term debt was $2.094 billion, with no current debt balance; the company reported compliance with credit-facility covenants.
- Six-month investing cash use was $170 million, including $118 million of capital expenditures. Financing used $1.317 billion, principally for debt repayment, share repurchases and dividends. Cash declined by $958 million to $3.727 billion.
- Deferred revenue was $3.5 billion at quarter-end, versus $4.0 billion at March 29, 2013 and $3.7 billion a year earlier. The balance-sheet amount includes current and long-term deferred revenue.
Material changes versus the prior comparable period
- Management attributed weaker revenue, particularly lower new license sales, partly to the sales-force transition into separate new-business and renewals teams. Asia Pacific/Japan revenue fell 14% for the quarter, with the Japanese yen cited as a factor; EMEA revenue grew 4%.
- Quarterly restructuring and transition expense increased to $122 million from $23 million; six-month expense rose to $205 million from $58 million. Despite lower sales and marketing expense and lower intangible amortization, consolidated operating income declined.
- Information Management revenue and margins weakened amid softness in information availability and Backup Exec, as well as higher appliance-material and services costs. User Productivity & Protection revenue also declined; Information Security’s six-month revenue increased modestly.
- Operating cash flow was $503 million versus $518 million. Receivables generated $465 million of cash, while deferred revenue declined by $556 million, both significant working-capital movements.
- Symantec began paying quarterly dividends of $0.15 per share in fiscal 2014 and paid $210 million over the six months. It repurchased $250 million of stock, compared with $501 million in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management said lower-than-expected new-business activity led it to lower full-year fiscal 2014 revenue, operating-margin and EPS expectations. The filing text does not provide clear revised numerical guidance. Management characterized the quarter as a transition period and emphasized product innovation, go-to-market changes, and investment in people, processes and technology.
- Management expected the lower deferred-revenue balance to adversely affect year-over-year revenue for at least the remainder of fiscal 2014. Research and development expense was expected to increase through fiscal 2017. Remaining severance and benefits costs under the restructuring plan were estimated at $35–$65 million; total costs incurred to date were $185 million.
- The company was in final testing and data-conversion stages for a new ERP financial-reporting module and anticipated placing it in service in fiscal 2014’s third quarter. CFO James A. Beer departed; Andrew H. Del Matto was acting CFO pending a permanent replacement.
- The effective tax rate was 4% for the quarter and 15% for six months, versus 29% and 28%. Fiscal 2014 results included tax benefits related to a Huawei joint-venture matter and settlement of the 2005–2008 IRS audit, as well as gains on short-term investment sales. These items affect comparability and are not necessarily recurring.
- The company repaid $1.0 billion principal on 1.00% convertible notes at maturity and paid $189 million of conversion value, offset by $189 million received under the related note hedge. Existing senior notes remained outstanding.
- The U.S. government was investigating Symantec’s compliance with provisions of its GSA contract, including pricing, country of origin, accessibility and commercial-sales-practice disclosures. Symantec was cooperating and could not predict the outcome or estimate any loss; the filing notes potential False Claims Act damages and civil penalties. Other proceedings were described as not expected to have a material adverse effect.
- International revenue exposes results to foreign-exchange movements. Liquidity also depends on cash generation and continued access to credit; approximately $2.0 billion of cash and equivalents was held by foreign subsidiaries. Management said available liquidity was sufficient for expected needs for at least 12 months.
- Symantec retrospectively changed commission accounting, capitalizing qualifying incremental commissions on contracts with deferred revenue and expensing them over the related revenue-recognition period. Prior periods were adjusted; the change did not affect cash flows.
Most important facts for investors to verify
- Obtain the revised fiscal 2014 revenue, operating-margin and EPS guidance, which is not quantified in this filing, and track whether sales-force changes restore new-business growth.
- Monitor license revenue, segment trends, and deferred revenue; assess whether the lower deferred-revenue balance produces the anticipated ongoing revenue pressure.
- Separate recurring earnings and cash generation from tax settlements, investment gains, restructuring costs and working-capital swings.
- Track restructuring spending against the remaining $35–$65 million estimate, and confirm ERP implementation timing and costs.
- Assess the outcome and potential financial exposure from the GSA investigation, alongside the company’s tax contingencies and foreign-currency exposure.
- Review debt maturity and repayment plans, liquidity location and availability, and the sustainability of dividends and share repurchases.