Business context and reporting period
Gen Digital Inc. (formerly NortonLifeLock Inc.; name change effective November 7, 2022) filed this Form 10-Q for the quarter and six months ended September 30, 2022. The quarter is fiscal Q2 2023. Gen completed its acquisition of Avast on September 12, 2022; Avast’s results are included only from that date. Gen operates as one reportable segment, providing consumer cybersecurity, identity-protection and online-privacy products.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2022 | Prior-year quarter | Six months ended Sep. 30, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $748 million | $692 million | $1,455 million | $1,378 million |
| Gross profit / margin | $629 million / 84% | $592 million / 86% | $1,234 million / 85% | $1,176 million / 85% |
| Operating income / margin | $241 million / 32% | $287 million / 41% | $502 million / 35% | $574 million / 42% |
| Net income | $69 million | $333 million | $269 million | $514 million |
| Diluted EPS | $0.12 | $0.56 | $0.45 | $0.87 |
| Operating cash flow | $(88) million | $60 million | $127 million | $318 million |
Quarterly revenue rose 8%; six-month revenue rose 6%. Gen attributed growth primarily to Avast’s $48 million of post-close revenue and higher identity and information-protection sales. Foreign exchange reduced revenue by $31 million for the quarter and $58 million for the six-month period. Avast’s inclusion was limited to the period after closing.
Quarterly operating expenses increased to $388 million from $305 million, including higher merger transaction and integration costs; general and administrative expense rose $47 million. Operating income declined 16%. Net income fell partly because the prior-year quarter included a $175 million property-sale gain; current-period results also included higher interest and tax expense. The effective tax rate was 65% for the quarter versus 23% a year earlier, reflecting, among other items, internal restructuring, merger-cost tax treatment and limits on foreign tax benefits.
For the six months, operating cash flow was $127 million versus $318 million. Investing cash outflow was $6.546 billion, including $6.550 billion paid for the Avast acquisition, net of cash acquired. Financing cash inflow was $5.649 billion, principally reflecting new debt proceeds, partly offset by debt repayments, dividends and $404 million of share repurchases.
At September 30, cash and cash equivalents were $1.095 billion, down from $1.887 billion at April 1. Total debt principal was $10.207 billion: $7.600 billion of variable-rate term loans, $2.600 billion of senior notes and $7 million of mortgage loans. The company had a $1.5 billion revolving facility with no borrowings outstanding and reported compliance with debt covenants. Current liabilities were $2.825 billion; contract liabilities totaled $1.684 billion. Remaining performance obligations were $1.204 billion, excluding $480 million of customer deposits, with approximately 93% expected to be recognized within 12 months.
Material changes, outlook and risks
- Avast acquisition and financing: The acquisition was completed for net consideration of $8.691 billion, including cash and equity consideration and repayment of Avast debt. Gen issued approximately 94.2 million shares; Avast shareholders held about 14% of Gen immediately after closing. Preliminary purchase accounting included $7.267 billion of goodwill and $2.383 billion of acquired intangible assets; valuation, tax and litigation matters remained subject to refinement.
- Debt and interest-rate exposure: Gen issued $3.910 billion of Term A loans, $3.690 billion of Term B loans and $1.5 billion of senior notes bearing 6.75% and 7.125% interest. The company estimates that a 1 percentage-point increase in SOFR would increase annual interest expense by $76 million on variable-rate debt. Quarterly debt installments begin March 31, 2023.
- Integration and restructuring: Management expects initial operating-cost increases to decline as merger synergies are realized, but provided no quantified earnings or revenue guidance. A merger-related restructuring plan anticipates costs of up to $280 million, with actions expected to be completed by fiscal 2024; $6 million had been incurred by September 30.
- Liquidity outlook: Management said cash, operating cash generation and revolving-facility availability should be sufficient for working capital, ongoing operations and expected synergy costs for at least the next 12 months, and for known long-term obligations. This depends on operating performance, economic conditions and other risks.
- Legal and regulatory matters: Gen accrued approximately $233 million for the Columbia University patent verdict, including prejudgment interest; the company intends to appeal, and a higher loss is reasonably possible but not estimable. It accrued $50 million for the GSA matter, with additional loss reasonably possible but not estimable. FTC proceedings relating to Avast’s former Jumpshot data practices and Czech privacy proceedings remained unresolved; potential losses could not be estimated. Other shareholder and derivative litigation also remained pending.
- Other risks and capital returns: The filing highlights acquisition-integration and synergy execution, competition and customer retention, privacy and cybersecurity regulation, foreign exchange, inflation and recession risks. Gen suspended operations in Russia and reported no material impact to date. A $0.125-per-share dividend was announced after quarter-end. Subsequent to September 30, the company repurchased 14 million shares for $308 million.
Important facts for investors to verify
- Track Avast integration, realization and timing of synergies, and final purchase-price allocation.
- Assess leverage, variable-rate debt exposure, refinancing needs and covenant headroom against cash generation and the $1.5 billion revolver.
- Monitor cash flow conversion, foreign-exchange headwinds, margins and the effect of acquisition-related and restructuring costs.
- Follow developments and potential exposure in the Columbia patent, GSA and Jumpshot matters, including any amounts beyond accrued losses.
- Evaluate the sustainability of customer growth and revenue, particularly given the acquisition’s limited contribution in this quarter and the decline in reported average revenue per direct user to $6.98 from $8.63.