Gen Digital Inc. quarterly report, Q2 FY2021

Business context and reporting period

This filing is for NortonLifeLock Inc. (now Gen Digital Inc.), a consumer cybersecurity and identity-protection company. It reports the second quarter and first six months of fiscal 2021, ended October 2, 2020. The comparable quarter ended October 4, 2019; the prior-year six-month period included one additional week. Enterprise Security was sold to Broadcom in November 2019 and is presented as discontinued operations.

Financial performance and position

Amounts are in millions of dollars, except per-share data and percentages.

For the six months, operating cash flow was $57 versus $506 in the prior-year period. Investing activities provided $157, including $118 from property sales; financing activities used $1,391, primarily for debt repayments and dividends. Cash and cash equivalents were $1,009 at October 2, with $40 in short-term investments; combined liquidity of $1,049 compared with $2,263 at April 3.

At October 2, total debt principal was $3,625: $1,250 in term loans, $1,500 in senior notes, and $875 in convertible notes. Long-term debt carrying value was $3,556, with $47 current. The company had no revolving-credit borrowings and $1,000 of available capacity. It reported compliance with debt covenants. Total liabilities were $6,789 and stockholders’ equity was a deficit of $476.

Material changes versus comparable periods

• Quarterly revenue rose 3%; consumer security and identity and information protection sales increased, partly offset by the ID Analytics divestiture. Six-month revenue declined 1%, reflecting the prior year’s extra week and the divested business, partly offset by growth in the two continuing product lines.
• Operating income improved substantially as sales and marketing, research and development, and general and administrative costs fell under cost-reduction programs. Six-month restructuring and other costs rose to $141 from $30, including $58 of asset write-offs and impairments and $49 of contract-cancellation charges.
• Net income fell sharply because discontinued operations produced a loss rather than the prior-year gain. The current-period discontinued-operations loss reflected the absence of Enterprise Security operating income, a lower tax benefit, and the Broadcom settlement.
• Cash and investments fell by $1,214 from fiscal year-end, principally due to debt settlements and repayment, dividends, and related cash outflows, partly offset by property-sale proceeds. The $625 principal of convertible notes settled in May was paid with $1,179 in cash, reflecting the conversion rights and settlement terms.

Outlook, commentary, risks and unusual items

• The filing provides no quantified revenue, earnings, or cash-flow guidance. Management said it had not yet seen a material increase in cancellations or material decline in retention during 2020, but warned a prolonged recession could reduce demand and retention because its products are discretionary purchases.
• COVID-19 risks included potential disruption to customer support, sales and marketing, employee productivity, and partners or service providers. Most employees were working remotely; the duration and financial impact remained uncertain.
• On October 1, 2020, the company entered into agreements with Broadcom for an aggregate $200, including a 5.6-year license for enterprise software, security engines, and telemetry, and resolution of specified outstanding payments and claims. The filing does not clearly break down the agreement’s consideration between these elements.
• A $35 gain on a property sale and a $20 gain on extinguishment of debt contributed to results. The company also recorded a $25 legal accrual in general and administrative expense related to a government-contract civil suit.
• In the GSA-related litigation, the company accrued $50 as the low end of its probable loss estimate, while noting a reasonable possibility of losses above that accrual. Trial was set for August 2021 and further mediation was expected. The SEC investigation and securities and derivative litigation remained unresolved; the company could not estimate potential losses for those matters.
• The company reported $1,117 of long-term income taxes payable, including uncertain tax positions, and $599 of remaining transition tax payable in installments through July 2025. It stated that significant changes in unrecognized tax benefits were reasonably possible within 12 months.
• Other key risks include reliance on Broadcom for certain critical security-engine and threat-response services, competition and customer retention, cybersecurity and privacy regulation, substantial indebtedness, and potential effects of COVID-19 on operations and demand.

Important facts for investors to verify

• Whether customer growth and direct monetization continue: quarterly direct customer count was 20.7 million versus 20.1 million, and direct ARPU was $9.10 versus $8.88.
• Whether operating-cost reductions are sustainable and how restructuring charges and cash expenditures develop.
• Cash generation and liquidity following the large debt and convertible-note settlements; assess debt maturities, interest costs, and covenant headroom.
• Potential exposure in the GSA case, SEC investigation, and other litigation, including whether losses could exceed recorded accruals.
• Execution of the Broadcom license and continued access to critical technology and threat-response services.
• Whether COVID-19, economic conditions, or changes in cancellations and retention affect demand for the company’s subscription products.