Gen Digital Inc. (historical registrant: Symantec Corporation) — Form 10-Q
Period: Quarter ended January 2, 2015; filed February 9, 2015. The filing is for Symantec Corporation, not a company named Gen Digital. Quarter comparisons cover 13 weeks in both periods; nine-month comparisons are 40 weeks in 2015 versus 39 weeks in 2013.
Business context and results
Symantec reported Consumer Security, Enterprise Security, and Information Management segments and planned to separate Information Management into an independent public company.
- Quarter revenue: $1.638 billion, down 4% from $1.705 billion. Content, subscription, and maintenance revenue fell 6% to $1.412 billion; license revenue rose 15% to $226 million.
- Quarter earnings: Operating income was $327 million versus $405 million; net income was $222 million versus $283 million. Diluted EPS was $0.32 versus $0.40. Gross margin was 83% in both periods.
- Nine-month revenue and earnings: Revenue was $4.990 billion, down 1%; operating income was $997 million versus $877 million; net income was $702 million versus $681 million. Diluted EPS was $1.01 versus $0.96.
- Nine-month segment trends: Consumer Security revenue declined 5% to $1.479 billion, while operating income increased 14% to $770 million. Enterprise Security revenue declined 1% to $1.572 billion and operating income declined 2% to $240 million. Information Management revenue rose 2% to $1.939 billion, but operating income fell 20% to $379 million.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $824 million, compared with $832 million. Investing activities used $1.003 billion, including $1.429 billion of short-term investment purchases and $300 million of capital expenditures. Financing activities used $622 million, principally for $375 million of repurchases and $311 million of dividends.
- At January 2, 2015, cash and cash equivalents were $2.764 billion and short-term investments were $976 million. Total debt was $2.095 billion, including $350 million current and $1.745 billion long-term. The company reported approximately $4.7 billion of liquidity, including an undrawn $1.0 billion credit facility; it was in covenant compliance.
- Cash and cash equivalents declined $943 million from fiscal year-end, to $2.764 billion. The filing attributes significant cash-flow movement to investment purchases, capital spending, shareholder returns, and foreign-exchange effects.
- Symantec returned $0.45 per share in dividends during the nine months and had $283 million remaining under its existing repurchase authorization at period-end. A new $1.0 billion repurchase program was authorized after quarter-end.
Changes, outlook, risks, and unusual items
- Management attributed lower revenue chiefly to U.S. dollar strength and declines in consumer security; NetBackup growth partly offset weakness in other products. International revenue fell 8% in the quarter, while U.S. revenue increased 1%.
- Quarter operating expenses were $1.032 billion, up 1%; higher restructuring, separation, and transition costs were largely offset by lower sales and marketing expense. Nine-month expenses declined 5%, primarily reflecting lower costs from the prior restructuring plan.
- The planned tax-free separation was targeted for completion by the end of December 2015, subject to market, regulatory, and other conditions. Expected restructuring and separation costs were $180 million–$220 million; management also expected approximately 10% headcount reductions. The company cautioned that the transaction could be delayed, fail to deliver expected benefits, or be taxable.
- A U.S. government investigation and related False Claims Act litigation concerning GSA and state contract compliance remained a material contingency. Symantec accrued $25 million, but said losses could exceed that amount and that it could not estimate the additional range.
- After quarter-end, a jury found two patents valid and infringed and awarded Intellectual Ventures $17 million; Symantec was considering post-trial motions and appeal and recorded no accrual, stating it did not consider a material loss probable.
- No specific revenue or earnings guidance was provided. Management said existing cash, investments, credit availability, and operating cash generation were expected to cover requirements, dividends, debt service, and repurchases for at least the next 12 months.
- The effective tax rate was 29% for the quarter and 26% for the nine months, versus 27% and 21% in the prior-year periods. The prior nine-month comparison included material tax benefits from resolving tax matters.
Most important facts for investors to verify
- Whether revenue pressure in Consumer Security and foreign markets continued, and whether NetBackup growth could offset weakness elsewhere.
- The eventual scope, cost, timing, tax treatment, and shareholder impact of the planned separation.
- Potential exposure beyond the $25 million accrual in the GSA/False Claims Act matter and developments in the patent case.
- Cash generation and liquidity after substantial investment purchases, capital expenditures, dividends, and repurchases.
- How the 40-week current nine-month period affects comparability with the 39-week prior-year period.