Business context and reporting period
Symantec Corporation (the registrant named in this filing) filed this unaudited Form 10-Q for its first quarter of fiscal 2014, the 13 weeks ended June 28, 2013. The comparable quarter ended June 29, 2012. Symantec described its business as security, backup and availability products and services, and reorganized reporting into User Productivity & Protection, Information Security, and Information Management.
Financial performance and position
| Metric | Quarter ended June 28, 2013 | Comparable 2012 quarter |
|---|---|---|
| Revenue | $1.709 billion | $1.668 billion |
| Gross profit / margin | $1.409 billion / 82% | $1.384 billion / 83% |
| Operating income / margin | $224 million / 13.1% | $250 million / 15.0% |
| Net income | $157 million | $160 million |
| Diluted EPS | $0.22 | $0.22 |
| Operating cash flow | $312 million | $340 million |
- Revenue grew 2%, with content, subscription and maintenance revenue up 3% to $1.520 billion; license revenue declined 2% to $189 million.
- Information Security revenue increased 7% to $336 million and segment operating income improved to $26 million from an $8 million loss. Information Management revenue rose 4% to $641 million, but segment operating income fell 10% to $149 million. User Productivity & Protection revenue declined 1% to $732 million; segment operating income was essentially unchanged at $257 million.
- Operating income declined despite revenue growth, principally as restructuring and transition expense rose to $83 million from $35 million. Gross margin fell one percentage point. A $16 million realized gain on short-term investments helped lift other income to $18 million from a $6 million expense.
- Cash and cash equivalents were $3.749 billion at quarter-end, down from $4.685 billion at March 29, 2013. The $1.192 billion financing cash outflow was largely related to settling the maturing convertible notes; operating and investing cash flows were $312 million and negative $29 million, respectively.
- Total debt was $2.094 billion, all long-term at quarter-end; the $997 million current portion reported at March 29 was repaid. Symantec also paid $189 million of conversion value and received $189 million under its note hedge. It reported an unused $1.0 billion revolving credit facility and total liquidity of approximately $4.7 billion.
- Current assets were $5.179 billion and current liabilities $4.205 billion. Deferred revenue totaled $3.812 billion, current and long term combined.
Material changes, outlook, and risks
- Management’s strategy was to develop products and services, revise go-to-market plans, and simplify the organization. It was reorganizing direct sales teams by functional area, creating a dedicated renewals team, and focusing its partner channels. Management expected research and development expense to increase through fiscal 2017.
- The restructuring plan was expected to be completed in fiscal 2014. Costs incurred to date were $74 million; total severance and benefit costs were expected to be $220–$250 million. Management cautioned that restructuring and investment spending would affect income and cash flows.
- The board initiated a quarterly dividend of $0.15 per share; $105 million was paid in the quarter, and a further $0.15 dividend was approved for September 2013. The company repurchased $125 million of stock and reported approximately $1.0 billion authorized for future repurchases. Management expected to return approximately 50% of free cash flow to shareholders over time, while funding investment.
- Management said existing cash, borrowing capacity, and operating cash generation should be sufficient for working capital, capital spending, dividends, and repurchases for at least the next 12 months and the foreseeable future. This is forward-looking and subject to the risks described in the filing and prior annual report.
- Foreign exchange reduced international revenue by approximately $13 million year over year; Asia Pacific/Japan revenue declined 5%, primarily reflecting the weaker Japanese yen. The filing notes continuing exposure to currency movements and changes in geographic earnings mix.
- The U.S. government was investigating Symantec’s compliance with certain GSA contract provisions, including pricing, country of origin, accessibility, and commercial-sales disclosures. The company was cooperating and could not estimate a potential loss; the filing notes possible False Claims Act damages and penalties. Other proceedings were not expected to have a material adverse effect, though losses could not be estimated for individual cases.
- Unrecognized tax benefits related to audits could decrease by $15–$130 million in the next 12 months; at least $15 million could affect the tax provision, depending on resolution. The company had $76 million deposited with the IRS for the 2005–2008 audit cycle.
- Symantec retrospectively changed its accounting for qualifying sales commissions, capitalizing costs associated with deferred-revenue contracts and expensing them over the related revenue period. It also changed segment reporting; prior-period segment data was recast. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and Information Security improvement can continue, and whether Information Management’s margin decline reverses.
- Actual restructuring costs and completion timing versus the $220–$250 million expected severance and benefit range.
- Cash generation after the convertible-note repayment, shareholder returns, and planned investment; confirm covenant compliance and available liquidity.
- Developments and potential financial exposure in the GSA investigation and tax audits, including the uncertain timing and effects of settlements.
- Effects of foreign exchange, the commission-accounting change, and the continuing dividend and repurchase program on reported results and cash.