Gen Digital Inc. quarterly report, Q1 FY2012

Business context and reporting period

This filing is Symantec Corporation’s Form 10-Q for its first quarter of fiscal 2012, the 13 weeks ended July 1, 2011, compared with the 13 weeks ended July 2, 2010. The filing identifies Symantec as the registrant; it does not identify the company as Gen Digital.

Symantec provided security, storage, and systems management software and services. Its reportable segments were Consumer, Security and Compliance, Storage and Server Management, Services, and Other.

Financial performance and position

Revenue rose 15% year over year. Content, subscription, and maintenance revenue increased 16% to $1.447 billion; license revenue increased 11% to $206 million. Segment revenue increased 11% in Consumer, 31% in Security and Compliance, and 14% in Storage and Server Management; Services revenue declined 20%. Security and Compliance operating margin fell to 19% from 23%, while Consumer and Storage and Server Management margins improved to 49% and 47%, respectively.

Operating cash flow increased by $168 million year over year. The filing attributes the quarter’s cash generation in part to $359 million from receivables collections, offset in part by a $182 million decrease in deferred revenue and a $121 million decrease in accrued compensation. Investing used $415 million, including $364 million net cash for acquisitions and $51 million for capital expenditures. Financing used $778 million, mainly for the $600 million maturity payment on convertible notes and $198 million of share repurchases.

At July 1, cash was $2.290 billion, current assets were $3.484 billion, and current liabilities were $4.051 billion. Long-term debt was $1.999 billion; there was no current debt balance and no borrowing under the $1 billion revolving credit facility. Symantec reported approximately $3.3 billion of “net liquidity,” defined as cash and cash equivalents plus unused credit-facility availability. It held $1.6 billion of cash, cash equivalents, and marketable securities at foreign subsidiaries.

Material changes and unusual items

• Clearwell Systems was acquired on June 24, 2011 for a stated purchase price of $392 million, including $20 million of acquired cash and $8 million of assumed options. The preliminary allocation included $258 million of goodwill and $168 million of intangible assets; purchase accounting remained subject to revision.
• Adoption of updated goodwill impairment guidance resulted in a $19 million impairment of the Services reporting unit, reducing its goodwill to zero. This was recorded as a cumulative-effect adjustment to beginning accumulated deficit, not as a charge to the quarter’s reported income.
• Management said revenue growth reflected acquisitions, existing-product sales, and favorable foreign exchange; currency movements increased international revenue by approximately $87 million. Lower amortization of previously acquired product rights also benefited year-over-year results by $23 million.
• Share repurchases totaled 10.43 million shares for $198 million, at an average $18.98 per share; $679 million remained authorized.

Outlook, risks, and contingencies

Management expected fiscal 2011 acquisitions to continue contributing positively to Security and Compliance revenue and stated that cash, borrowing capacity, and operating cash generation should cover working capital and capital expenditure needs for at least the next 12 months. The filing provides no specific revenue, earnings, or cash-flow guidance, and cautions that quarterly results are not necessarily indicative of full-year results.

Risks highlighted include foreign-exchange exposure given significant international sales, the possibility of varying results from forward-looking expectations, and ongoing tax controversies. Symantec contested $80 million of additional tax assessments and all penalties related to Veritas tax years 2002–2005; the IRS Appeals process remained unresolved, and a reserve reduction within 12 months was reasonably possible. The company also reported a $13 million share of its Huawei-Symantec joint venture loss, versus $7 million in the comparable quarter. Other pending litigation was not expected to have a material adverse effect, and the filing reported no material change in previously disclosed risk factors.

Important facts for investors to verify

• Confirm the filing’s issuer and period: Symantec Corporation, quarter ended July 1, 2011; the supplied company metadata says Gen Digital.
• Assess the sustainability of growth, including acquisition contributions and the $87 million favorable foreign-exchange effect.
• Review cash conversion and liquidity, particularly the decline in deferred revenue, foreign-held cash, acquisition spending, and negative working capital.
• Verify Clearwell’s final purchase-price allocation and the integration outcomes expected from the acquisition.
• Track the $80 million tax dispute, remaining $1.999 billion long-term debt, and future repurchases under the remaining $679 million authorization.