Gen Digital Inc. (then Symantec Corporation) — Form 10-Q summary
Business context and reporting period
The filing is for Symantec Corporation, the company identified in the report, for its fiscal third quarter ended January 1, 2010. It covers the three and nine months ended January 1, 2010; comparable periods ended January 2, 2009. The quarters were each 13 weeks, while the current and prior nine-month periods were 39 and 40 weeks, respectively. Symantec provided security, storage and systems-management software and services.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $1.548 billion, up 2% | $4.454 billion, down 5% |
| Gross profit / gross margin | $1.290 billion / 83% | $3.625 billion / 81% |
| Operating income (loss) | $277 million | $686 million |
| Net income (loss) | $300 million; $0.37 diluted EPS | $523 million; $0.64 diluted EPS |
| Cash from operating activities | Not separately stated in the supplied text | $990 million |
- Revenue mix shifted toward recurring content, subscription and maintenance revenue: $1.292 billion for the quarter, up 8%; license revenue was $256 million, down 19%. For nine months, recurring revenue grew 2% to $3.755 billion, while license revenue fell 31% to $699 million.
- Cash and cash equivalents were $2.593 billion and short-term investments were $18 million at January 1, 2010. The company reported approximately $3.6 billion of net liquidity, including its undrawn $1 billion revolving facility. Current assets were $3.944 billion versus current liabilities of $3.600 billion.
- Convertible senior notes had a $1.844 billion carrying value and $2.1 billion principal amount. The $1 billion revolving credit facility had no borrowings; the company reported compliance with its covenants.
- For the nine months, investing activities provided $52 million and financing activities used $304 million. Capital expenditures were $149 million and share repurchases were $364 million.
Material changes versus the prior comparable period
- Quarterly revenue rose $34 million, mainly from recurring revenue, Consumer growth and favorable currency effects; license revenue declined. Nine-month revenue fell $228 million, driven chiefly by lower license sales, with the shorter reporting period also affecting comparison.
- Quarterly and nine-month net income contrasted with prior-year losses of $6.820 billion and $6.522 billion. Those prior losses included a $7.006 billion noncash goodwill impairment, so the earnings comparison is not indicative of a comparable operating improvement alone.
- Quarterly gross margin increased to 83% from 80%. Operating income improved substantially from the prior-year impairment-affected loss. Segment results were mixed: Consumer revenue increased, while Storage and Server Management revenue fell; its operating income nevertheless edged higher.
- Operating cash flow decreased to $990 million from $1.064 billion. The current period included a $118 million reduction in income taxes payable and a $95 million decrease in deferred revenue.
- Cash and cash equivalents increased from $1.793 billion at April 3, 2009. Convertible-note carrying value increased as its discount was amortized under newly adopted convertible-debt accounting guidance, applied retrospectively.
Outlook, commentary, risks and unusual items
- Management said tight corporate IT budgets and weaker demand for new licenses, particularly in storage and server management, could continue to cause slower or negative revenue growth. It planned to align costs with revenue expectations.
- Higher OEM placement fees, associated with increased PC shipments, weighed on operating income and margins, especially in Consumer; management expected revenue benefits from those fees in future periods. Currency movements also affected reported revenue and expenses.
- Management believed cash, investments, borrowing capacity and operating cash generation would meet working-capital and capital-expenditure needs for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Net income benefited from a $78.5 million tax benefit following a favorable Tax Court opinion concerning Veritas tax years 2000–2001, plus other tax benefits. The ruling remained subject to appeal and final calculations. A separate IRS assessment for 2002–2005 included $30 million of tax the company agreed with and $80 million it planned to contest, excluding interest.
- The Ninth Circuit withdrew its Xilinx opinion; the company cited a reasonable possibility of a $37 million change in unrecognized tax benefits within 12 months. Other income included $43 million of quarterly and $46 million of nine-month gains from liquidation of foreign legal entities.
- Restructuring expense was $64 million for nine months; management estimated $20–$25 million of remaining transition and transformation costs and $15–$30 million of remaining severance costs. A property sale generated a $10 million loss. Management reported no goodwill impairment indicators at January 1, 2010.
- The company said other pending proceedings were not expected to have a material adverse effect, though losses could not be estimated for every matter. It reported no material change in risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether recurring-revenue growth can offset continuing weakness in license sales and enterprise storage demand.
- How much of reported earnings reflects tax benefits and foreign-entity liquidation gains, and the eventual outcome of the Veritas and other tax disputes.
- Cash-flow sustainability, particularly deferred-revenue movements, tax payments and working-capital requirements.
- The principal amount, maturity and conversion terms of the notes, and future use of the remaining $936 million share-repurchase authorization.
- Whether acquisition-related amortization, restructuring costs and segment reporting changes affect period-to-period comparability.