Business context and reporting period
This is NortonLifeLock Inc.’s Form 10-Q for the first quarter of fiscal 2022, the 13 weeks ended July 2, 2021, compared with the 13 weeks ended July 3, 2020. The filing identifies the registrant as NortonLifeLock Inc. (ticker NLOK); it does not identify the company as Gen Digital Inc. The company provides consumer cybersecurity, identity and information-protection services and reports one operating segment.
Key financial results
| Metric | Quarter ended July 2, 2021 | Prior-year quarter |
|---|---|---|
| Revenue | $686 million | $614 million |
| Gross profit / margin | $584 million / 85% | $528 million / 86% |
| Operating income / margin | $287 million / 42% | $120 million / 20% |
| Continuing-operations income | $181 million | $149 million |
| Net income | $181 million | $118 million |
| Diluted EPS | $0.31 | $0.19 |
| Operating cash flow | $258 million | $170 million |
Net income margin was 26%, versus 19%. Interest expense was $32 million, down from $40 million. Income tax expense was $71 million, compared with a $50 million tax benefit in the prior-year quarter; the effective tax rate was 28%, versus negative 51%.
Revenue and operating performance
Revenue rose 12%: consumer security increased to $412 million from $363 million, and identity and information protection increased to $274 million from $251 million. Management attributed growth to higher direct customer counts, stable annual retention and Avira revenue following its acquisition. Average direct customer count increased to 23.0 million from 20.4 million; direct ARPU declined to $8.84 from $9.03. Sales and marketing expense increased to $156 million, primarily reflecting higher advertising investment. Operating income benefited substantially from restructuring costs falling to $7 million from $127 million as the November 2019 plan was completed.
Cash, debt and liquidity
Cash and cash equivalents were $1.230 billion at July 2, 2021; cash, equivalents and short-term investments totaled $1.245 billion. Operating cash flow was $258 million; investing activities used $1 million and financing activities provided $44 million. Total debt principal was $3.876 billion ($3.860 billion carrying value), including $1.741 billion of term loans, $1.500 billion of senior notes and $625 million of convertible notes. The company had an undrawn $1 billion revolving facility and reported compliance with its debt covenants. Total liabilities were $7.062 billion and stockholders’ deficit was $497 million. Management said available cash, operating cash generation and credit availability should cover working capital and ongoing needs for at least 12 months and known long-term contractual obligations.
Material changes and notable items
- On May 7, 2021, the company borrowed an additional $525 million under its Initial Term Loan and extended the term-loan and revolving-facility maturities to May 2026.
- In May 2021, it settled $250 million principal and conversion rights on its 2.5% convertible notes for an aggregate $364 million, plus interest and dividends.
- On July 14, 2021, after quarter-end, it sold Mountain View land and buildings for $358 million cash and expects to recognize a $176 million gain. It entered into a seven-year leaseback for part of the property.
- The board authorized an additional $1.5 billion of share repurchases in May. No shares were repurchased in the quarter; $1.774 billion remained authorized at July 2. A $0.125-per-share dividend was declared for payment in September.
- Remaining performance obligations were $881 million, excluding $350 million of customer deposit liabilities; approximately 94% of the obligations were expected to be recognized as revenue over the next 12 months.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management reported no meaningful COVID-19-related impact to date on customer success, sales and marketing, or employee productivity, but warned that a prolonged recession could pressure demand and retention because its services are discretionary purchases. It also cited competitive and pricing pressure, execution and conversion risks associated with Avira, cybersecurity and privacy threats, and dependence on Broadcom for certain engineering and threat-response services.
Material legal exposures include the GSA contract litigation: the company accrued $50 million, its current estimate of the low end of probable losses, and said a loss above the accrual is reasonably possible. The trial was continued to September 27, 2021. A proposed $70 million securities class-action settlement, of which $67.1 million was expected to be covered by insurance, was subject to court approval. The company continued to cooperate with an SEC investigation and said it could not assess whether a material loss was reasonably possible or estimate a range. It also disclosed a Florida privacy class action and uncertain tax positions, including $563 million of long-term tax liabilities for which settlement timing could not be reliably estimated.
The Mountain View sale was delayed by commercial real-estate conditions attributed partly to the COVID-19 pandemic. The company also cautioned that actual results may differ materially from estimates and forward-looking statements. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material changes to internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Confirm the registrant and reporting period: the supplied filing is NortonLifeLock Inc.’s fiscal Q1 2022 10-Q, not a filing naming Gen Digital Inc.
- Track whether revenue and customer growth persist while direct ARPU declines and advertising investment rises.
- Review debt maturities, variable-rate exposure, covenant headroom and the company’s capacity to service debt while funding dividends and repurchases.
- Check completion and accounting for the post-quarter property sale and leaseback, including the expected $176 million gain.
- Follow the GSA litigation, securities settlement approval, SEC investigation and related cash, insurance and legal-cost implications.
- Monitor changes in uncertain tax positions and potential effects of tax examinations on earnings and cash flows.