Gen Digital Inc. annual report, FY2018

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Business context and reporting period

The filing is Symantec Corporation’s Form 10-K for the fiscal year ended March 30, 2018, filed October 26, 2018. Although the request identifies Gen Digital Inc. and “2017 Q4,” this filing is for Symantec and fiscal 2018; it includes unaudited fourth-quarter results for the quarter ended March 30, 2018. Symantec operated Enterprise Security and Consumer Digital Safety businesses, including Norton and LifeLock.

Financial performance and liquidity

Unless otherwise noted, figures are in U.S. dollars and millions.

  • Fiscal 2018 revenue: $4,834, up 20% from $4,019 in fiscal 2017. Enterprise Security revenue rose 8% to $2,554; Consumer Digital Safety rose 37% to $2,280, primarily reflecting a full year of LifeLock revenue.
  • Profit and margins: Gross profit was $3,802, or 79% of revenue, versus $3,166 and 79% in 2017. GAAP operating income was $49, compared with an operating loss of $100; GAAP operating margin was 1.0% versus negative 2.5%. Continuing-operations income was $1,127 (diluted EPS $1.69), versus a loss of $236 (diluted loss per share $0.38). Net income was $1,138 versus a net loss of $106.
  • Unusual earnings contributors: Fiscal 2018 continuing-operations income included a $653 pretax gain on the WSS/PKI divestiture and a $690 income tax benefit. The tax benefit included provisional U.S. tax reform benefits partly offset by transition-tax expense; reported earnings therefore do not represent operating performance alone.
  • Non-GAAP measures: Management reported non-GAAP operating income of $1,710 and margin of 34.5%, compared with $1,194 and 28.7% in 2017. Non-GAAP diluted EPS was $1.67 versus $1.18. These measures exclude substantial items, including stock compensation, acquired-intangible amortization and restructuring costs.
  • Fourth quarter: Revenue was $1,210 versus $1,115 in fiscal 2017 Q4; gross profit was $946 versus $856. Operating income was $6 versus an operating loss of $178, while continuing-operations results were a loss of $58 versus a loss of $177. These reported quarterly figures are subject to the filing’s disclosed revenue-deferral review.
  • Cash flow: Cash from continuing operating activities was $957, compared with cash used of $145 in 2017. Total operating cash flow, including discontinued operations, was $950 versus cash used of $209. Fiscal 2018 cash flow included a $541 increase in deferred revenue and an $880 increase in income taxes payable.
  • Liquidity and debt: Cash, cash equivalents and short-term investments totaled $2,162 at year-end, down from $4,256. Principal debt declined to $5,100 from $8,310 after $3,210 of repayments; the company also had an undrawn $1,000 revolving facility. Current assets were $3,493 and current liabilities $3,170. Dividends paid were $211, or $0.30 per share; no shares were repurchased in Q4.
  • Deferred revenue: The balance-sheet total was $3,103, up $316 year over year, reflecting greater use of ratable subscriptions and enterprise billings, partly offset by the divestiture.

Material changes versus the prior comparable period

  • Revenue growth reflected acquired LifeLock and Blue Coat businesses and stronger network/web security sales; it was partly offset by the WSS/PKI divestiture and declining consumer security revenue.
  • Enterprise Security operating income increased to $473 from $187; Consumer Digital Safety operating income increased to $1,111 from $839. Segment margins were 19% and 49%, respectively, versus 8% and 50% in 2017.
  • Operating expenses rose 15% to $3,753, including $410 of restructuring, transition and other costs, $453 of total intangible amortization, and $610 of stock-based compensation. Interest expense rose to $256 from $208.
  • Cash and short-term investments fell substantially, chiefly due to debt repayments and acquisition spending. Debt reduction was a stated capital-allocation priority.

Outlook, risks and unusual items

  • Filing and investigation: The company said the Audit Committee’s internal investigation was complete, but the SEC’s formal investigation continued. The filing and other periodic reports were delayed; the company anticipated further delayed quarterly filings. Securities class-action and derivative suits were pending, with no specific damages alleged in those suits.
  • Revenue adjustment: The investigation identified a Q4 customer transaction with $13 recognized as revenue; Symantec concluded $12 should have been deferred. It said previously announced Q4 fiscal 2018 and Q1 fiscal 2019 results would be revised for this and any related adjustments. Verify the revised figures against subsequent filings.
  • Listing and financing compliance: Delinquent reports put the company out of compliance with Nasdaq listing requirements; Nasdaq had granted until November 26, 2018 to regain compliance. The delays also affected reporting covenants under debt agreements. Lenders waived certain term-loan and revolver reporting requirements through October 27, 2018; noteholders had not issued a default notice as of the filing.
  • Other contingencies: The company accrued $25 for the GSA/FCA matter but said potential losses could exceed that amount and the high end could not be estimated. A $65 Finjan settlement resolved related patent litigation. Loss exposure from investigation-related litigation could not yet be estimated.
  • Guidance and plans: The filing does not provide a clear numerical fiscal 2019 financial forecast. Management planned continued debt repayment and reported an August 2018 restructuring plan targeting up to 8% of the global workforce, with estimated costs of about $50, primarily severance. It also expected fiscal 2019 adoption of the new revenue standard to change revenue timing and reduce opening deferred revenue by about $169, with an offset to retained earnings; cash-flow impact was not expected.
  • Accounting and controls: Management and the auditor concluded internal control over financial reporting was effective at March 30, 2018, although the Audit Committee noted weak and informal processes in some transition-cost reviews and tracking. Management said it did not anticipate a broad restatement, apart from the identified transaction and related adjustments.
  • Key business risks: The filing highlights renewal and retention dependence, intense competition, cloud execution and service reliability, privacy regulation, acquisition integration, foreign exchange, and substantial indebtedness. The $896 transition-tax liability is payable over eight years.

Important facts for investors to verify

  1. Subsequent filings’ revised Q4 FY2018 and Q1 FY2019 results, including the $12 revenue deferral.
  2. Completion and timing of delinquent quarterly reports, Nasdaq listing compliance, and any developments in debt-covenant or noteholder matters.
  3. Updates on the SEC investigation, related lawsuits, legal expenses and any quantified loss exposure.
  4. Cash generation and cash available for debt service after the large year-over-year cash decline, alongside debt maturities, variable-rate exposure and covenant headroom.
  5. How much future growth is organic versus acquisition-related, and whether subscription growth and deferred revenue translate into sustainable revenue, margins and renewals.
  6. Final tax-reform accounting and fiscal 2019 revenue-recognition effects, including any changes to provisional tax estimates.