Gen Digital Inc. quarterly report, Q2 FY2013

Symantec Corporation — Q2 FY2013 Form 10-Q

Reporting period: Three and six months ended September 28, 2012. The filing is by Symantec Corporation; the supplied company metadata identifies Gen Digital Inc., a name not used in this 2012 filing. Unless otherwise stated, amounts are in U.S. dollars.

Business context and performance

Symantec provided security, storage, and systems management products and services through Consumer, Security and Compliance, Storage and Server Management, Services, and Other segments. CEO Enrique Salem resigned in July 2012; Chairman Stephen M. Bennett became President and CEO effective July 25.

Financial highlights

• Quarterly gross margin was 83% versus 84%; operating margin was approximately 18.0% versus 17.0%, and net margin approximately 11.4% versus 10.8%.
• For the six-month period, operating margin was approximately 17.1% versus 17.6%, and net margin approximately 10.8% versus 11.2%.
• Quarterly content, subscription, and maintenance revenue rose 3% to $1.498B, while license revenue fell 12% to $201M. Security and Compliance grew; Storage and Server Management and Consumer revenue declined slightly.
• Cash and cash equivalents were $4.002B at September 28, up from $3.162B at March 30. Management reported $5.0B of liquidity, including an undrawn $1.0B revolving facility.
• Debt included $968M current and $2.093B long-term. The company issued $1.0B of senior notes in the first quarter; it planned to use $1.0B of cash to repay convertible notes maturing in June 2013. It was compliant with credit-facility covenants, with no revolver borrowings outstanding.

Changes and drivers

• Revenue increased 1% year over year in both the quarter and first half, despite adverse currency effects of approximately $58M and $111M, respectively.
• Quarterly operating income improved 7%, but first-half operating income fell 2%. First-half net income declined from $373M to $365M, while diluted EPS increased from $0.49 to $0.51, aided by fewer weighted-average shares.
• First-half operating cash flow fell to $518M from $811M. Lower cash flow reflected, among other factors, reduced deferred revenue of $339M; the prior-year period also had stronger receivables collections.
• Security and Compliance revenue increased 6% for the quarter and operating income increased 49%. Storage and Server Management revenue fell 2% and operating income fell 8%, with Backup Exec declines a key factor.
• First-half repurchases totaled $501M for 31M shares. The company also paid approximately $92M to increase its ownership of VeriSign Japan from about 54% to 92%.

Outlook, risks, and unusual items

• Management said existing cash and investments, borrowing capacity, access to debt markets, and operating cash generation should meet working-capital and capital-expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
• Management cited foreign-exchange exposure and a weaker PC shipment environment; the filing cautions that interim results are not necessarily indicative of full-year results.
• The Department of Justice was investigating compliance with provisions of Symantec’s GSA contract, including pricing, country-of-origin, accessibility, and commercial-sales-practice disclosures. Symantec was cooperating but could not predict the outcome; potential False Claims Act exposure could include damages and civil penalties.
• IRS disputes included contested tax assessments and penalties related to Veritas tax years 2002–2005. The company had $184M on deposit with the IRS and said gross unrecognized tax benefits related to audits could decrease by $160M–$310M in the next 12 months; timing and ultimate amounts were uncertain.
• Restructuring and transition expense was $58M for the first half, including $40M severance and $16M ERP implementation consulting costs. The mobile-application-management acquisition cost $28M; goodwill recognized was $24M.
• Management reported effective disclosure controls and no material change in internal control over financial reporting during the six-month period.

Investor verification points

• Confirm the issuer and reporting-period identity: this document is Symantec Corporation’s Q2 FY2013 10-Q, not a filing under the Gen Digital name.
• Track operating cash flow, deferred-revenue trends, and whether cash generation supports repurchases, debt maturities, and planned investments.
• Assess the 2013 convertible-note repayment plan, total debt, and the distinction between reported cash and cash held by foreign subsidiaries.
• Monitor the DOJ GSA investigation and IRS audits for developments, exposures, settlements, and cash or tax-provision effects.
• Evaluate whether Security and Compliance growth offsets continued weakness in Storage and Server Management, Consumer, and license revenue.