Gen Digital Inc. (Symantec Corporation) — Form 10-Q Summary
Entity and period note: The supplied filing is for Symantec Corporation, not Gen Digital Inc. It covers fiscal Q3 and the first nine months of fiscal 2011, ended December 31, 2010; the comparable periods ended January 1, 2010. Unless otherwise stated, amounts are U.S. dollars in millions. Prior-period figures were adjusted for the joint venture’s revenue-recognition guidance.
Business context and reporting period
Symantec provided security, storage, systems-management and related services to business and consumer customers. Its five operating segments were Consumer, Security and Compliance, Storage and Server Management, Services, and Other. Fiscal 2011 was a 52-week year ending April 1, 2011. The filing cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended Dec. 31, 2010 | Three months ended Jan. 1, 2010 | Nine months ended Dec. 31, 2010 | Nine months ended Jan. 1, 2010 |
|---|---|---|---|---|
| Revenue | $1,604 | $1,548 | $4,517 | $4,454 |
| Gross profit | $1,340 | $1,290 | $3,742 | $3,625 |
| Operating income | $229 | $277 | $641 | $686 |
| Net income attributable to Symantec shareholders | $132 | $301 | $429 | $530 |
| Diluted EPS | $0.17 | $0.37 | $0.54 | $0.64 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,105 | $990 |
- Quarterly revenue grew 4%; nine-month revenue grew 1%. Content, subscription and maintenance revenue rose 5% for the quarter and 3% year to date, while license revenue fell 3% and 8%, respectively.
- Gross margin was 84% for the quarter versus 83% prior year, and 83% year to date versus 81%. Operating margin was approximately 14% for the quarter versus 18%, and 14% year to date versus 15%.
- Quarterly net income declined 56% and nine-month net income declined 19%. Management cited foreign-entity liquidation losses, operating costs and acquisition-related effects; prior-year earnings benefited from tax items and foreign-entity liquidation gains.
- Cash from operations increased to $1,105 from $990 for the nine-month period. Investing used $1,678, chiefly reflecting $1,537 of acquisition payments and $185 of capital expenditures. Financing used $51. Cash and cash equivalents ended at $2,445, down from $3,029 at fiscal year-end.
- At December 31, 2010, total debt was $2,561: $587 current and $1,974 long-term. Current assets were $3,893 and current liabilities $4,584. The company reported $3.4 billion of liquidity, including cash and unused capacity under its $1.0 billion revolving facility; no facility borrowings were outstanding and the company was in covenant compliance.
Material changes versus the comparable period
- Security and Compliance revenue rose 13% in the quarter and 7% year to date, while segment operating income fell 54% and 32%. Acquisition costs, commissions and purchase-accounting reductions to acquired deferred revenue weighed on margins.
- Consumer revenue increased 4% for both periods. Storage and Server Management revenue rose 1% quarterly but declined 2% year to date; Services revenue declined 17% quarterly and 9% year to date.
- International revenue was adversely affected by currency movements by approximately $24 for the quarter and $75 year to date. EMEA revenue declined, while Asia Pacific/Japan revenue increased.
- Sales and marketing expense increased 11% quarterly and 7% year to date. Restructuring and transformation charges were $20 for the quarter and $88 year to date, compared with $5 and $64.
Outlook, commentary, risks and unusual items
- Management expected the fiscal 2011 acquisitions to contribute positively to future Security and Compliance revenue. It cited growth in backup and archiving and stabilization in storage management for the quarter, but noted year-to-date weakness in storage management, including lower Sun/Oracle-related revenue. No quantitative earnings or revenue guidance was provided in the supplied filing.
- Fiscal 2011 acquisitions included VeriSign’s identity and authentication business, PGP, GuardianEdge and two other businesses, for approximately $1.5 billion net of cash acquired. The VeriSign transaction’s purchase-price allocation was preliminary; goodwill and intangible assets increased materially.
- Symantec issued $1.1 billion of senior notes, repurchased $500 million principal amount of convertible notes for a net cash cost of $497, and repurchased $690 of common stock during the nine months. A new $1.0 billion stock-repurchase authorization was announced January 26, 2011.
- Management stated that cash, investments, borrowing capacity and operating cash generation should cover working-capital and capital-expenditure needs for at least 12 months. This is a forward-looking assessment, not a guarantee.
- The Veritas tax dispute concerning 2000–2001 was closed after the IRS elected not to appeal; the company recorded an additional $39 tax benefit in fiscal 2011. A separate IRS examination of 2002–2005 included $80 of disputed tax assessments, excluding interest, and remained under Appeals review. The company estimated a separate tax agreement could result in $13 or less of tax, for which it had accrued.
- Other notable items included a $21 noncash loss on liquidation of foreign entities, a $16 loss on early debt extinguishment, and restructuring plans with estimated remaining severance costs of $20–$30 and facilities costs of $3–$6. The company reported no goodwill impairment indicators and no material change in previously disclosed risk factors.
- Disclosure controls were assessed as effective at period-end; the filing reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: the source filing identifies Symantec Corporation, despite the request metadata naming Gen Digital Inc.
- Review acquisition integration, purchase-price allocation estimates, and the effect of deferred-revenue fair-value adjustments on reported margins and future amortization.
- Assess whether organic growth supports revenue performance, given acquisition-driven Security and Compliance gains, declining license revenue and weakness in some storage and services areas.
- Verify debt maturities, refinancing needs, covenant compliance and the company’s ability to sustain substantial buybacks while funding acquisitions and operations.
- Track the remaining IRS tax controversy, restructuring costs and foreign-exchange sensitivity; compare subsequent results with management’s stated liquidity and business outlook.