Business context and reporting period
Symantec Corporation, a global cybersecurity company, filed this unaudited Form 10-Q for the third quarter of fiscal 2017, the 13 weeks ended December 30, 2016, and the first nine months of fiscal 2017, the 39 weeks ended December 30, 2016. The comparable periods ended January 1, 2016. The filing identifies the registrant as Symantec Corporation; the request metadata names Gen Digital Inc.
Results reflect Blue Coat from its August 1, 2016 acquisition. Veritas, sold on January 29, 2016, is reported as discontinued operations in both periods.
Financial performance and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 FY17 | Q3 FY16 | Nine months FY17 | Nine months FY16 |
|---|---|---|---|---|
| Revenue | $1,041 | $909 | $2,904 | $2,727 |
| Gross profit / margin | $806 / 77% | $759 / 83% | $2,310 / 80% | $2,259 / 83% |
| Operating income (loss) | $(16) | $146 | $78 | $329 |
| Continuing-operations income (loss) | $(56) | $114 | $(59) | $192 |
| Net income | $46 | $170 | $37 | $443 |
| Diluted EPS | $0.07 | $0.25 | $0.06 | $0.65 |
Quarterly revenue rose 15%; nine-month revenue rose 6%. Enterprise Security revenue increased 30% in the quarter and 16% year to date, largely reflecting Blue Coat, which contributed $160 million and $248 million, respectively. Consumer Security revenue declined 4% and 5%, respectively, as new customer additions did not offset customer attrition. The filing attributes lower gross margins principally to purchase-accounting reductions in Blue Coat deferred revenue, acquired-intangible amortization, and acquired-inventory fair-value adjustments.
Segment operating income was $271 million for the quarter and $773 million year to date, before unallocated corporate costs and other reconciling items. Consumer Security revenue was $397 million for the quarter and $1,205 million year to date; Enterprise Security revenue was $644 million and $1,699 million, respectively. Quarterly reported operating loss included higher stock compensation, acquired-intangible amortization, restructuring, acquisition and integration costs. Nine-month comparisons also reflect $186 million of prior-year corporate charges allocated to Veritas that were absent in FY17.
Continuing operating cash flow was negative $469 million for the nine months, versus positive $316 million in the prior-year period; total operating cash flow, including discontinued operations, was negative $573 million. Management cited an $845 million increase in cash taxes, mainly related to the Veritas sale gain, as the primary driver. Investing cash flow was negative $4.55 billion, including $4.53 billion of net acquisition payments. Financing cash flow was positive $4.78 billion, principally from debt issuance.
At December 30, 2016, cash and cash equivalents were $5.575 billion; total current assets were $6.511 billion and current liabilities $3.605 billion. Debt was $7.138 billion carrying value, or $7.255 billion principal, including $780 million classified as current. The company had no revolving-credit-facility borrowings and reported $1.0 billion of unused capacity. Cash, cash equivalents, and short-term investments held by foreign subsidiaries totaled $3.4 billion. The quarterly dividend declared was $0.075 per share; nine-month dividends and equivalents paid totaled $173 million.
Material changes, outlook and risks
- Blue Coat acquisition: Completed August 1, 2016, for $4.673 billion net of acquired cash. The acquisition added $4.086 billion of goodwill and $1.608 billion of identified intangible assets; purchase-price allocation remained preliminary. Management cited integration costs and expected strategic benefits, but did not quantify expected synergies.
- LifeLock: A proposed acquisition for approximately $2.3 billion in enterprise value was expected to close in fiscal Q4 2017. Symantec planned to use cash and approximately $1.0 billion of new debt financing. The transaction subsequently received LifeLock stockholder approval; closing remained pending at the filing date.
- Restructuring: The fiscal 2017 plan was expected to cost $230 million to $280 million, with completion expected in fiscal 2018. Remaining cash payments were estimated at approximately $90 million to $140 million. The company also expected continuing ERP-transition and business-automation costs.
- Liquidity outlook: Management said cash, available credit, financing capacity, and customer collections should meet business needs for at least 12 months and the foreseeable future. It expected to issue $1.0 billion of debt for LifeLock and reiterated a commitment to quarterly dividends totaling $0.30 per share annually. The filing provides no specific revenue or earnings guidance.
- Legal contingencies: The GSA matter had a $25 million accrued low-end probable loss estimate; the company said additional loss was reasonably possible but it could not estimate the high end. A $40 million Finjan patent-verdict loss and related interest had been accrued and was being appealed. A previously accrued $30 million EDS/NDI settlement had received final approval, but objectors appealed.
- Other risks: Management highlighted acquisition integration and leadership transitions, consumer customer attrition, competitive and technology shifts, cybersecurity and service disruptions, privacy and regulatory exposure, foreign-exchange and interest-rate risks, and substantial post-acquisition debt. The company reported compliance with credit-facility covenants and effective disclosure controls.
Important facts for investors to verify
- How much of revenue growth and Enterprise Security performance is recurring or organic versus acquired Blue Coat revenue and purchase-accounting effects.
- Whether Consumer Security customer retention improves and whether LifeLock closes on the expected timetable and delivers anticipated benefits.
- Progress on integration and restructuring, including actual costs, savings, and the effect on margins and cash flow.
- Debt repayment and refinancing needs, variable-rate exposure, and financing for LifeLock alongside dividends and planned share repurchases.
- Developments in the GSA and Finjan cases, including exposure beyond accrued amounts, and the outcome of the EDS/NDI appeal.