Business context and reporting period
The supplied filing is Symantec Corporation’s Form 10-K for the fiscal year ended March 31, 2017—not a 2016 Q4 filing, and the registrant named in the filing is not Gen Digital Inc. Fiscal 2017 and fiscal 2016 each comprised 52 weeks. Veritas is reported as discontinued operations. Symantec reported two continuing segments: Consumer Digital Safety and Enterprise Security.
The company completed its $4.7 billion net-consideration acquisition of Blue Coat in August 2016 and its $2.3 billion acquisition of LifeLock in February 2017. Their results are included from their respective acquisition dates.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $4.019 billion | $3.600 billion |
| Gross profit / margin | $3.166 billion / 78.8% | $2.985 billion / 82.9% |
| Operating income (loss) / margin | ($100 million) / (2.5%) | $457 million / 12.7% |
| Continuing operations income (loss) | ($236 million) | ($821 million) |
| Net income (loss), including discontinued operations | ($106 million) | $2.488 billion |
| Cash from continuing operating activities | ($156 million) | $1.456 billion |
| Cash and cash equivalents at year-end | $4.247 billion | $5.983 billion |
Revenue increased 12%, primarily because of Blue Coat. Enterprise Security revenue rose 22% to $2.355 billion, including $427 million of Blue Coat product revenue. Consumer Digital Safety revenue was nearly flat at $1.664 billion: a $73 million Norton decline was largely offset by $67 million of LifeLock revenue. Revenue from Norton products declined 4%.
Gross margin fell about four percentage points. Management attributed the decline principally to acquired deferred-revenue fair-value adjustments, $122 million of acquired-intangible amortization in cost of revenue, and a $24 million Blue Coat inventory write-up. Operating expenses rose with the acquisitions, stock-based compensation, amortization, and $120 million of acquisition and integration costs. Continuing operating cash flow was affected by an $887 million tax payment related to the Veritas sale and changes in working capital.
Liquidity, debt, and capital allocation
At March 31, 2017, cash, cash equivalents, and short-term investments were approximately $4.3 billion; the company also had $1.0 billion available on its revolving credit facility, for reported liquidity of approximately $5.3 billion. About $3.3 billion of cash and short-term investments was held by foreign subsidiaries.
Debt principal totaled $8.31 billion ($8.186 billion carrying value), including $1.31 billion classified as current. The company reported $6.81 billion of debt maturing within five fiscal years. Variable-rate borrowings were approximately $3.7 billion; a 50-basis-point rate increase was estimated to add $19 million in annual cash interest. Subsequent to year-end, Symantec prepaid $710 million and $100 million of term loans in April and May 2017, respectively.
Fiscal 2017 dividends were $0.30 per share, compared with $4.60 in fiscal 2016, which included a $4.00 special dividend. The company made a $500 million accelerated share repurchase payment in March 2017; final settlement delivered 16.4 million shares at an average $30.51 per share.
Material changes and unusual items
- Fiscal 2017 revenue growth and the substantial increase in goodwill and intangible assets reflect the Blue Coat and LifeLock acquisitions; goodwill rose to $8.627 billion from $3.148 billion.
- Operating performance weakened despite higher revenue: consolidated operating income moved from $457 million to a $100 million loss, while interest expense increased $133 million to $208 million, mainly from acquisition-related borrowing.
- Fiscal 2016 included a $1.1 billion tax charge for certain undistributed foreign earnings and $3.309 billion of net income from discontinued operations, including the Veritas sale gain. These items make the year-over-year net-income comparison unusually distorted.
- Fiscal 2017 included a $52 million tax expense related to tax attributes lost in restructuring activities. The company reported a $26 million income-tax benefit overall.
- Fourth-quarter figures in this annual report are FY2017: revenue $1.115 billion, operating loss $178 million, continuing-operations loss $177 million, and net loss $143 million. The included FY2016 fourth-quarter comparatives were revenue $873 million, operating income $128 million, and net income $2.045 billion, including discontinued operations.
Outlook, risks, and contingencies
Management did not provide a numeric revenue or earnings forecast in the supplied filing text. It expected to complete its fiscal 2017 restructuring actions in fiscal 2018 and projected annual net cost efficiencies and synergies exceeding $550 million when the plan is complete. Estimated total plan costs were $415 million to $465 million; expected fiscal 2018 expenses were approximately $240 million to $290 million. The company also expected significant ERP, process-automation, and acquisition-integration costs.
- Key execution risks include integrating Blue Coat and LifeLock, realizing expected synergies, leadership and employee transitions, and competition amid shifts to cloud and subscription security offerings.
- Debt, near-term maturities, floating interest rates, credit-rating pressure, and restrictive covenants create liquidity and financing risks.
- Privacy and data-security obligations increased with LifeLock. LifeLock’s services are also subject to heightened regulation and prior FTC and state settlement restrictions.
- Symantec disclosed a government investigation and litigation concerning its former GSA contract. It accrued $25 million as the low end of its probable loss estimate, but could not determine the high end; potential exposure could be materially higher.
- A $40 million Finjan patent-verdict loss was accrued by Blue Coat and assumed in the acquisition; Symantec said it was appealing. Objectors also appealed approval of a previously accrued $30 million EDS/NDI settlement.
- The company warned that a browser proposal to reduce trust in its SSL/TLS certificates could harm its website-security business. Other disclosed risks include cyber incidents, service outages, product defects, foreign-exchange exposure, and uncertain tax examinations.
Important facts for investors to verify
- Confirm the intended issuer and period: this is Symantec’s FY2017 10-K, while the request identifies Gen Digital Inc. and 2016 Q4.
- Assess organic performance separately from acquired revenue, including Norton customer attrition, subscription renewal trends, and Blue Coat and LifeLock contribution.
- Track post-acquisition margins, deferred-revenue accounting effects, integration costs, stock-based compensation, and progress toward the restructuring savings target.
- Review debt repayment and refinancing plans, covenant headroom, variable-rate exposure, and the use and location of cash.
- Monitor outcomes and potential costs of the GSA matter, Finjan appeal, tax disputes, and LifeLock regulatory obligations.