Business context and reporting period
This is NortonLifeLock Inc.’s unaudited Form 10-Q for the fiscal third quarter ended January 1, 2021 (13 weeks), with year-to-date results for 39 weeks. The company, identified as Gen Digital Inc. in the request, filed under the NortonLifeLock name. It reported one segment focused on consumer cybersecurity, identity and information protection. Prior-period comparisons are affected by the 2019 sale of its Enterprise Security business to Broadcom and the subsequent divestiture of ID Analytics.
Financial performance and position
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Quarter ended Jan. 1, 2021 | Prior-year quarter | Nine months ended Jan. 1, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $639 | $618 | $1,879 | $1,876 |
| Gross profit / margin | $552 / 86% | $515 / 83% | $1,616 / 86% | $1,580 / 84% |
| Operating income / margin | $280 / 44% | $62 / 10% | $630 / 34% | $311 / 17% |
| Continuing-operations income | $173 | $353 | $488 | $429 |
| Net income | $178 | $2,845 | $360 | $3,656 |
| Diluted EPS from continuing operations | $0.29 | $0.55 | $0.81 | $0.67 |
| Operating cash flow | Not provided for the quarter | $350 | $905 |
Quarterly revenue grew 3%; year-to-date revenue was nearly unchanged, although the current period had one fewer week. Revenue growth came from consumer security and identity/information protection. Direct customer revenue was $569 million versus $542 million; quarter-end direct customers were 21.0 million versus 20.1 million, and monthly direct ARPU was $9.10 versus $8.99.
Cash, cash equivalents and short-term investments totaled $1.073 billion at January 1, 2021, down $1.190 billion from April 3, 2020. The company generated $350 million in operating cash flow, used $1.658 billion in financing activities, and received $164 million from investing activities over the nine months. Financing outflows included $1.929 billion of debt repayments, $300 million of dividends and equivalents, and $138 million of share repurchases.
Total debt principal was $3.625 billion ($3.605 billion carrying value); cash and short-term investments imply net debt of about $2.552 billion. Current liabilities were $1.821 billion against current assets of $1.848 billion. The company had a $1.0 billion undrawn revolving facility and reported compliance with debt covenants. Stockholders’ equity was negative $492 million. Contract liabilities were $1.135 billion, and remaining performance obligations were $738 million, excluding $397 million of customer deposits; approximately 94% of the obligations were expected to be recognized as revenue within 12 months.
Material changes versus the prior comparable period
- Quarterly operating income rose $218 million, chiefly reflecting lower compensation, outside-services, facility and IT costs from cost-reduction efforts, and much lower restructuring costs.
- Quarterly continuing-operations income fell $180 million despite higher operating income, principally because the prior-year quarter included a $379 million DigiCert investment-sale gain.
- Reported net income fell sharply because the prior-year results included the $5.422 billion Broadcom-sale gain within discontinued operations. Current-quarter discontinued-operations income was $5 million versus $2.492 billion a year earlier.
- For the nine months, operating income increased $319 million and continuing-operations income rose $59 million. Net income declined as prior-year discontinued operations included the Broadcom-sale gain; current-year discontinued operations recorded a $128 million loss, including the Broadcom settlement.
- Year-to-date operating cash flow was lower than the prior year, whose cash flow included materially different discontinued-business activity and working-capital movements. Investing cash flow also fell substantially from the prior-year Broadcom sale proceeds.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said it had not experienced a material increase in cancellations or material deterioration in retention in fiscal 2021, but warned that prolonged recession, discretionary-spending pressure and work-from-home effects could harm demand, retention and operations.
- COVID-19 created uncertainty around employees, partners, service providers, customer demand and asset values. The pandemic delayed the expected sale of certain real estate classified as held for sale.
- The company accrued $50 million for the GSA contract litigation, but disclosed a reasonable possibility of loss above the accrual. The government has pursued claims with potentially material exposure; trial was scheduled for August 2021 and further mediation was expected.
- The SEC investigation remained ongoing, with significant legal costs; the company said it could not assess whether a material loss was reasonably possible or estimate a range. Securities class and derivative litigation also remained pending, with the class-action trial scheduled for June 2021; potential losses could not be estimated.
- On January 8, 2021, after quarter-end, the company completed its acquisition of Avira for approximately $360 million in cash and estimated up to $20 million of integration and synergy costs. Purchase-price allocation was not yet available.
- Key strategic and financial risks include dependence on Broadcom for certain critical security-engine services, cybersecurity and privacy threats, competition and customer retention, acquisition integration, substantial debt and variable-rate exposure, and uncertain tax positions. Unrecognized tax benefits were $643 million; the company noted significant changes could occur within 12 months.
- Other notable items: the company recognized a $35 million gain on sale of property and a $20 million gain on early extinguishment of debt during the nine months. It declared a $0.125-per-share dividend for payment in March 2021 after quarter-end.
Most important facts for investors to verify
- Underlying growth and retention trends, including direct customer count, ARPU, partner revenue and the effect of the divested ID Analytics business.
- Whether cost reductions can be sustained without weakening product development, customer service or growth, and how margins evolve after restructuring completion.
- Liquidity and debt-service capacity after the large convertible-note settlement, including covenant headroom, variable-rate exposure and planned shareholder returns.
- Developments in GSA litigation, the SEC investigation and securities litigation, including exposure beyond recorded accruals.
- Avira’s integration, purchase-price allocation, costs and contribution to international growth, alongside continued reliance on Broadcom-provided services.
- Effects of COVID-19 and macroeconomic conditions on discretionary demand, customer retention, operations and asset-sale timing.