Symantec Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months of fiscal 2014, ended December 27, 2013; comparisons are to the periods ended December 28, 2012. The filing identifies the registrant as Symantec Corporation, not Gen Digital Inc.
Business context and performance
Symantec described itself as a provider of security, backup, and availability solutions. It reorganized its business into User Productivity & Protection, Information Security, and Information Management segments, and was implementing a strategy centered on new offerings, revised sales channels, and organizational changes.
| Metric | Three months ended Dec. 27, 2013 | Prior-year quarter | Nine months ended Dec. 27, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $1.705 billion | $1.791 billion | $5.051 billion | $5.158 billion |
| Operating income | $405 million | $304 million | $877 million | $851 million |
| Net income | $283 million | $216 million | $681 million | $565 million |
| Diluted EPS | $0.40 | $0.31 | $0.96 | $0.80 |
| Operating cash flow | Not separately reported for the quarter | $832 million | $981 million |
- Quarterly revenue declined 5%; nine-month revenue declined 2%. Content, subscription, and maintenance revenue was $1.508 billion for the quarter, down 1%, while license revenue was $197 million, down 27%.
- Gross margin was 83% in both comparative periods. Operating margin was approximately 24% for the quarter versus 17% a year earlier; nine-month operating margin was approximately 17% versus 16%.
- Quarterly operating expenses fell to $1.017 billion from $1.188 billion, particularly due to lower sales and marketing and intangible amortization costs. Nine-month restructuring and transition expense rose to $237 million from $85 million.
- Cash and cash equivalents were $3.813 billion at period-end, down from $4.685 billion at March 29, 2013; short-term investments were $77 million. The company reported approximately $3.9 billion in cash, cash equivalents, and short-term investments, plus an undrawn $1.0 billion credit facility.
- Long-term debt was $2.094 billion, with no current debt shown, versus $3.091 billion total debt at March 29, 2013. The $1.0 billion convertible notes matured and were repaid in June 2013. The company said it was in compliance with credit-facility covenants.
- Current assets were $5.316 billion and current liabilities $4.149 billion at December 27, 2013. Current deferred revenue was $3.087 billion; total deferred revenue was $3.6 billion, down from $4.0 billion at fiscal year-end.
Material changes versus comparable periods
- Management attributed lower revenue primarily to reduced sales activity during the transition to separate new-business and renewals sales teams. The lower deferred-revenue balance was expected to weigh on future revenue.
- For the quarter, User Productivity & Protection revenue fell 4%, Information Security revenue fell 3%, and Information Management revenue fell 6%. Information Management operating income fell 12%. Information Security operating income increased, helped by lower personnel and outside-services costs.
- Nine-month operating cash flow decreased to $832 million from $981 million, with a $470 million decline in deferred revenue among the principal offsets to cash generation. Financing used $1.525 billion, including debt repayment, $375 million of repurchases, and $314 million of dividends.
- The company began paying quarterly dividends of $0.15 per share in fiscal 2014 and repurchased 15 million shares for $375 million in the nine-month period; $783 million remained authorized.
- A retrospective accounting-policy change capitalized qualifying sales commissions and amortized them over related revenue periods. Prior-period statements were adjusted; management said the change did not affect cash flows.
Outlook, commentary, risks, and unusual items
- Management said existing cash and investments, the credit facility, potential debt issuance, and operating cash flow should cover working capital, capital expenditures, dividends, and repurchases for at least the next 12 months. Its capital-allocation strategy targeted returning approximately 50% of free cash flow to stockholders over time. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management expected research and development expense to increase as it invested in organic growth. The restructuring plan was expected to continue through fiscal 2014; remaining severance and benefit costs were estimated at less than $50 million.
- The company implemented the first phase of a new ERP system during the quarter. It reported disclosure controls were effective at a reasonable-assurance level and said ERP-related control processes had been modified and would continue to be monitored.
- A U.S. government investigation concerned Symantec’s GSA contract. In January 2014, the government presented an initial actual-damages analysis of approximately $145 million. Symantec said the matter was at a preliminary stage, it could not estimate a precise loss range, and its recorded accrual was not material. A False Claims Act resolution could be substantially higher depending on damages, penalties, and other factors.
- Symantec reported that its acting CFO and Chief Accounting Officer departed in December 2013; its VP of Tax became interim CFO and interim Chief Accounting Officer pending appointments.
- Nine-month net income benefited from specified tax items, including $33 million related to a Huawei joint-venture tax matter and $24 million from settlement of an IRS audit, partly offset by $12 million of tax expense related to investment sales. The company also reported a $32 million realized gain on short-term investments.
- International sales represented 52% of nine-month revenue. Management cited foreign-exchange exposure, including yen weakness affecting Asia Pacific/Japan revenue. It reported no material change in previously disclosed risk factors or market-risk exposures.
Most important facts for investors to verify
- Whether sales-force and channel changes restore license sales and stabilize deferred revenue, particularly given management’s warning about future revenue effects.
- The eventual government claims, potential penalties, and loss estimate or accrual for the GSA investigation.
- Whether operating cash flow can support the stated dividend and repurchase policy while funding restructuring, ERP implementation, and investment needs.
- The sustainability of earnings growth, considering lower revenue, cost reductions, falling intangible amortization, restructuring costs, and tax-related benefits.
- Progress of the ERP implementation and ongoing effectiveness of related financial-reporting controls, as well as appointment of permanent finance leadership.