Gen Digital Inc. quarterly report, Q2 FY2010

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Gen Digital Inc. — Filing Summary

Important identity and period note: The supplied filing is Symantec Corporation’s Form 10-Q, not a filing under the name Gen Digital Inc. It covers the quarter ended October 2, 2009 (Symantec fiscal Q2 2010), rather than calendar 2009 Q2. Comparisons below use the filing’s stated periods.

Business context and reporting period

Symantec provided security, storage, systems-management software and services to businesses and consumers. The three-month periods compared each included 13 weeks; the six months ended October 2, 2009 included 26 weeks versus 27 weeks in the prior-year period. Segment reporting was revised to reflect changes in operating structure, and prior-year segment data was reclassified.

Financial performance and liquidity

  • Quarter revenue: $1.474 billion, down 3% year over year. Content, subscriptions and maintenance revenue rose 6% to $1.254 billion; license revenue fell 35% to $220 million.
  • Six-month revenue: $2.906 billion, down 8% from $3.168 billion. License revenue declined 36% to $443 million; content, subscriptions and maintenance revenue was nearly flat at $2.463 billion. The prior period had one extra week.
  • Profit and margins, quarter: Gross profit was $1.215 billion, with an approximately 82% gross margin, versus 80% a year earlier. Operating income was $257 million (17% operating margin), up from $217 million (14%). Net income was $150 million, up from $126 million; diluted EPS was $0.18 versus $0.15.
  • Profit and margins, six months: Operating income was $409 million versus $495 million; net income was $223 million versus $298 million; diluted EPS was $0.27 versus $0.35. Gross margin was approximately 80% in both periods. Operating and net margins were approximately 14% and 8%, respectively, versus 16% and 9% a year earlier.
  • Cash flow: Six-month operating cash flow was $597 million versus $661 million. Investing activities provided $69 million; financing activities used $205 million. Cash and cash equivalents increased by $521 million to $2.314 billion, including a $60 million favorable currency effect.
  • Liquidity and debt: Cash and cash equivalents were $2.314 billion and short-term investments $18 million. Management reported approximately $3.3 billion of net liquidity, including unused revolving-credit availability. The $1 billion revolver had no borrowings and the company was in compliance with its covenants. Convertible-note principal was $2.1 billion; the reported liability carrying value was $1.818 billion.
  • Balance sheet: Total assets were $10.611 billion, total liabilities $6.410 billion, and stockholders’ equity $4.201 billion at October 2, 2009.

Material changes versus prior comparable periods

  • Quarter revenue declined $44 million, chiefly because license revenue fell $117 million, partly offset by a $73 million increase in subscription-related revenue. Six-month revenue declined $262 million, predominantly due to a $253 million license-revenue decline.
  • Consumer was the only segment with quarter revenue growth, up 6% to $463 million. Storage and Server Management revenue fell 9% to $563 million in the quarter and 13% to $1.116 billion for six months. Security and Compliance revenue fell 3% in the quarter and 9% for six months.
  • Quarter net income increased despite lower revenue, which management attributed primarily to cost and expense discipline. Six-month net income and operating income declined.
  • Foreign-currency movements reduced international revenue by approximately $14 million in the quarter and $89 million over six months versus the prior-year periods. The Americas and EMEA declined 4% and 5% in the quarter; Asia Pacific/Japan grew 5%.
  • Six-month cash from operations was lower, in part because the prior-year period included $58.5 million of litigation-settlement receipts. Deferred revenue declined $259 million in the current six-month period.
  • Retrospective adoption of convertible-debt accounting increased reported interest expense through non-cash discount amortization and adjusted prior-period financial statements; it did not change prior-period cash flows.

Outlook, management commentary, risks and unusual items

  • Management gave no quantified revenue or earnings guidance in the supplied filing. It said existing cash, expected operating cash generation and borrowing capacity should cover anticipated working-capital and capital-expenditure needs for at least 12 months.
  • Management cited constrained corporate IT budgets and slower consumer spending, warning that continued weak economic conditions or tight IT spending could lead to slower or negative revenue growth. It said it would continue aligning costs with revenue expectations.
  • Restructuring charges were $59 million for six months, including $22 million of transition, transformation and related costs. Management estimated approximately $25 million of remaining transition and transformation costs and $15 million to $40 million of remaining costs under the 2008 restructuring plan.
  • Properties held for sale had an estimated fair value less selling costs of approximately $56 million; completion of sales was expected by fiscal year-end. A $3 million impairment was recorded in the six-month period.
  • On October 28, 2009, after quarter-end, the board approved a new $1 billion share-repurchase program. The company had repurchased $243 million of stock during the six months ended October 2.
  • Tax matter: The IRS originally asserted $867 million of additional tax, excluding interest and penalties, for Veritas tax years 2000 and 2001. After the IRS revised its position, $545 million, excluding interest, remained at issue; the company was awaiting a Tax Court decision. A separate court ruling led Symantec to record approximately $7 million of tax expense and a $30 million reduction in additional paid-in capital.
  • Management said no goodwill-impairment indicators had been identified as of October 2. The filing noted that adverse economic conditions, reduced demand, competition, product-development challenges, legal or regulatory changes, and foreign-exchange movements could affect results. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.

Most important facts for investors to verify

  • Confirm the issuer and filing period: this document identifies Symantec Corporation and the quarter ended October 2, 2009, not Gen Digital Inc. or calendar Q2 2009.
  • Assess the sustainability and mix of revenue, particularly the steep decline in license revenue and the reported growth in recurring subscription and maintenance revenue.
  • Review cash-flow quality, including the effects of deferred-revenue movements, seasonal collections, the extra week in the comparative period, and prior-year litigation receipts.
  • Verify the convertible notes’ $2.1 billion principal, accounting carrying value, maturity dates and conversion terms; distinguish the unused $1 billion revolver from funded debt.
  • Monitor the $545 million remaining IRS tax dispute, restructuring commitments, property disposals and the post-quarter $1 billion repurchase authorization.