Business Context and Reporting Period
This Form 10-Q covers Symantec Corporation (not Gen Digital Inc.) for the quarterly period ended January 1, 1999 (fiscal quarter ended December 31, 1998) and the nine-month period ended December 31, 1998. Symantec develops utility software for business and personal computing. The nine-month period comprised 39 weeks of activity, compared to 40 weeks in the prior year.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 1998 | Nine Months Ended Dec 31, 1998 | Nine Months Ended Dec 31, 1997 |
|---|---|---|---|
| Net Revenues | $165.1 million | $458.2 million | $422.3 million |
| Gross Margin | 84% | 85% | 84% |
| Operating Income | $24.8 million | $20.3 million | $70.6 million |
| Net Income | $16.2 million | $13.2 million | $61.0 million |
| Diluted EPS | $0.28 | $0.23 | $1.02 |
| Cash & Short-Term Investments | $182.8 million (Dec 31, 1998) | N/A | |
| Net Cash from Operating Activities | N/A | $85.9 million | $87.5 million |
| Debt (Current Portion) | $33.3 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 11% in the quarter and 9% in the nine-month period compared to the prior year, driven by corporate sales growth and expansion in Europe. Retail sales were lower due to market softness.
- Profitability Decline: Net income for the nine months dropped 78% to $13.2 million from $61.0 million in the prior year. This was primarily due to significant non-recurring charges.
- Acquisition Charges: The company recorded $41.9 million in write-offs for in-process research and development (IPR&D) related to acquisitions of IBM's anti-virus business, Binary Research, Intel's anti-virus business, and Quarterdeck.
- Restructuring and Litigation: Additional expenses included $5.1 million for restructuring (outsourcing manufacturing) and a $5.8 million litigation judgment related to a copyright action inherited from Delrina.
- Stock Repurchase: The company repurchased 2.875 million shares of common stock for approximately $56.3 million during the period.
Guidance, Outlook, Risks, and Unusual Items
- SEC Comment Letter: On January 6, 1999, the SEC issued a comment letter questioning the accounting for certain acquisitions, specifically the write-off of IPR&D costs. The company is re-evaluating these transactions, and prior period results may be restated.
- Acquisition Integration: Symantec completed the acquisition of a 63% interest in Quarterdeck and is integrating technologies from IBM, Binary, and Intel. Future amortization of purchased intangibles is expected to increase expenses.
- Year 2000 (Y2K) Issues: The company is actively remediating systems for Y2K compliance. Costs are estimated at $2 million. There are ongoing lawsuits regarding the Y2K compliance of older Norton AntiVirus products.
- Market Risks: Management highlights risks related to Microsoft's Windows 98 and upcoming Windows 2000 releases potentially reducing demand for standalone utility products, as well as intense price competition in the anti-virus market.
- Liquidity: Cash and investments decreased by $69 million year-to-date due to acquisitions and stock buybacks. The company maintains a $10 million line of credit with no borrowings outstanding.
Investor Verification Checklist
- Restatement Risk: Verify the outcome of the SEC comment letter regarding IPR&D accounting, as it could materially restate earnings for the quarters ended June, September, and December 1998.
- Quarterdeck Merger Completion: Confirm the timeline and financial impact of the remaining 37% acquisition of Quarterdeck, including the repayment of Quarterdeck's $25 million convertible notes due March 31, 1999.
- Y2K Litigation Exposure: Monitor the status of class-action lawsuits regarding pre-version 4.0 Norton AntiVirus Y2K compliance and potential liability.
- Product Cannibalization: Assess the impact of Microsoft's integrated utilities in Windows 98/2000 on Symantec's standalone utility product sales.
- Amortization Impact: Review future quarters for increased amortization expenses related to the $41.9 million in acquired intangible assets (excluding IPR&D write-offs).