Gen Digital Inc

NASDAQ:GEN

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon. My name is Ian and I'll be your conference operator today. At this time, I would like to welcome everyone to the Symantec Corporation's Fourth Quarter Fiscal Year 2019 (sic) [2018] (00:11) Earnings Call. [Operator Instructions] Thank you.

I'd now like to turn the call over to Ms. Cynthia Hiponia. Ma'am, you may begin.

[Cynthia Hiponia, Symantec Corp.]

Thank you. I'm Cynthia Hiponia, Vice President of Investor Relations at Symantec, and I'm pleased to welcome you to our fourth quarter and full year fiscal year 2018 earnings results. We've posted the earnings materials and prepared remarks to our Investor Relations Events webpage.

Speakers on today's call are Greg Clark, Symantec's CEO; and Nick Noviello, EVP and CFO. This call will be available for replay via webcast on our website.

I'd like to remind everyone that all references to financial metrics are non-GAAP, unless otherwise stated. Please refer to the CFO commentary posted on the Investor Relations website for further definition of our non-GAAP metrics.

Please note, non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measure in the press release and supplemental materials posted on our website. We believe our presentation of the non-GAAP financial measures, when taken together with corresponding GAAP financial measures, provides meaningful supplemental information regarding our operating performance for reasons discussed below. Our management team uses those non-GAAP financial measures in assessing our operating results as well as when planning, forecasting and annualizing future periods. We believe our non-GAAP financial measures also facilitate comparisons of our performance to prior periods and that investors benefit from understanding of the non-GAAP financial measures. Non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP.

Today's call contains forward-looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date and, as such, involve risk and uncertainties that may cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information.

You will also find a detailed discussion about our risk factors in our filings with the SEC and, in particular, on our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.

Lastly, as mentioned in the company's press release, the Audit Committee of the Board of Directors has commenced an internal investigation in connections with concerns raised by a former employee. The Audit Committee has retained independent counsel and other advisors to assist in its investigation. The company has voluntarily contacted the Securities and Exchange Commission to advise that an internal investigation is underway, and the Audit Committee intends to provide additional information to the SEC as the investigation proceeds.

The investigation is in its early stages and the company cannot predict the duration or outcome of the investigation. The company's financial results and guidance may be subject to change based on the outcome of the Audit Committee investigation. It is unlikely that the investigation will be completed in time for the company to file its Annual Report on Form 10-K for the fiscal year ended March 30, 2018, in a timely manner. The investigation does not relate to any security concern or breach with respect to our products or systems. Now because this is an ongoing matter, we will be unable to comment further on this topic during today's call and there will be no question-and-answer session following our prepared remarks.

And now, I'd like to turn the call over to our CEO, Greg Clark.

[Gregory S. Clark, Symantec Corp.]

Thank you for joining us, and good afternoon. We were pleased with our performance in the fourth quarter and FY 2018, delivering operating results across the business above the guidance levels we provided in our last earnings call. We're also pleased that we exceeded our full-year EPS guidance based on our second half performance and good results from our cost control initiatives.

In Q4, our total revenue was driven by performance in both Enterprise Security and Consumer Digital Safety. Our operating margin exceeded our guidance as a result of revenue growth and continued cost and operating efficiencies. We generated strong cash flow from operations, which should benefit going forward from our continued business momentum, deferred revenue, and the drop off of costs associated with our restructuring initiatives.

In Enterprise Security, our Integrated Cyber Defense platform gained traction with customers attracted to our value proposition of an integrated platform with best-of-breed solutions. We saw continued adoption in Q4, with our deals greater than $1 million again exceeding 100. We also had a large number of deals greater than $5 million in the quarter.

Our-best-of-breed solutions were also recognized by industry analysts. In FY 2018, we were named a leader in the Gartner Magic Quadrant for Managed Security Services, Endpoint Protection Platforms, Cloud Access Security Brokers, CASB, and Secure Web Gateways. We were also named a leader in the IDC MarketScape for Mobile Threat Management in FY 2018.

As we've discussed on prior calls, to grow our Enterprise business, we've focused on integrating our Enterprise sales force and our product offerings to bring to customers an Integrated Cyber Defense platform. We believe our third and fourth quarter results indicate the successful integration of our sales force and the success of our Integrated Cyber Defense platform strategy.

Now turning to the market and how we are doing with customers. The trend that I described in our last earnings call of increased cross-selling in our Enterprise Security segment continued to gain strength this quarter. Enterprise customers are buying more of our products and solutions, embedding us deeper in their security architectures, and simplifying their environments, cutting costs by consolidating around our platform.

The rising awareness of long-term challenges and higher costs associated with sustaining many fragmented solutions across the enterprise is extensive and fragile. This has created opportunities within our installed base and with new customers for the platform and product integrations we provide. We are pleased with the adoption of our cloud-based Network and Web Security products, driven by sales to new customers, cross selling our cloud-based products into our installed base and displacing cloud solutions of native cloud incumbent competitors within existing and new accounts.

I would like to cover some examples that illustrate the trends we are seeing in our Enterprise Security segment. In the fourth quarter, we had a new customer adopt our platform in a seven-figure deal. One of the 10 largest banks in the U.S. found itself struggling with an overly complex and expensive global security architecture. The customer turned to our Integrated Cyber Defense platform, purchasing Data Loss Prevention, Advanced Threat Protection, Web Isolation from our Fireglass acquisition, Data Center Security, SEP, PGP, Business Critical Services and professional services. In the process, we displaced the DLP solution and Endpoint Protection offering of two separate incumbent competitors. This is just one of many examples of customer transactions driven in part by the need to cut complexity and costs from the security stack while improving performance.

Another critical need for enterprise customers is ensuring compliance and security in the cloud. This is a rising priority for customers who must contend with more complex regulations and decentralized sensitive data.

In the fourth quarter, we also closed an eight-figure deal with a large global professional services company that adopted solutions throughout our web security stack including CASB, cloud proxy, cloud DLP and Symantec Endpoint Protection Mobile. We displaced the CASB and web filtering offerings of two vendors. With one of the most mobile and geographically disbursed workforces in the world, this customer needed a way to keep their data safe while enabling easy access and information-sharing across their hundreds of thousands of roaming employees.

We also had another new customer win during the fourth quarter with a Fortune 500 enterprise software company that turned to us for help with their advanced threat and forensic security environments across their cloud infrastructure. This eight-figure deal included Security Analytics and our Encrypted Traffic Management product.

Turning to Consumer Digital Safety. With 40% of U.S. citizens affected by a cyber issue last year, consumers are moving beyond device security and focusing on protecting their entire life. The core tenets of our Consumer Digital Safety platform are malware, identity protection and privacy, which are center of mind in consumer populations. This category of digital safety is playing out favorably in FY 2018 and we have seen our competitors attempt to copy our strategy and partners are beginning to realize it's a better proposition for the customers than a malware-centered security tool. We believe consumers are seeing the value in our bundled offerings, which offer protection across device, information and identity, and we expect our growth in FY 2019 will be driven by further integration of our offerings and increased marketing to drive consumer awareness of our Consumer Digital Safety platform.

In summary, we are pleased by our performance in FY 2018 across both of our segments. Nick will now discuss our financial results in more detail and provide our outlook.

[Nicholas R. Noviello, Symantec Corp.]

Thank you, Greg, and good afternoon, everyone. All references to financial metrics are non-GAAP, unless otherwise stated. Please note, we've posted information on our financial metrics as well as other tables and reconciliations of GAAP to non-GAAP metrics in our supplemental materials and CFO commentary to our Investor Relations website.

I will start with a high level view of our Q4 and full year fiscal 2018 results. Recall that the first three quarters of fiscal year 2018 and fiscal year 2017 include results from our WSS/PKI solutions that we divested in Q3. For comparative purposes, our organic growth rates discussed are adjusted for acquisitions and divestitures.

As Greg mentioned in his comments, we were pleased with our performance in the fourth quarter with both Enterprise Security and Consumer Digital Safety revenues above our prior guidance. Looking at organic revenue growth in constant currency, adjusted for acquisitions and divestitures, total company year-over-year revenue growth was 4%. This included Enterprise Security segment growth of 1% and Consumer Digital Safety segment growth of 6%.

At the same time, year-over-year deferred revenue, adjusted for acquisitions and divestitures, was up 21% for the total company, 34% in our Enterprise Security segment, and 3% in our Consumer Digital Safety segment. We look at the combination of in-quarter recognized revenue and deferred revenue as a strong indicator of the health of our business segments.

In our Enterprise Security segment in the fourth quarter, over 80% of our business was ratable. Our Q4 implied billings was $937 million. Contract duration for our ratable business was approximately 18.5 months in Q4, up from slightly under 18 months in Q3; approximately 16.5 months in Q2, and approximately 15.5 months in Q1. We calculate contract duration as total order value divided by annual order value for ratable orders with a term of one year or more.

Due to integration activities that began in Q1 fiscal year 2018, we are not able to provide comparable duration metrics in fiscal year 2017. Contract duration impacts implied billings growth, and we expect our contract duration will continue to increase during fiscal year 2019. This increase is due to our selling a greater proportion of new customer transactions on three-year terms, partially offset by our substantial renewal business, where we typically sell one-year contracts.

We plan to give you contract duration on a quarterly basis going forward. We expect that the implementation of the new revenue recognition standard will impact our metrics, and we will give you the details on our Q1 earnings call.

With respect to our deferred revenue as of March 30, 2018, as we look into fiscal year 2019 and beyond, if the revenue recognition standard in effect in fiscal year 2018 had continued to apply after fiscal year 2018, we believe approximately 85% of our total Enterprise Security deferred revenue would be recognized into revenue over 24 months and approximately 95% over 36 months. And we believe approximately one-third of our Enterprise Security short-term deferred revenue balance would be recognized in revenue in the first quarter of fiscal year 2019.

Let me now turn to our quarterly Consumer Digital Safety metrics, which are defined in the CFO commentary. In the fourth quarter, our direct customer count was 20.9 million, down slightly from Q3. Direct ARPU increased to $8.62 per month, up approximately 3% from Q3. We expect these direct customer statistics to represent approximately 90% of our revenue stream at any point in time.

Total company operating margin for the fourth quarter was 36.5%. The year-over-year improvement in operating margin was the result of higher revenue and continued cost and operating efficiencies. Fully diluted earnings per share was $0.46, primarily driven by higher operating income.

Please see the dilution tables posted to our Investor Relations website where you can see the impact to diluted share count from the convertible notes at various stock prices.

Turning to full fiscal year 2018 results, total company year-over-year organic revenue growth in constant currency, adjusted for acquisitions and divestitures was 2%. This included flat revenue for Enterprise Security and 3% revenue growth for Consumer Digital Safety.

At our Financial Analyst Day last year, we stated we would supplement our quarterly metrics with annual metrics for our Consumer Digital Safety segment around retention and digital safety adoption. These metrics are defined in the supplemental CFO commentary posted to the Investor Relations website.

For fiscal year 2018, our annual retention rate was approximately 83% and our digital safety adoption was approximately 11%. We believe both are evidence of the value of our digital safety strategy with consumers.

Operating margin for the full fiscal year 2018 was 34.7% as compared to 28.7% in fiscal year 2017. This year-over-year improvement reflects our top line revenue growth as well as operating efficiencies.

Fully diluted earnings per share was $1.69, up 43% year-over-year. We generated cash flow from operating activities in the fiscal year of $950 million, and CapEx was $142 million.

We significantly reduced the principal amount of debt over the fiscal year from approximately $8.3 billion to $5.1 billion, with $1.75 billion of the year-end balance comprising of convertible notes. We exited the fiscal year with approximately $2.2 billion in cash and short-term investments.

Looking back on fiscal year 2018, each of our Enterprise Security and Consumer Digital Safety segments successfully leveraged cross-sell and upsell opportunities within our installed base, which you can see in our revenue and deferred revenue growth. We realigned, integrated and added capacity to our Enterprise sales force. We achieved our cost savings and integration synergies ahead of schedule. We significantly deleveraged our balance sheet.

We enter fiscal year 2019 with industry-leading platforms in both Enterprise and Consumer, a continued focus on operating efficiency, a stronger balance sheet and cash generating capability.

Our forecast model for fiscal year 2019 is based on the revenue recognition standard in effect in fiscal year 2018. We are not updating guidance at this point for the impact of the new revenue recognition standard, which we have adopted effective at the beginning of Q1 fiscal year 2019 on a modified retrospective basis. We expect the adoption of the new revenue standard will impact the pattern of revenue recognition for certain contracts.

Each quarter, we will be disclosing the impact of the adoption of the new revenue recognition standard on our operating results and the balance sheet, as well as our achievements against revenue guidance provided under the previous standard.

In fiscal year 2019, we anticipate that our shift to a more ratable-based enterprise business will continue. While we expect this ratable shift to lower in-period revenue in the near-term, we believe it will provide us with greater revenue visibility over time.

In our Consumer Digital Safety segment, our integrated bundled offerings provide consumers with a broad suite of digital safety options. We expect to further enhance our bundled offerings in fiscal year 2019 and drive further retention and adoption.

Before I transition to financial guidance, our organic growth rate discussed going forward will be adjusted for the WSS/PKI divestiture.

We are forecasting fiscal year 2019 revenue in the range of $4.760 billion to $4.900 billion, comprised of $2.325 billion to $2.425 billion in Enterprise Security, and $2.435 billion to $2.475 billion in Consumer Digital Safety. At the midpoint, on an organic basis, our guidance suggests flat revenue for the total company, a decline of 2% for Enterprise Security, and just over 3% growth for Consumer Digital Safety. You can see our revenue and deferred revenue details in our supplemental tables.

Based on the revenue recognition standard in effect in fiscal year 2018, we expect higher revenue in Enterprise Security in the second half of the year compared to the first half as deferred revenue is recognized. We are forecasting a fiscal Q1 2019 revenue range of $1.135 billion to $1.165 billion, comprised of $535 million to $555 million in Enterprise Security, and $600 million to $610 million in Consumer Digital Safety. At the midpoint, our guidance on an organic basis suggests flat year-over-year revenue for the total company, a decline in Enterprise Security, and growth in Consumer Digital Safety.

We believe the forecasted year-over-year decline in Enterprise Security revenue can be primarily attributed to a lower mix of business yielding in-period revenue and other contributors, including increased contract duration and timing of maintenance renewals.

In fiscal year 2019, implied billings and contract duration will be important metrics of the growth of this segment, and we will continue to report on them each quarter.

We are forecasting operating margin in fiscal year 2019 to be in the range of 30% to 32%, with Enterprise Security margins in the low teens, and Consumer Digital Safety margins of approximately 50%. As we look at our operating margin in fiscal year 2018 and compare it to our forecast for fiscal year 2019, we believe total operating margin will be negatively impacted by just over 1 point due to the WSS/PKI divestiture, as well as additional investments we are planning to make, partially offset by revenue growth.

We are forecasting operating margin in Q1 fiscal year 2019 to be in the range of 26% to 28%, with Enterprise Security margins impacted by higher costs versus Q4 and lower revenue. As a result of U.S. tax reform, we expect our effective tax rate in fiscal year 2019 to be approximately 20.4%, lower than the 21% to 22% range we discussed on our last earnings call.

We are forecasting non-GAAP EPS for fiscal year 2019 in the range of $1.50 to $1.65. Our fiscal year 2019 EPS forecast compared to fiscal year 2018 reflects higher revenue and a lower tax rate, partially offset by the WSS/PKI divestiture, and increased spend investment to drive revenue growth.

Our Q1 fiscal year 2019 EPS forecast is in the range of $0.31 to $0.35. We are forecasting cash flow from operations for fiscal year 2019 to be in the range of $1.3 billion to $1.5 billion as compared to $950 million in fiscal year 2018.

Turning to capital allocation, our strategy is to balance driving shareholder returns, managing financial risk, and preserving our flexibility to pursue strategic options including M&A.

On our last call, we discussed our opportunity to repatriate or otherwise utilize just over $1 billion of international cash as a result of U.S. tax reform. This process started in Q4. At the end of fiscal year 2018, $1.1 billion of our total principal amount of debt consisted of pre-payable term loans. We expect to continue to focus on debt repayment in fiscal year 2019.

Consistent with our capital allocation strategy, we also continue to focus on share repurchase and have an existing $800 million share repurchase authorization. We also plan to continue our regular dividend of $0.075 per share through fiscal year 2019.

We continue to believe that M&A can be an important supplement to our organic initiatives. We have shown our ability to successfully integrate and bring to market technologies from tuck-in acquisitions such as Fireglass and Skycure as well as execute on large transactions such as Blue Coat and LifeLock.

Looking forward, our balance sheet provides us with ability to continue to evaluate opportunities that make sense for the long-term value of Symantec.

Now, let me turn the call back to Greg for some closing remarks.

[Gregory S. Clark, Symantec Corp.]

As I look back on the fiscal year 2018, I'm pleased with how we executed for the year. When we launched our new go-to-market strategy in Enterprise at the beginning of fiscal year 2018, we had a vision of how our sales force could market and sell our Integrated Cyber Defense platform. Our strategy is resonating with customers. Enterprise customers are designing us into their security architectures and adopting our platform. As our customer workloads move to the cloud, we have launched a suite of cloud-hosted products ranging from CASB, WSS and DLP in the cloud to bring security into the cloud as our customers make this transition.

Our enterprise customers are rapidly adopting the subscription-based ratable form factors of our on-premise solutions based on their evolving buying preference for cloud and subscription form factors and the breadth and differentiation of our solutions.

Our FY 2019 guidance reflects our expectation that our Enterprise Security segment revenue will become more ratable on an annualized basis in FY 2019 compared to FY 2018.

In our Consumer Digital Safety segment, our goal in FY 2018 was to start to leverage the significant cross-sell opportunity of the Norton and LifeLock installed base and transform the traditionally PC-centric business to a growing Consumer Digital Safety category. We accomplished this with a platform that includes endpoint security, mobile, identity protection, Wi-Fi privacy and cyber safety in the home.

In FY 2018, our Consumer Digital Safety segment experienced rising ARPU with an annual retention rate of approximately 83% and digital safety adoption rate of approximately 11%. These statistics validate that our strategy of cyber safety platform that includes protecting against malware and identity theft and enhances privacy in cyber space is resonating in the market.

In summary, fiscal 2018 was a significant year in Symantec's corporate evolution, the latest chapter of which started with the divestiture of Veritas in fiscal year 2016. Since then, Symantec has undertaken two transformational acquisitions with Blue Coat and LifeLock while delivering substantial margin improvement. In the last year, Symantec continued to sharpen its strategic focus by divesting its Website Security and PKI offerings to DigiCert and completing several tuck-in acquisitions, including Fireglass and Skycure.

We believe our strategy to drive organic growth and leverage our scale, innovation and capital to create industry-leading platform solutions across our enterprise and consumer segments is working.

Thank you for joining us this afternoon.

[Operator]

Ladies and gentlemen, this does conclude the Symantec Corporation's Fourth Quarter Fiscal Year 2019 (sic) [2018] (27:15) Earnings Call. You may now disconnect.