SYMANTEC REPORTS THIRD QUARTER FISCAL YEAR 2018 RESULTS

Financial and Business Q3 Highlights

MOUNTAIN VIEW, Calif. – January 31, 2018 – Symantec Corp. (NASDAQ: SYMC) today reported results for its third quarter fiscal year 2018 ended December 29, 2017.

“Despite selling the business volume that we planned in our Enterprise segment, third quarter revenue came in below our guidance,” said Greg Clark, Symantec CEO. “This result was due to an increased ratable mix shift in our Enterprise segment. Adoption of our cloud solutions by enterprise customers accelerated during the quarter, which reduced in-period revenue recognition, but increased implied billings and deferred revenue. Cloud adoption is positive for our customers and a long term benefit for our business. At the same time, our Consumer Digital Safety segment delivered revenue at the high end of our prior guidance range and continues to be a growth driver for the company. Company operating margins exceeded our expectations and we generated strong cash flow from operations.  Our Integrated Cyber Defense platform and Consumer Digital Safety solutions are resonating with customers and we expect continued momentum in the fourth quarter.”

To help readers understand our past financial performance and our future results, we supplement the financial results that we provide in accordance with generally accepted accounting principles, or GAAP, with non-GAAP financial measures. The methods we use to produce non-GAAP results are not in accordance with GAAP and may differ from the methods used by other companies. Additional information regarding our non-GAAP measures is provided below.

 

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Results for the Third Quarter of Fiscal Year 2018

 

			Q3 FY18				Q3 FY17				Y/Y Change
GAAP
Revenue			$1,209M				$1,041M				16%
Operating Margin			7.9%				(1.5%)				940bps
EPS (Diluted)			$2.01				$0.07				$1.94
Non-GAAP
Revenue			$1,234M				$1,088M				13%
Operating Margin			37.5%				30.4%				710bps
EPS (Diluted)			$0.49				$0.32				$0.17

 

Fiscal Year 2018 Guidance

For additional details regarding Symantec’s results and outlook, please see the CFO commentary on the investor relations page of our website at: http://www.symantec.com/invest.

Conference Call

Symantec has scheduled a conference call for 5:00 p.m. ET / 2:00 p.m. PT today to discuss its results for its third quarter fiscal 2018 ended December 29, 2017 and to review guidance. Interested parties may access the conference call on the Internet at http://investor.symantec.com/investor-relations/events-calendar/. To listen to the live call, please go to the website at least 15 minutes early to register, download and install any necessary audio software. For telephone access to the conference, call (877) 475-6198 within the United States or (970) 297-2372 from outside the United States. Please call 15 minutes early and give the operator conference ID number 1584866.

A replay and our prepared remarks will be available on the investor relations home page shortly after the call is completed.

About Symantec

NOTE TO EDITORS: If you would like additional information on Symantec Corporation and its products, please visit the Symantec News Room at http://www.symantec.com/news. All prices noted are in U.S. dollars and are valid only in the United States.

Symantec, the Symantec logo and the Checkmark logo are trademarks or registered trademarks of Symantec Corporation or its affiliates in the U.S. and other countries. Other names may be trademarks of their respective owners.

USE OF NON-GAAP FINANCIAL INFORMATION: We use non-GAAP measures of adjusted revenues, operating margin, net income and earnings per share, which are adjusted from results based on GAAP to include certain purchase accounting adjustments and exclude certain expenses, gains and losses. Additionally, we provide the non-GAAP metric of implied billings.  These non-GAAP financial measures are provided to enhance the user’s understanding of our past financial performance and our prospects for the future. Our management team uses these non-GAAP financial measures in assessing Symantec’s performance, as well as in planning and forecasting future periods. These non-GAAP financial measures are not computed according to GAAP and the methods we use to compute them may differ from the methods used by other companies. Non-GAAP financial measures are supplemental, should not be considered a substitute for financial information presented in accordance with GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Readers are encouraged to review the reconciliation of our non-GAAP financial measures to the comparable GAAP results, which is attached to our quarterly earnings release and which can be found, along with other financial information including CFO Commentary and Supplemental Information, on the investor relations page of our website at: http://www.symantec.com/invest. 

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⁽¹⁾ The held for sale classification of our WSS and PKI assets and liabilities at the beginning of the period was not considered in the changes in operating assets and liabilities within cash flows from operating activities.

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⁽¹⁾ This presentation includes non-GAAP measures. Non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP. For a detailed explanation of these non-GAAP measures, please see Appendix A.

⁽²⁾ Net income per share amounts may not add due to rounding.

⁽³⁾ Diluted GAAP and non-GAAP weighted-average shares outstanding are the same, except in periods in which there is a GAAP loss from continuing operations. In accordance with GAAP, we do not present dilution for GAAP in periods in which there is a loss from continuing operations. However, if there is non-GAAP net income, we present dilution for non-GAAP weighted-average shares outstanding in an amount equal to the dilution that would have been presented had there been GAAP income from continuing operations for the period.

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⁽¹⁾ This presentation includes non-GAAP measures. Non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP. For a detailed explanation of these non-GAAP measures, please see Appendix A.

⁽²⁾ On February 9, 2017, we completed the acquisition of LifeLock. The pre-acquisition implied billings of LifeLock are not included in our implied billings for the three months ended December 30, 2016.

⁽³⁾ Deferred revenue adjustment includes the change in deferred revenue related to Veritas discontinued operations. In addition, for the three months ended December 29, 2017, the adjustment includes the in-quarter change in WSS & PKI deferred revenue prior to the divestiture that is not captured in the GAAP Enterprise Security deferred revenue change due to its classification as liabilities held for sale.

⁽⁴⁾ On October 31, 2017 we completed our sale of WSS & PKI products. These products contributed $35 million of revenue and $29 million of implied billings during the three months ended December 29, 2017 and $104 million of revenues and $91 million of implied billings during the three months ended December 30, 2016.

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⁽¹⁾ This presentation includes non-GAAP measures. Non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP. For a detailed explanation of these non-GAAP measures, please see Appendix A.

⁽²⁾ Diluted GAAP and non-GAAP weighted-average shares outstanding are the same, except in periods in which there is a GAAP loss from continuing operations. We use 622 million and 680 million of diluted GAAP and non-GAAP weighted-average shares outstanding, respectively, in calculating our earnings per share for the fourth quarter of fiscal 2018.

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SYMANTEC CORPORATION

Appendix A

Explanation of Non-GAAP Measures

Objective of non-GAAP measures:  We believe our presentation of non-GAAP financial measures, when taken together with corresponding GAAP financial measures, provides meaningful supplemental information regarding the Company’s operating performance for the reasons discussed below. Our management team uses these non-GAAP financial measures in assessing Symantec’s performance, as well as in planning and forecasting future periods. Due to the importance of these measures in managing the business, we use non-GAAP measures in the evaluation of management’s compensation. These non-GAAP financial measures are not computed according to GAAP and the methods we use to compute them may differ from the methods used by other companies.  Non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

 

Deferred revenue adjustment:  Our non-GAAP net revenues eliminate the impact of deferred revenue purchase accounting adjustments required by GAAP. GAAP requires an adjustment to the liability for acquired deferred revenue such that the liability approximates how much we, the acquirer, would have to pay a third party to assume the liability. We believe that eliminating the impact of this adjustment improves the comparability of revenues between periods. Also, although the adjustment amounts will never be recognized in our GAAP financial statements, we do not expect the acquisitions to affect the future renewal rates of revenues excluded by the adjustments. In addition, our management uses non-GAAP net revenues, adjusted for the impact of purchase accounting adjustments to assess our operating performance and overall revenue trends. Nevertheless, non-GAAP net revenues has limitations as an analytical tool and should not be considered in isolation or as a substitute for GAAP net revenues. We believe these adjustments are useful to investors as an additional means to reflect revenue trends of our business. However, other companies in our industry may not calculate these measures in the same manner which may limit their usefulness for comparative purposes.

 

Inventory fair value adjustment:  Purchase accounting requires us to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. These non-GAAP adjustments to our cost of revenues exclude the expected profit margin component that is recorded under purchase accounting associated with our acquisitions. We believe the adjustments are useful to investors as an additional means to reflect cost of revenues and gross margin trends of our business.

 

Stock-based compensation:  This consists of expenses for employee restricted stock units, performance based awards, bonus share programs, stock options and our employee stock purchase plan, determined in accordance with GAAP.  We evaluate our performance both with and without these measures because stock-based compensation is a non-cash expense and can vary significantly over time based on the timing, size, nature and design of the awards granted, and is influenced in part by certain factors that are generally beyond our control, such as the volatility of the market value of our common stock. In addition, for comparability purposes, we believe it is useful to provide a non-GAAP financial measure that excludes stock-based compensation to facilitate the comparison of our results to those of other companies in our industry.

 

Amortization of intangible assets: Amortization of intangible assets consists of amortization of acquisition-related intangibles assets such as developed technology, customer relationships and trade names acquired in connection with business combinations. We record charges relating to the amortization of these intangibles within both cost of revenues and operating expenses in our GAAP financial statements.  Under purchase accounting, we are required to allocate a portion of the purchase price to intangible assets acquired and amortize this amount over the estimated useful lives of the acquired intangible assets. However, the purchase price allocated to these assets is not necessarily reflective of the cost we would incur to internally develop the intangible asset. Further, amortization charges for our acquired intangible assets are inconsistent in size and are significantly impacted by the timing and valuation of our acquisitions. We eliminate these charges from our non-GAAP operating results to facilitate an evaluation of our current operating performance and provide better comparability to our past operating performance.

 

Restructuring, transition and other costs:  Restructuring charges are costs associated with a formal restructuring plan and are primarily related to employee severance and benefit arrangements. Other charges include facilities and other exit and disposal costs, including asset write-offs. Transition costs are associated with formal discrete strategic information technology initiatives and primarily consist of consulting charges associated with our enterprise resource planning and supporting systems and costs to automate business processes.  In addition, transition costs include expenses associated with our divestitures. We exclude restructuring, transition and other costs from our non-GAAP results as we believe that these costs are incremental to core activities that arise in the ordinary course of our business and do not reflect our current operating performance, and that excluding these charges facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

 

Acquisition-related costs:  These represent the transaction and business integration costs related to significant acquisitions that are charged to operating expense in our GAAP financial statements. These costs include incremental expenses incurred to affect these business combinations such as advisory, legal, accounting, valuation, and other professional or consulting fees. We exclude these cost from our non-GAAP results as they have no direct correlation to the operation of our business, and because we believe that the non-GAAP financial measures excluding these costs provide meaningful supplemental information regarding the spending trends of our business. In addition, these costs vary, depending on the size and complexity of the acquisitions, and are not indicative of costs of future acquisitions.

 

Non-cash interest expense and amortization of debt issuance costs:  In accordance with GAAP, we separately account for the value of the conversion feature on our convertible notes as a debt discount that reflects our assumed non-convertible debt borrowing rates. We amortize the discount and debt issuance costs over the term of the related debt. We exclude the difference between the imputed interest expense, which includes the amortization of the conversion feature and of the issuance costs, and the coupon interest payments because we believe that excluding these costs provides meaningful supplemental information regarding the cash cost of our convertible debt and enhance investors’ ability to view the Company’s results from management’s perspective.

 

 

Gain on divestiture:  We recognized a gain in the third quarter of fiscal 2018 as a result of our divestiture of our WSS and PKI solutions. We have excluded this gain for purposes of calculating our non-GAAP results. We believe making these adjustments facilitates a better evaluation of our current operating performance and comparisons to past operating results.

 

Income tax effects and adjustments:  In the third quarter of fiscal 2018, we revised our estimated annual effective non-GAAP tax rate to reflect a change in the federal statutory rate as a result of U.S. income tax reform. The federal statutory rate change is effective January 1, 2018, and therefore, will require us to use a blended statutory rate of 31.58% for our fiscal year 2018. As a result, we recognized a reduction in our effective tax rate in the third quarter of fiscal 2018. Effective in the third quarter of fiscal 2018, we have applied an effective tax rate of 26.8% to our year to date pre-tax income, after the elimination of the effects of the non-GAAP adjustment to our operating results described above. For purposes of calculating non-GAAP measures, we also excluded from the non-GAAP tax provision the one-time provisional benefit of $810 million, which reflects the adjustments to income tax expense related to the discrete effects of the U.S. reform. This includes (1) the benefit of $1.4 billion reduction in previously accrued deferred income tax liability for foreign earnings and (2) the benefit of $200 million of other adjustments to our deferred income taxes, partially offset by (3) $821 million tax expense that was recorded for the one-time transition tax on our previously untaxed foreign earnings. Through the second quarter of fiscal 2018, we used a projected long-term non-GAAP tax rate in order to provide better consistency across the interim financial reporting periods. Our non-GAAP tax rate for fiscal year 2017 and the first two quarters of fiscal 2018 was 28.7% and 29.5%, respectively. The long-term projected non-GAAP tax rates reflected the elimination of the effects of the non-GAAP adjustments to our operating results described above and significant discrete items, as well as certain unique GAAP reporting requirements under discontinued operations as a result of the sale of Veritas. We believe making these adjustments facilitates a better evaluation of our current operating performance and comparisons to past operating results. Our tax rate is subject to change for a variety of reasons, such as significant changes in the geographic earnings mix due to acquisition and divestiture activities or fundamental tax law changes in major jurisdictions where we operate.

 

Discontinued operations:  In August 2015, we entered into a definitive agreement to sell the assets of our information management business (“Veritas”) to Carlyle. The transaction closed on January 29, 2016. The results of Veritas are presented as discontinued operations in our Consolidated Statements of Operations and thus have been excluded from non-GAAP net income and segment results for all reported periods.

 

Diluted GAAP and non-GAAP weighted-average shares outstanding:  Diluted GAAP and non-GAAP weighted-average shares outstanding are the same, except in periods that there is a GAAP loss from continuing operations. In accordance with GAAP, we do not present dilution for GAAP in periods in which there is a loss from continuing operations. However, if there is non-GAAP net income, we present dilution for non-GAAP weighted-average shares outstanding in an amount equal to the dilution that would have been presented had there been GAAP income from continuing operations for the period.

 

Implied billings:  We define implied billings as total revenue plus the change in adjusted deferred revenue. The change in deferred revenue excludes deferred revenue acquired or divested during the period as well as the change in deferred revenue related to discontinued operations that does not amortize to revenue from continuing operations. We consider implied billings to be a useful metric for management and investors because it facilitates an analysis of changes in deferred revenue balances that are an indicator of the health and visibility of our business. There are several limitations related to the use of implied billings versus revenue calculated in accordance with GAAP. First, implied billings include amounts that have not yet been recognized as revenue. Second, our calculation of implied billings may be different from other companies in our industry, some of which may not use implied billings, may calculate implied billings differently, may have different implied billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of implied billings as a comparative measure. We compensate for these limitations by providing specific information regarding GAAP revenue and evaluating implied billings together with revenue calculated in accordance with GAAP.