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| SYMC > SEC Filings for SYMC > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
Forward-Looking Statements and Factors That May Affect Future Results
The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Exchange Act. Forward-looking statements include references to our ability to utilize our deferred tax assets, as well as statements including words such as "expects," "plans," "anticipates," "believes," "estimates," "predicts," "projects," and similar expressions. In addition, statements that refer to projections of our future financial performance, anticipated growth and trends in our businesses and in our industries, the anticipated impacts of acquisitions, and other characterizations of future events or circumstances are forward-looking statements. These statements are only predictions, based on our current expectations about future events and may not prove to be accurate. We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report. These forward-looking statements involve risks and uncertainties, and our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss in Risk Factors, set forth in Part I, Item 1A, of our annual report on Form 10-K for the fiscal year ended April 3, 2009. We encourage you to read that section carefully.
Fiscal Calendar
We have a 52/53-week fiscal accounting year. Unless otherwise stated, references to three months ended in this report relate to fiscal periods ended July 3, 2009 and July 4, 2008. The three months ended July 3, 2009 consisted of 13 weeks, whereas the three months ended July 4, 2008 consisted of 14 weeks. Our 2010 fiscal year consists of 52 weeks and ends on April 2, 2010.
Our Business
Symantec is a global leader in providing security, storage and systems management solutions to help businesses and consumers secure and manage their information. We provide customers worldwide with software and services that protect, manage and control information risks related to security, data protection, storage, compliance, and systems management. We help our customers manage cost, complexity and compliance by protecting their IT infrastructure as they seek to maximize value from their IT investments.
Our Operating Segments
Our operating segments are significant strategic business units that offer different products and services, distinguished by customer needs. Since the March 2008 quarter, we have operated in five operating segments: Consumer, Security and Compliance, Storage and Server Management, Services, and Other. During the June 2009 quarter, we changed our reporting segments to better align to our operating structure, resulting in the Enterprise Vault products that were formerly included in the Security and Compliance segment being moved to the Storage and Server Management segment. Also, Software as a Service ("SaaS") offerings moved to either the Security and Compliance segment or the Storage and Server Management segment from the Services segment, based on the nature of the service delivered. Fiscal year 2009 Enterprise Vault revenue of $197 million and fiscal year 2009 SaaS revenue of $51 million was moved. The predominant amount of SaaS revenue went to the Security and Compliance segment. We revised the segment information for the prior year to conform to the new presentation. For further descriptions of our operating segments, see Note 9 of the Notes to Condensed Consolidated Financial Statements in this quarterly report. Our reportable segments are the same as our operating segments.
Financial Results and Trends
Revenue decreased for the three months ended July 3, 2009 as compared to the same period last year. Revenue declined across all of our segments and geographical regions for the three months ended July 3, 2009. The global economic slowdown led to customers purchasing smaller volumes of our products, particularly in the Storage and
Server Management segment. If the challenging economic conditions affecting global markets continue or deteriorate further, we may continue to experience slower or negative revenue growth and our business and operating results might suffer. In light of these economic conditions, we will continue to align our cost structure with our revenue expectations.
Fluctuations in the U.S. dollar compared to foreign currencies negatively impacted our international revenue by approximately $75 million during the three months ended July 3, 2009 as compared to the same period last year. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency exchange rates. If our level of international sales and expenses increase in the future, changes in foreign exchange rates may have a potentially greater impact on our revenues and operating results.
As discussed above under "Fiscal Calendar," the three months ended July 4, 2008 consisted of 14 weeks, whereas the three months ended July 3, 2009 consisted of 13 weeks. The 14th week contributed additional revenue to the July 4, 2008 quarter when compared to the July 3, 2009 quarter.
Our net income was $73 million for the three months ended July 3, 2009 as compared to our net income of $172 million for the three months ended July 4, 2008. The lower net income for the first quarter of fiscal 2010 as compared to the same period last year was primarily due to the decrease in revenues, the inclusion of the 14th week in the July 4, 2008 period and fluctuations in the U.S. dollar compared to foreign currencies, partially offset by our ongoing cost and expense discipline.
Critical Accounting Estimates
There have been no changes in the matters for which we make critical accounting estimates in the preparation of our consolidated financial statements during the three months ended July 3, 2009, as compared to those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended April 3, 2009. While there have been no such changes, we have revised our description of the critical accounting estimates made in the valuation of goodwill, intangible assets and long-lived assets, as provided below.
Valuation of goodwill, intangible assets and long-lived assets
When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset.
Goodwill. We review goodwill for impairment on an annual basis on the first day of the fourth quarter of each fiscal year, and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of SFAS No. 142 require that a two-step impairment test be performed on goodwill. In the first step, we compare the estimated fair value of each reporting unit to its allocated carrying value (book value). If the carrying value of the reporting unit exceeds the fair value of the equity assigned to that unit, there is an indicator of impairment and we must perform the second step of the impairment test. This second step involves determining the implied fair value of that reporting unit's goodwill in a manner similar to the purchase price allocation for an acquired business. If the carrying value of the reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the excess.
Our reporting units are identified in accordance with SFAS No. 142 and are consistent with our operating segments.
As the first step in our annual goodwill impairment analysis, we assess the value of the long-lived assets in each reporting unit, which include tangible and intangible assets recorded in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and SFAS No. 86, Accounting for the Costs of Software to Be Sold, Leased of Otherwise Marketed. We then compare this estimated fair value with the carrying value of the reporting unit's assets.
The process of estimating the fair value of our reporting units requires significant judgment at many points during the analysis. Many assets and liabilities, such as accounts receivable and property and equipment, are not specifically allocated to an individual reporting unit. In determining the carrying value of the reporting units, we apply judgment to allocate the assets and liabilities, and this allocation affects the carrying value of the respective reporting units. Similarly, we use judgment to allocate goodwill to the reporting units based on relative fair values. The use of relative fair values has been necessary for certain reporting units due to changes in our operating structure in prior years.
To determine a reporting units' fair value, we use the income approach under which we calculate the fair value of each reporting unit based on the estimated discounted future cash flows of that unit. We evaluate the reasonableness of this approach with the market approach, which involves a review of the carrying value of our assets relative to our market capitalization and to the valuation of publicly traded companies operating in the same or similar lines of business.
Applying the income approach requires that we make a number of important estimates and assumptions. We estimate the future cash flows of each reporting unit based on historical and forecasted revenues and operating costs. This, in turn, involves further estimates, such as estimates of future growth rates and foreign exchange rates. In addition, we apply a discount rate to the estimated future cash flows for the purpose of the valuation. This discount rate is based on the estimated weighted-average cost of capital for each reporting unit and may change from year to year. For example, in our valuation process in the fourth quarter of fiscal 2009 we used a higher discount rate than in the prior year due to increased risk associated with the declining global economic conditions. Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis for a given year.
As of April 3, 2009, the last day of fiscal 2009, our goodwill balance was $4.6 billion. Based on the impairment analysis performed on January 3, 2009, we determined that the fair value of each of our reporting units exceeded the carrying value of the unit by not less than 20% of the carrying value. While discount rates are only one of several important estimates used in the analysis, we determined that an increase of one percentage point in the discount rate used for each respective reporting unit would not have resulted in an impairment indicator for any unit in the current quarter.
A number of factors, many of which we have no ability to control, could affect our financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions we employed. These factors include:
• a prolonged global economic crisis;
• a significant decrease in the demand for our products;
• the inability to develop new and enhanced products and services in a timely manner;
• a significant adverse change in legal factors or in the business climate;
• an adverse action or assessment by a regulator;
• successful efforts by our competitors to gain market share in our markets;
• a loss of key personnel;
• our determination to dispose of one or more of our reporting units;
• the testing for recoverability under SFAS No. 144 of a significant asset group within a reporting unit; and
• recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
Intangible Assets. We assess the impairment of identifiable intangible assets according to SFAS Nos. 142 or 144, as appropriate, whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value. Our cash flow assumptions are based on historical and forecasted revenue, operating costs, and other relevant factors. If management's estimates of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of our acquired product rights and other identifiable intangible assets could change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition.
We account for developed technology or acquired product rights in accordance with SFAS No. 86. We record impairment charges on acquired product rights when we determine that the net realizable value of the assets may not be recoverable. To determine the net realizable value of the assets, we use the estimated future gross revenues from each product. Our estimated future gross revenues of each product are based on company forecasts and are subject to change.
Long-Lived Assets (including Assets Held for Sale). We account for long-lived assets in accordance with SFAS No. 144. We record impairment charges on long-lived assets to be held and used when we determine that the carrying value of the long-lived assets may not be recoverable. Based upon the existence of one or more indicators of impairment, we measure any impairment of long-lived assets based on a projected undiscounted cash flow method using assumptions determined by our management to be commensurate with the risk inherent in our current business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many triggering factors which could change and cause a material impact to our operating results or financial condition. We record impairment charges on long-lived assets to be held for sale when we determine that the carrying value of the long-lived assets may not be recoverable. In determining our fair value, we obtain market value appraisal information from third-parties.
Recently Issued Accounting Pronouncements
Information with respect to Recently Issued Accounting Pronouncements may be found in Note 1 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.
RESULTS OF OPERATIONS
Total Net Revenues
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
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Net revenues $ 1,432 $ 1,650 $ (218 ) (13 )%
Net revenues decreased for the three months ended July 3, 2009, as compared to the same period last year, due to a $136 million decrease in Licenses revenues coupled with an $82 million decrease in Content, subscriptions, and maintenance revenues. The net decrease was primarily driven by the items discussed above under "Financial Results and Trends," including currency fluctuations and the 14th week of activity during the July 4, 2008 quarter.
Content, subscriptions, and maintenance revenues
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
Content, subscriptions, and maintenance revenues $ 1,209 $ 1,291 $ (82 ) (6 )%
Percentage of total net revenues 84 % 78 %
|
Content, subscriptions, and maintenance revenues decreased for the three months ended July 3, 2009 as compared to the same period last year for the reasons discussed above under "Financial Results and Trends," including currency fluctuations and the 14th week of activity during the July 4, 2008 quarter.
Licenses revenues
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
|
Licenses revenues $ 223 $ 359 $ (136 ) (38 )% Percentage of total net revenues 16 % 22 %
Licenses revenues decreased for the three months ended July 3, 2009 as compared to the same period last year, primarily due to the global economic slowdown and smaller volumes of new licenses during the July 3, 2009 period as well as for the reasons discussed above under "Financial Results and Trends," including currency fluctuations and the 14th week of activity during the July 4, 2008 quarter.
Net revenue and operating income by segment
Consumer segment
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
Consumer revenues $ 447 $ 472 $ (25 ) (5 )%
Percentage of total net revenues 31 % 29 %
Consumer operating income $ 223 $ 275 $ (52 ) (19 )%
Percentage of Consumer revenues 50 % 58 %
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Consumer revenues decreased for the three months ended July 3, 2009 as compared to the same period last year primarily due to the unfavorable impact of foreign currencies and the 14th week as discussed above under "Financial Results and Trends." This decrease was partially offset by an increase in revenue from our core consumer products in the electronic channel and from acquired security products.
Our electronic channel sales are derived from OEMs, subscriptions, upgrades, online sales, and renewals. For the three months ended July 3, 2009, electronic channel revenue remained relatively flat as compared to the same period last year. Electronic sales constituted 80% of Consumer revenues for the three months ended July 3, 2009 as compared to 78% for the same period last year.
Operating income for the Consumer segment decreased for the three months ended July 3, 2009 as compared to the same period last year, as the revenue decrease was coupled with an increase in expense. Total expenses for the segment increased primarily as a result of the PC Tools and SwapDrive acquisitions, offset in part by the effect of the 14th week discussed above under "Financial Results and Trends."
Security and Compliance segment
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
Security and Compliance revenues $ 336 $ 393 $ (57 ) (15 )%
Percentage of total net revenues 23 % 24 %
Security and Compliance operating income $ 78 $ 117 $ (39 ) (33 )%
Percentage of Security and Compliance revenues 23 % 30 %
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Security and Compliance revenues decreased for the three months ended July 3, 2009 as compared to the same period last year for the reasons discussed above under "Financial Results and Trends." Additionally, there was a decline in demand from small and medium sized businesses. This decrease was partially offset by increased revenues from our acquisition of MessageLabs during fiscal 2009.
Operating income for the Security and Compliance segment decreased for the three months ended July 3, 2009 as compared to the same period last year, as the revenue decrease more than offset the expense decrease. Total expenses decreased primarily as a result of lower sales expenses as well as the effect of the 14th week discussed above under "Financial Results and Trends."
Storage and Server Management segment
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
Storage and Server Management revenues $ 553 $ 665 $ (112 ) (17 )%
Percentage of total net revenues 39 % 40 %
Storage and Server Management operating income $ 261 $ 263 $ (2 ) (1 )%
Percentage of Storage and Server Management revenues 47 % 40 %
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Storage and Server Management revenues decreased for the three months ended July 3, 2009 as compared to the same period last year for the reasons discussed above under "Financial Results and Trends." In addition, some of our customers bought smaller volumes of licenses, particularly with respect to our storage management products.
Operating income for the Storage and Server Management segment decreased for the three months ended July 3, 2009 as compared to the same period last year, as the revenue decrease more than offset the expense decrease. Total expenses decreased primarily as a result of lower sales expenses as well as the effect of the 14th week discussed above under "Financial Results and Trends."
Services segment
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
Services revenues $ 96 $ 120 $ (24 ) (20 )%
Percentage of total net revenues 7 % 7 %
Services operating income $ 5 $ 4 $ 1 25 %
Percentage of Services revenues 5 % 3 %
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Services revenues decreased for the three months ended July 3, 2009 as compared to the same period last year primarily due to a reduction in consulting revenues associated with new license sales, in addition to the reasons discussed above under "Financial Results and Trends."
Operating income for the Services segment increased for the three months ended July 3, 2009 as compared to the same period last year, as a decrease in expenses more than offset the revenue decrease. The Services operating income increase was the result of financial and operations efficiencies aimed at driving profitability.
Other segment
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
Other revenues $ - $ - $ - NA
Percentage of total net revenues 0 % 0 %
Other operating loss $ (415 ) $ (381 ) $ (34 ) (9 )%
Percentage of other revenues * *
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* Percentage not meaningful
Revenue from our Other segment is comprised primarily of sunset products and products nearing the end of their life cycle. Our Other segment also includes general and administrative expenses; amortization of acquired product rights, other intangible assets, and other assets; goodwill impairment charges; charges such as stock-based compensation and restructuring; and certain indirect costs that are not charged to the other operating segments.
Net revenues by geographic region
Three Months Ended
July 3, July 4, Change in
2009 2008 $ %
($ in millions)
Americas (U.S., Canada and Latin America) $ 784 $ 861 $ (77 ) (9 )%
Percentage of total net revenues 55 % 52 %
EMEA (Europe, Middle East, Africa) $ 433 $ 558 $ (125 ) (22 )%
Percentage of total net revenues 30 % 34 %
Asia Pacific/Japan $ 215 $ 231 $ (16 ) (7 )%
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