filings.toolsGen Digital 10-Q 2022-12-30
Filed 2023-02-06. 7 sections, 267K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 30, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 000-17781
Gen Digital Inc.
(Exact name of the registrant as specified in its charter)
| Delaware | 77-0181864 | ||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer Identification no.) | ||||||||||||||||
| 60 E. Rio Salado Parkway, | Suite 1000, | Tempe, | Arizona | 85281 | |||||||||||||
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code:
(650) 527-8000
Former name or former address, if changed since last report:
Not applicable
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | |||||||||
| Common Stock, | par value $0.01 per share | GEN | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | þ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The number of shares of Gen common stock, $0.01 par value per share, outstanding as of January 27, 2023 was 639,129,470 shares.
GEN DIGITAL INC.
FORM 10-Q
Quarterly Period Ended December 30, 2022
TABLE OF CONTENTS
“Gen,” “we,” “us,” “our,” and “the Company” refer to Gen Digital Inc. and all of its subsidiaries. Gen, the Gen Logo, the Checkmark Logo, Norton, LifeLock, the LockMan Logo, Avast, Piriform and AVG are trademarks or registered trademarks of Gen Digital Inc. or its affiliates in the United States (U.S.) and other countries. Other names may be trademarks of their respective owners.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
GEN DIGITAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value per share amounts)
| December 30, 2022 | April 1, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 812 | $ | 1,887 | |||||||
| Short-term investments | — | 4 | |||||||||
| Accounts receivable, net | 168 | 120 | |||||||||
| Other current assets | 366 | 193 | |||||||||
| Assets held for sale | 30 | 56 | |||||||||
| Total current assets | 1,376 | 2,260 | |||||||||
| Property and equipment, net | 104 | 60 | |||||||||
| Operating lease assets | 49 | 74 | |||||||||
| Intangible assets, net | 3,212 | 1,023 | |||||||||
| Goodwill | 10,124 | 2,873 | |||||||||
| Other long-term assets | 638 | 653 | |||||||||
| Total assets | $ | 15,503 | $ | 6,943 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 75 | $ | 63 | |||||||
| Accrued compensation and benefits | 106 | 81 | |||||||||
| Current portion of long-term debt | 233 | 1,000 | |||||||||
| Contract liabilities | 1,643 | 1,264 | |||||||||
| Current operating lease liabilities | 26 | 18 | |||||||||
| Other current liabilities | 795 | 639 | |||||||||
| Total current liabilities | 2,878 | 3,065 | |||||||||
| Long-term debt | 9,831 | 2,736 | |||||||||
| Long-term contract liabilities | 86 | 42 | |||||||||
| Deferred income tax liabilities | 386 | 75 | |||||||||
| Long-term income taxes payable | 928 | 996 | |||||||||
| Long-term operating lease liabilities | 38 | 75 | |||||||||
| Other long-term liabilities | 46 | 47 | |||||||||
| Total liabilities | 14,193 | 7,036 | |||||||||
| Commitments and contingencies (Note 18) | |||||||||||
| Stockholders’ equity (deficit): | |||||||||||
| Common stock and additional paid-in capital, $0.01 par value: 3,000 shares authorized; 639 and 582 shares issued and outstanding as of December 30, 2022 and April 1, 2022, respectively | 2,838 | 1,851 | |||||||||
| Accumulated other comprehensive income (loss) | (28) | (4) | |||||||||
| Retained earnings (accumulated deficit) | (1,500) | (1,940) | |||||||||
| Total stockholders’ equity (deficit) | 1,310 | (93) | |||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | 15,503 | $ | 6,943 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GEN DIGITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | ||||||||||||||||||||
| Net revenues | $ | 936 | $ | 702 | $ | 2,391 | $ | 2,080 | |||||||||||||||
| Cost of revenues | 178 | 105 | 399 | 307 | |||||||||||||||||||
| Gross profit | 758 | 597 | 1,992 | 1,773 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 183 | 160 | 506 | 466 | |||||||||||||||||||
| Research and development | 91 | 60 | 225 | 194 | |||||||||||||||||||
| General and administrative | 11 | 42 | 225 | 150 | |||||||||||||||||||
| Amortization of intangible assets | 61 | 21 | 111 | 63 | |||||||||||||||||||
| Restructuring and other costs | 44 | 12 | 55 | 24 | |||||||||||||||||||
| Total operating expenses | 390 | 295 | 1,122 | 897 | |||||||||||||||||||
| Operating income (loss) | 368 | 302 | 870 | 876 | |||||||||||||||||||
| Interest expense | (154) | (32) | (233) | (95) | |||||||||||||||||||
| Other income (expense), net | 2 | (9) | 3 | 165 | |||||||||||||||||||
| Income (loss) before income taxes | 216 | 261 | 640 | 946 | |||||||||||||||||||
| Income tax expense (benefit) | 51 | 59 | 206 | 230 | |||||||||||||||||||
| Net income (loss) | $ | 165 | $ | 202 | $ | 434 | $ | 716 | |||||||||||||||
| Net income (loss) per share - basic | $ | 0.26 | $ | 0.35 | $ | 0.72 | $ | 1.23 | |||||||||||||||
| Net income (loss) per share - diluted | $ | 0.25 | $ | 0.34 | $ | 0.70 | $ | 1.21 | |||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | 647 | 582 | 605 | 581 | |||||||||||||||||||
| Diluted | 651 | 591 | 617 | 591 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GEN DIGITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHEN****SIVE INCOME (LOSS)
(Unaudited, in millions)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | ||||||||||||||||||||
| Net income (loss) | $ | 165 | $ | 202 | $ | 434 | $ | 716 | |||||||||||||||
| Other comprehensive income (loss), net of taxes: | |||||||||||||||||||||||
| Foreign currency translation gain (loss) | (13) | (12) | (24) | (25) | |||||||||||||||||||
| Other comprehensive income (loss), net of taxes | (13) | (12) | (24) | (25) | |||||||||||||||||||
| Comprehensive income (loss) | $ | 152 | $ | 190 | $ | 410 | $ | 691 |
The accompanying notes are an integral part of these Condensed Con
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 (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,” “goal,” “intent,” “momentum,” “projects,” and similar expressions. In addition, projections of our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, paying users, annual recurring revenue, average revenue per user, free cash flow, and the assumptions underlying such trends; anticipated growth and trends in our businesses and in our industries; the consummation of or anticipated impacts of acquisitions (including our ability to achieve synergies from the Merger with Avast), divestitures, restructurings, stock repurchases, financings, debt repayments and investment activities; the outcome or impact of pending litigation, claims or disputes; our intent to pay quarterly cash dividends in the future; plans for and anticipated benefits of our products and solutions; anticipated tax rates, benefits and expenses; the impact of inflation, fluctuations in foreign currency exchange rates, changes in interest rates, Russia’s invasion of Ukraine, the COVID-19 pandemic and other global macroeconomic factors on our operations and financial performance; 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 economic recessions, inflationary pressures and those other factors that we discuss in Part II Item 1A, of this Quarterly Report on Form 10-Q. We encourage you to read that section carefully.
OVERVIEW
Gen is a global, leading provider of consumer Cyber Safety solutions, empowering over 500 million users in more than 150 countries. Our portfolio provides protection across three Cyber Security categories: security, identity protection and online privacy. We help customers protect their computer and mobile devices from online threats, safeguard their identity and personal information and strengthen online privacy capabilities and functionalities.
Merger with Avast
On September 12, 2022, we completed the Merger with Avast with the issuance of 94,201,223 shares of our common stock to Avast shareholders and cash consideration of $6,910 million, which includes repayment of Avast’s outstanding debt. In connection with the Merger, we changed our corporate name to Gen Digital Inc. and became dual headquartered in Tempe, Arizona and Prague, Czech Republic. Prior to the Merger, Avast was a global leader in consumer cybersecurity, offering a comprehensive range of digital security and privacy products and services that protected and enhanced users’ online experiences. We believe combining Avast’s strength in privacy and our strength in identity creates a broad and complementary consumer product portfolio beyond core security and towards adjacent trust-based solutions. We also believe the Merger provides greater geographic diversification and access to a larger user base and will accelerate the transformation of global consumer cyber safety. All financial information related to Avast that is discussed below in key financial metrics, results of operations and liquidity and capital resources is inclusive as of the Closing Date.
Fiscal calendar
We have a 52/53-week fiscal year ending on the Friday closest to March 31. The three and nine months ended December 30, 2022 and December 31, 2021 each consisted of 13 and 39 weeks, respectively. Our 2023 fiscal year consists of 52 weeks and ends on March 31, 2023.
Key financial metrics
The following tables provide our key financial metrics for the periods presented:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (In millions, except for per share amounts) | December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | |||||||||||||||||||
| Net revenues | $ | 936 | $ | 702 | $ | 2,391 | $ | 2,080 | |||||||||||||||
| Operating income (loss) | $ | 368 | $ | 302 | $ | 870 | $ | 876 | |||||||||||||||
| Net income (loss) | $ | 165 | $ | 202 | $ | 434 | $ | 716 | |||||||||||||||
| Net income (loss) per share - diluted | $ | 0.25 | $ | 0.34 | $ | 0.70 | $ | 1.21 | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 306 | $ | 330 | $ | 433 | $ | 648 |
| As Of | |||||||||||
| (In millions) | December 30, 2022 | April 1, 2022 | |||||||||
| Cash, cash equivalents and short-term investments | $ | 812 | $ | 1,891 | |||||||
| Contract liabilities | $ | 1,729 | $ | 1,306 |
Below are our financial highlights for the third quarter of fiscal 2023, compared to the corresponding period in the prior year:
-
Net revenues increased $234 million and Operating income increased $66 million, primarily due to revenue attributable to Avast and higher sales in our identity and information protection products, offset by FX headwinds.
-
Net income decreased $37 million and Net income per share - diluted decreased 0.09, primarily due to an increase in interest expense associated with our new senior credit facilities and two senior notes.
Below are our financial highlights for the first nine months of fiscal 2023, compared to the corresponding period in the prior year:
-
Net revenues increased $311 million, primarily due to revenue attributable to Avast and higher sales in our identity and information protection products, offset by FX headwinds.
-
Net income decreased $282 million and Net income per share - diluted decreased $0.51, primarily due to the increase in non-operating other expense.
-
Cash, cash equivalents and short-term investments decreased by $1,079 million compared to April 1, 2022, primarily due to the completion of the Merger and repurchases of our common stock, offset by proceeds from the issuance of the senior credit facilities and the two senior notes. Additionally, subsequent to December 30, 2022, we made a voluntary prepayment of $250 million for our senior credit facilities, which was applied exclusively to the Term B Facility.
-
Contract liabilities increased $423 million compared to April 1, 2022, primarily due to contract liabilities assumed as part of the Merger, partially offset by seasonally lower billings than recognized revenue during the period.
The Merger has altered the size and scope of our operations, impacting our assets, liabilities, obligations, capital requirements and performance measures. We expect the key financial metrics and results of operations of the combined company to be materially different than the trends experienced during the three and nine months ended December 30, 2022. As a combined company, we expect to achieve synergies, rapidly launch a broad and innovative product portfolio, expand into new and diversified sales channels and enhance customer experience and retention. Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information about this business combination.
GLOBAL MACROECONOMIC CONDITIONS
Our results of operations and cash flows are subject to fluctuations due to inflation, changes in foreign currency exchange rates relative to U.S. dollars, our reporting currency, as well as changes in interest rates. Volatile market conditions related to Russia’s invasion of Ukraine and retaliatory sanctions against the Russian Federation and Belarus, the COVID-19 pandemic and other macroeconomic events have, at times, and may in the future negatively impact our results of operations and cash flows. Conversely, we have seen and may continue to see cost savings from the shift to remote and distributed work for certain of our employees in areas including events, travel, utilities and other benefits. Due to our subscription-based business model, the effect of recent macroeconomic events may not be fully reflected in our results of operations until future periods, if at all. For a further discussion of the potential impacts of the global macroeconomic conditions on our business, please see “Risk Factors” in Part II, Item 1A below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Condensed Consolidated Financial Statements and related notes in accordance with generally accepted accounting principles in the U.S. requires us to make estimates, including judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on a regular basis and make changes accordingly. Management believes that the accounting estimates employed and the resulting amounts are reasonable; however, actual results may differ from these
estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.
Our critical accounting policies and estimates were disclosed in Item 7, 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 1, 2022. There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the three and nine months ended December 30, 2022.
RESULTS OF OPERATIONS
The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | ||||||||||||||||||||
| Net revenues | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Cost of revenues | 19 | 15 | 17 | 15 | |||||||||||||||||||
| Gross profit | 81 | 85 | 83 | 85 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 20 | 23 | 21 | 22 | |||||||||||||||||||
| Research and development | 10 | 9 | 9 | 9 | |||||||||||||||||||
| General and administrative | 1 | 6 | 9 | 7 | |||||||||||||||||||
| Amortization of intangible assets | 7 | 3 | 5 | 3 | |||||||||||||||||||
| Restructuring and other costs | 5 | 2 | 2 | 1 | |||||||||||||||||||
| Total operating expenses | 42 | 42 | 47 | 43 | |||||||||||||||||||
| Operating income (loss) | 39 | 43 | 36 | 42 | |||||||||||||||||||
| Interest expense | (16) | (5) | (10) | (5) | |||||||||||||||||||
| Other income (expense), net | — | (1) | — | 8 | |||||||||||||||||||
| Income (loss) before income taxes | 23 | 37 | 27 | 45 | |||||||||||||||||||
| Income tax expense (benefit) | 5 | 8 | 9 | 11 | |||||||||||||||||||
| Net income (loss) | 18 | % | 29 | % | 18 | % | 34 | % |
Note: Percentages may not add due to rounding.
Net revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| (In millions, except for percentages) | December 30, 2022 | December 31, 2021 | Change in % | December 30, 2022 | December 31, 2021 | Change in % | |||||||||||||||||||||||||||||
| Net revenues | $ | 936 | $ | 702 | 33 | % | $ | 2,391 | $ | 2,080 | 15 | % |
Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021
Net revenues increased $234 million, primarily due to revenue attributable to Avast and an increase in sales of our identity and information protection products, offset by $34 million of foreign exchange headwinds, primarily in our consumer security solutions.
Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021
Net revenues increased $311 million, primarily due to revenue attributable to Avast and an increase in sales of our identity and information protection products, offset by $92 million of foreign exchange headwinds, primarily in our consumer security solutions.
Performance Metrics
We regularly monitor a number of metrics in order to measure our current performance and estimate our future performance. Our metrics may be calculated in a manner different than similar metrics used by other companies.
The following table summarizes supplemental key performance metrics:
| Three Months Ended (2) | |||||||||||||||||
| (In millions, except for per user amounts) | December 30, 2022 (3) | September 30, 2022 (3) | December 31, 2021 | ||||||||||||||
| Direct customer revenues (1) | $ | 818 | $ | 660 | $ | 624 | |||||||||||
| Partner revenues | $ | 95 | $ | 74 | $ | 68 | |||||||||||
| Total Cyber Safety revenues | $ | 913 | $ | 734 | $ | 692 | |||||||||||
| Legacy revenues | $ | 23 | $ | 14 | $ | 12 | |||||||||||
| Direct customer count (at quarter end) | 38.4 | 38.6 | 24.2 | ||||||||||||||
| Direct average revenue per user (ARPU) | $ | 7.09 | $ | 6.98 | $ | 8.62 |
(1) Direct customer revenues during the three months ended December 31, 2021 excludes a $2 million reduction of revenue, from contract liability purchase accounting adjustments. We believe that eliminating the impact of these adjustments improves the comparability of revenues between periods. In addition, 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.
(2) From time to time, changes in our product hierarchy cause changes to the revenue channels above. When changes occur, we recast historical amounts to match the current revenue channels. Direct revenues currently includes Mobile App Store customers, and legacy revenues includes revenues from products or solutions that are no longer in operations in exited markets, have been discontinued or identified to be discontinued, or remain in maintenance mode as a result of integration and product portfolio decisions. As such, the changes to historical revenue amounts and the other performance metrics, including direct customer count and ARPU, are reflected for all periods presented above.
(3) The performance metrics for the three months ended December 30, 2022 and three months ended September 30, 2022 include the revenues earned and customers acquired through our Merger with Avast. ARPU is based on average customer count and assumes full quarter of revenue for both companies.
We define direct customer revenues as revenues from sales of our consumer solutions to direct customers, which we define as active paid users who have a direct billing relationship with the Company at the end of the reported period. We exclude users on free trials and users who have indirectly purchased our product or services through partners unless such users convert or renew their subscription directly with us, or sign up for a paid membership through our web store or third party app stores.
ARPU is calculated as estimated direct customer revenues for the period divided by the average direct customer count for the same period, expressed as a monthly figure. Non-GAAP estimated direct customer revenues and ARPU have limitations as analytical tools and should not be considered in isolation or as a substitute for GAAP estimated direct customer revenues or other GAAP measures. We monitor ARPU because it helps us understand the rate at which we are monetizing our consumer customer base.
Net revenues by geographical region
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | ||||||||||||||||||||
| Americas | 66 | % | 70 | % | 69 | % | 70 | % | |||||||||||||||
| EMEA | 24 | % | 18 | % | 20 | % | 18 | % | |||||||||||||||
| APJ | 10 | % | 12 | % | 11 | % | 12 | % |
The Americas include the U.S., Canada and Latin America; EMEA includes Europe, the Middle East and Africa; APJ includes Asia Pacific and Japan.
Percentage of revenue by geographic region in the three and nine months ended December 30, 2022 remains primarily in the Americas but is beginning to shift more into the EMEA markets, as the Merger with Avast has contributed to a stronger presence in those regional countries.
Cost of revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| (In millions, except for percentages) | December 30, 2022 | December 31, 2021 | Change in % | December 30, 2022 | December 31, 2021 | Change in % | |||||||||||||||||||||||||||||
| Cost of revenues | $ | 178 | $ | 105 | 70 | % | $ | 399 | $ | 307 | 30 | % |
Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021
Our cost of revenues increased $73 million, primarily due to a $46 million increase in the amortization of acquired intangible assets and $24 million increase in payment processing fees.
Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021
Our cost of revenues increased $92 million, primarily due to a $46 million increase in the amortization of acquired intangible assets, $29 million increase in payment processing fees, and $18 million increase in revenue share costs and royalty charges.
Operating expenses
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| (In millions, except for percentages) | December 30, 2022 | December 31, 2021 | Change in % | December 30, 2022 | December 31, 2021 | Change in % | |||||||||||||||||||||||||||||
| Sales and marketing | $ | 183 | $ | 160 | 14 | % | $ | 506 | $ | 466 | 9 | % | |||||||||||||||||||||||
| Research and development | 91 | 60 | 52 | % | 225 | 194 | 16 | % | |||||||||||||||||||||||||||
| General and administrative | 11 | 42 | (74) | % | 225 | 150 | 50 | % | |||||||||||||||||||||||||||
| Amortization of intangible assets | 61 | 21 | 190 | % | 111 | 63 | 76 | % | |||||||||||||||||||||||||||
| Restructuring and other costs | 44 | 12 | 267 | % | 55 | 24 | 129 | % | |||||||||||||||||||||||||||
| Total operating expenses | $ | 390 | $ | 295 | 32 | % | $ | 1,122 | $ | 897 | 25 | % |
Our operating expenses increased in the three and nine months ended December 30, 2022 compared to the three and nine months ended December 31, 2021 primarily due to increased headcount, IT and facility occupancy costs, as well as efforts to realize cost synergies, in connection with the Merger which was completed during the second quarter of fiscal 2023.
Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021
Sales and marketing expense increased $23 million, primarily due to a $21 million increase of headcount, IT and facility occupancy costs.
Research and development expense increased $31 million, primarily due to a $23 million increase of headcount, IT and facility occupancy costs, $5 million increase of outside services and software expense and $4 million increase of stock-based compensation expense.
General and administrative expense decreased $31 million, primarily due to a $42 million legal accrual reversal relating to an ongoing contract compliance lawsuit, partially offset by a $11 million increase of headcount costs.
Amortization of intangible assets increased $40 million primarily as a result of the Merger with Avast.
Restructuring and other costs increased $32 million, primarily due to severance and termination benefit costs in connection with the September 2022 Plan. See Note 12 of the Notes to the Condensed Consolidated Financial Statements for details of the fiscal 2023 restructuring activities.
Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021
Sales and marketing expense increased $40 million, primarily due to a $28 million increase of headcount and IT costs and a $11 million increase of stock-based compensation expense.
Research and development expense increased $31 million, primarily due to a $19 million increase of headcount and IT costs, a $7 million increase of stock-based compensation expense and a $6 million increase in outside services and software expense.
General and administrative expense increased $75 million, due to a $43 million increase of transaction and integration costs incurred in connection with the Merger, a $57 million legal accrual, of which $49 million was prejudgment interest, relating to an ongoing patent infringement lawsuit and the corresponding legal fees, and a $16 million increase of stock-based compensation expense. This was partially offset by a $42 million legal accrual reversal relating to an ongoing contract compliance lawsuit.
Amortization of intangible assets increased $48 million primarily as a result of the Merger with Avast.
Restructuring and other costs increased $31 million, primarily due to severance and termination benefit costs in connection with the September 2022 Plan. See Note 12 of the Notes to the Condensed Consolidated Financial Statements for details of the fiscal 2023 restructuring activities.
Non-operating income (expense), net
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (In millions) | December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | |||||||||||||||||||
| Interest expense | $ | (154) | $ | (32) | $ | (233) | $ | (95) | |||||||||||||||
| Interest income | 5 | — | 10 | — | |||||||||||||||||||
| Foreign exchange gain (loss) | (7) | 1 | (8) | 3 | |||||||||||||||||||
| Gain (loss) on early extinguishment of debt | — | — | (9) | (5) | |||||||||||||||||||
| Gain on sale of properties | — | — | — | 175 | |||||||||||||||||||
| Other | 4 | (10) | 10 | (8) | |||||||||||||||||||
| Total non-operating income (expense), net | $ | (152) | $ | (41) | $ | (230) | $ | 70 |
Three Months Ended December 30, 2022 Compared with Three Months Ended December 31, 2021
Non-operating income (expense), net, increased by $111 million in expense, primarily due to an increase in interest expense associated with our new senior credit facilities and two senior notes, all of which were issued during the second quarter of fiscal 2023.
Nine Months Ended December 30, 2022 Compared with Nine Months Ended December 31, 2021
Non-operating income (expense), net, increased by $300 million in expense, primarily due to the absence of the $175 million gain on sale of certain land and buildings in Mountain View, California during the second quarter of fiscal 2022 and an increase in interest expense associated with our new senior credit facilities and two senior notes, all of which were issued during the second quarter of fiscal 2023.
Provision for income taxes
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (In millions, except for percentages) | December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | |||||||||||||||||||
| Income (loss) before income taxes | $ | 216 | $ | 261 | $ | 640 | $ | 946 | |||||||||||||||
| Income tax expense (benefit) | $ | 51 | $ | 59 | $ | 206 | $ | 230 | |||||||||||||||
| Effective tax rate | 24 | % | 23 | % | 32 | % | 24 | % |
Our effective tax rate for income for the three and nine months ended December 30, 2022 differs from the federal statutory income tax rate primarily due to state taxes and the U.S. taxation on foreign earnings, and certain discrete items this quarter including the tax impacts of internal restructuring, deductibility of transaction costs from the Merger, and the limitations of foreign taxes due to the increase of interest expense.
Our effective tax rate for the three and nine months ended December 31, 2021 differs from the federal statutory income tax rate primarily due to state taxes and U.S. taxation on foreign earnings.
We are a multinational company dual headquartered in the U.S. and Czech Republic, subject to tax in multiple U.S. and international tax jurisdictions. Our results of operations would be adversely affected to the extent that our geographical mix of income becomes more weighted toward jurisdictions with higher tax rates and would be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions. Our results can also be impacted by the costs incurred and the potential deductibility of the expenses. Any change in our mix of earnings is dependent upon many factors and therefore, is difficult to predict.
In connection with the Merger, we established $345 million of net deferred tax liabilities primarily related to the excess of book basis over the tax basis of acquired identified intangible assets. The net deferred tax liabilities are based upon certain assumptions underlying our preliminary purchase price allocation. Upon finalization of the purchase price allocation, additional adjustments to the amount of our net deferred taxes may be required.
The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Given the potential resolution of uncertain tax positions involves multiple tax periods and jurisdictions, we are unable to accurately estimate when these unrecognized tax benefits will be realized or released. However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next 12 months.
We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
LIQUIDITY, CAPITAL RESOURCES AND CASH REQUIREMENTS
Liquidity and Capital Resources
We have historically relied on cash generated from operations, borrowings under credit facilities, issuances of debt and proceeds from divestitures for our liquidity needs.
Our capital allocation strategy is to balance driving stockholder returns, managing financial risk and preserving our flexibility to pursue strategic options, including acquisitions and mergers. Historically, this has included a quarterly cash dividend, the repayment of debt and the repurchase of shares of our common stock.
Based on past performance and current expectations, we believe that our existing cash and cash equivalents, together with cash generated from operations and amounts available under our Revolving Facility, will be sufficient to meet our working capital needs, support on-going business activities and finance the expected synergy costs related to the Merger through at least the next 12 months and to meet our known long-term contractual obligations. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. However, our future liquidity and capital requirements may vary materially from those as of December 30, 2022 depending on several factors, including, but not limited to, economic conditions; political climate; the expansion of sales and marketing activities; the costs to acquire or invest in businesses; and the risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A below.
Cash flows
The following summarizes our cash flow activities:
| Nine Months Ended | |||||||||||
| (In millions) | December 30, 2022 | December 31, 2021 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 433 | $ | 648 | |||||||
| Investing activities | $ | (6,546) | $ | 316 | |||||||
| Financing activities | $ | 5,064 | $ | (116) |
See Note 7 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for our supplemental cash flow information.
Cash from operating activities
Our cash flows provided by operating activities decreased by $215 million, primarily due to an increase in cash payments during the first nine months of fiscal 2023, including payments of federal income taxes, debt interest, and transaction costs and other regulatory closing fees in connection with the Merger.
Cash from investing activities
Our cash flows used in investing activities increased by $6,862 million, primarily due to the $6,547 million total cash consideration paid for the Merger with Avast, net of $363 million cash acquired and $2,141 million non-cash consideration transferred, as well as the absence of $355 million in proceeds from the sale of certain Mountain View, California properties during the first six months of fiscal 2022.
Cash from financing activities
Our cash flows provided by financing activities increased $5,180 million, primarily due to proceeds from the issuance of debt, partially offset by repayment of debt and the continuation of our stock repurchase program. The first six months of fiscal 2023 reflects $8,954 million of aggregate proceeds: $3,910 million from Term Facility A, $3,690 million from Term Facility B, $900 million from the 6.75% Senior Notes and $600 million from the 7.125% Senior Notes, net of $146 million of debt issuance costs. This was partially offset by the $400 million repayment of our 3.95% Senior Notes, $1,010 million repayment of our Initial Term Loan, $703 million repayment of our Delayed Draw Term Loan, settlement of the $525 million principal and $100 million equity rights associated with our New 2.0% Convertible Notes, and common stock repurchases of $904 million. In contrast, the first three months of fiscal 2022 reflects $512 million of proceeds from the issuance of our Initial Term Loan, partially offset by the $364 million settlement of our New 2.5% Convertible Notes.
Cash and cash equivalents
As of December 30, 2022, we had cash, cash equivalents and short-term investments of $812 million, of which $440 million was held by our foreign subsidiaries. Our cash, cash equivalents and short-term investments are managed with the objective to preserve principal, maintain liquidity and generate investment returns. The participation exemption system under current U.S. federal tax regulations generally allows us to make distributions of non-U.S. earnings to the U.S. without incurring additional U.S. federal tax, however, these distributions may be subject to applicable state or foreign taxes.
Debt
On June 1, 2022, we fully repaid the principal and accrued interest under the 3.95% Senior Notes due June 2022, which had an aggregate principal amount outstanding of $400 million. In addition, we paid $7 million of accrued and unpaid interest through the redemption date.
On August 15, 2022, we settled the $525 million principal and conversion rights of our New 2.0% Convertible Notes in cash. The aggregate settlement amount of $630 million was based on $20.41 per underlying share into which the New 2.0% Convertible Notes were convertible. In addition, we paid $5 million of accrued and unpaid interest through the date of settlement.
On September 12, 2022, upon close of the Merger with Avast, we entered into the Amended and Restated Credit Agreement (Credit Agreement) with certain financial institutions, in which they agreed to provide us with (i) a $1,500 million revolving credit facility (Revolving Facility), a $3,910 million term loan A facility (Term A Facility), (iii) a $3,690 million term loan B facility (Term B Facility) and (iv) a $750 million tranche A bridge loan (Bridge Loan) (collectively, the senior credit facilities). The Bridge Loan was undrawn and immediately terminated upon the Merger’s close. We drew down the aggregate principal amounts of the Term A Facility and Term B Facility to finance the cash consideration payable for the transaction and to fully repay the outstanding principal of $1,703 million and accrued and unpaid interest of $3 million under the Initial Term Loan and Delay Draw Term Loan from the existing credit facilities. The Credit Agreement replaced the existing credit facilities upon the close of the transaction. During the nine months ended December 30, 2022, we paid an aggregate $145 million in debt issuance costs associated with the senior credit facilities.
On September 19, 2022, we issued two series of senior notes, consisting of 6.75% Senior Notes due 2027 and 7.125% Senior Notes due 2030, for an aggregate principal of $1,500 million. They are senior unsecured obligations that rank equally in right of payment with all of our existing and future senior, unsecured, unsubordinated obligations and may be redeemed at any time, subject to the make-whole provisions contained in the applicable indenture relating to such series of notes. Interest on these series of notes is payable semi-annually in arrears on March 31 and September 30 for both the 6.75% Senior Notes and 7.125% Senior Notes, commencing on March 31, 2023. During the nine months ended December 30, 2022, we paid an aggregate $14 million in debt issuance costs associated with the two senior notes.
In connection with the financing provided for Term B Facility, we incurred customary ticking fees with respect to the undrawn commitments that began accruing on the 61st day post-syndication. The ticking fees were accrued at the per annum rate of (i) 50% of the interest rate margin for adjusted SOFR (or applicable replacement rate) loans for 61-90 days from January 28, 2022, the syndication date, and (ii) 100% of the interest rate margin for adjusted SOFR (or applicable replacement rate) loans on and after 91 days from the syndication date. Ticking fees were payable on the Closing Date of the transaction. During the nine months ended December 30, 2022, we paid $31 million in ticking fees.
Subsequent to December 30, 2022, on January 19, 2023, we made a voluntary prepayment of $250 million for our senior credit facilities, which was applied exclusively to the Term B Facility.
Share repurchases
During the three and nine months ended December 30, 2022, we executed repurchases of 23 million and 40 million shares of our common stock, respectively, under our existing share repurchase program for an aggregate amount of $500 million and $904 million, respectively.
Merger with Avast
On September 12, 2022, we completed the Merger with Avast for a total cash consideration of approximately $6,547 million, net of $363 million of cash acquired and $2,141 million non-cash consideration transferred. The cash consideration included repayment of outstanding Avast debt totaling $942 million. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information about this business combination.
Material Cash Requirements
Our principal cash requirements are primarily to meet our working capital needs, support on-going business activities, including payment of taxes and cash dividends, payment of contractual obligations, funding capital expenditures, servicing existing debt, repurchasing shares of our common stock and investing in business acquisitions and mergers.
Debt instruments
As of December 30, 2022, our total outstanding principal amount of indebtedness is summarized as follows. See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on our debt.
| (In millions) | December 30, 2022 | ||||
| Term Loans | $ | 7,600 | |||
| Senior Notes | 2,600 | ||||
| Mortgage Loans | 7 | ||||
| Total debt | $ | 10,207 |
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including compliance with specified financial ratios. As of December 30, 2022, we were in compliance with all debt covenants. See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding financial ratios and debt covenant compliance.
Dividends
On February 2, 2023, we announced a cash dividend of $0.125 per share of common stock to be paid in March 2023. Any future dividends and dividend equivalents will be subject to the approval of our Board of Directors.
Share repurchase program
Under our stock repurchase program, we may purchase shares of our outstanding common stock on the open market (including through trading plans intended to qualify under Rule 10b5-1 under the Exchange Act) and through accelerated stock repurchase transactions. As of December 30, 2022, the remaining balance of our stock repurchase authorization was $870 million and does not have an expiration date. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and other investment opportunities.
Restructuring
In connection with the Merger, our Board of Directors approved a restructuring plan (the September 2022 Plan) to realize cost savings and operational synergies, which became effective upon the close of the Merger on September 12, 2022. We have incurred and expect to incur cash expenditures for severance and termination benefits, contract terminations, facilities closures, and the sale of underutilized facilities as well as stock-based compensation charges for accelerated equity awards for certain terminated employees. As of December 30, 2022, we expect that we will incur total costs up to $280 million, with $180 million and $100 million estimated to be incurred within the first and second full years, respectively, following the completion of the Merger. These actions are expected to be completed by fiscal 2024. During the nine months ended December 30, 2022, we made $21 million in cash payments related to the September 2022 Plan. See Note 12 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further cash flow information associated with our restructuring activities.
Significant contractual obligations
The following is a schedule of our significant contractual obligations and commitments as of December 30, 2022, including those associated with the Merger with Avast. The expected timing and amount of short-term and long-term payments of the obligations in the following table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for certain obligations.
| Short-Term Payments | Long-Term Payments | Total | |||||||||||||||
| (In millions) | |||||||||||||||||
| Contractual obligations: | |||||||||||||||||
| Debt (principal payments) (1) | $ | 233 | $ | 9,974 | $ | 10,207 | |||||||||||
| Interest payments on debt (2) | 601 | 2,565 | 3,166 | ||||||||||||||
| Purchase obligations (3) | 285 | 107 | 392 | ||||||||||||||
| Deemed repatriation taxes (4) | 128 | 310 | 438 | ||||||||||||||
| Operating leases (5) | 28 | 40 | 68 | ||||||||||||||
| Total | $ | 1,275 | $ | 12,996 | $ | 14,271 |
(1)As of December 30, 2022, our total outstanding principal amount of indebtedness is comprised of $7,600 million in Term Loans, $2,600 million in Senior Notes and $7 million in Mortgage Loans. See Note 10 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information about our debt and debt covenants.
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including a covenant that we maintain a consolidated leverage ratio of not more than 5.25 to 1.0, or 5.75 to 1.0 if we acquire assets or business in an aggregate amount greater than $250 million, and restrictions on indebtedness, liens, investments, stock repurchases, and dividends (with exceptions permitting our regular quarterly dividend and other specific capital returns). As of December 30, 2022, we were in compliance with all debt covenants.
(2)Interest payments calculated based on the contractual terms of the related debt instruments. Interest on variable rate debt was calculated using the interest rate in effect as of December 30, 2022. See Note 10 of the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on the Term Loans and Senior Notes.
(3)Agreements for purchases of goods or services, with terms that are enforceable and legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. These amounts include agreements to purchase goods or services that have cancellation provisions requiring little or no payment. The amounts under such contracts are included because management believes that cancellation of these contracts is unlikely, and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials.
(4)Transition tax payments on previously untaxed foreign earnings of foreign subsidiaries under the Tax Cuts and Jobs Act, which may be paid through July 2025.
(5)Payments for various non-cancelable operating lease agreements that expire on various dates through fiscal 2028. The amounts in the table above exclude expected sublease income. See Note 9 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on leases.
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits and other long-term taxes as of December 30, 2022, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $614 million in long-term income taxes payable has been excluded from our quarterly review of timing of contractual obligations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks related to fluctuations in foreign currency exchange and interest rates. We may use derivative financial instruments to reduce the volatility of earnings and cash flow that may result from adverse economic conditions and events or changes in foreign currency exchange and interest rates.
Interest rate risk
As of December 30, 2022, we had $2,600 million in aggregate principal amount of fixed-rate Senior Notes outstanding, with a carrying amount and a fair value of $2,552 million, based on Level 2 inputs. The fair value of these notes fluctuates when interest rates change. Since these notes bear interest at fixed rates, financial statement risk associated with changes in interest rates is limited to future refinancing of current debt obligations. If these notes were refinanced at higher interest rates prior to maturity, our total interest payments could increase by a material amount; however, this risk is mitigated by our strong cash position and expected future cash generated from operations, which will be sufficient to satisfy this increase in obligation.
As of December 30, 2022, we also had $7,600 million outstanding debt with variable interest rates based on the Secured Overnight Financing Rate (SOFR). A hypothetical 1% change in SOFR would have resulted in a $76 million increase in interest expense on an annualized basis.
In addition, we have a $1,500 million revolving credit facility that if drawn bears interest at a variable rate based on SOFR and would be subject to the same risks associated with adverse changes in SOFR.
Foreign currency exchange rate risk
We conduct business in numerous currencies through our worldwide operations, and our entities hold monetary assets or liabilities, earn revenues or incur costs in currencies other than the entity’s functional currency, primarily in Euro, Japanese Yen, British Pound, Australian Dollar, Czech Koruna and Canadian Dollar. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services provided. Our cash flow, results of operations and certain of our intercompany balances that are exposed to foreign exchange rate fluctuations may differ materially from expectations, and we may record significant gains or losses due to foreign currency fluctuations and related hedging activities. As a result, we are exposed to foreign exchange gains or losses which impacts our operating results.
Growth in our international operations will incrementally increase our exposure to foreign currency fluctuations as well as volatile market conditions, including the weakening of foreign currencies relative to USD, which has and may in the future negatively affect our revenue expressed in USD.
We manage these exposures and reduce the potential effects of currency fluctuations on our results of operations through monthly foreign exchange forward contracts on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. The gains and losses on these foreign exchange contracts are recorded in Other income (expense), net in the Consolidated Statements of Operations.
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of the changes in foreign exchange rates. As our international operations grow, we will continue to reassess our approach to managing risks related to fluctuations in foreign currency.
Additional information related to our debt and derivative instruments is included in Note 10 and Note 11, respectively, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) has conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
(b) Changes in Internal Control over Financial Reporting
During the third quarter of fiscal 2023, except for the Merger with Avast discussed below, there were no changes in our internal controls over financial reporting or in other factors, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
On September 12, 2022, we completed the Merger with Avast and are currently integrating Avast into our operations and internal control processes. Pursuant to the Securities and Exchange Commission's guidance that an assessment of a recently acquired business may be omitted from the scope of the evaluation for a period up to one year following the Merger, the scope of our assessment of our internal controls over financial reporting is ongoing. We are currently assessing the control environment related to our Merger with Avast and have designed and implemented new controls as needed.
(c) Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this Item may be found under the heading “Litigation contingencies” in Note 18 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.
Item 1A. Risk Factors
A description of the risk factors associated with our business is set forth below and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Legal Proceedings, and Quantitative and Qualitative Disclosures About Market Risk.” The list is not exhaustive, and you should carefully consider these risks and uncertainties before investing in our common stock.
RISKS RELATED TO OUR BUSINESS STRATEGY AND INDUSTRY
If we are unable to develop new and enhanced solutions, or if we are unable to continually improve the performance, features, and reliability of our existing solutions, our business and operating results could be adversely affected.
Our future success depends on our ability to effectively respond to evolving threats to consumers, as well as competitive technological developments and industry changes, by developing or introducing new and enhanced solutions on a timely basis.
We have in the past incurred, and will continue to incur, significant research and development expenses as we focus on organic growth through internal innovation. We believe that we also must continue to dedicate a significant amount of resources to our research and development efforts to decrease our reliance on third parties. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected. Additionally, we must continually address the challenges of dynamic and accelerating market trends and competitive developments. Customers may require features and capabilities that our current solutions do not have. Our failure to develop new solutions and improve our existing solutions to satisfy customer preferences and effectively compete with other market offerings in a timely and cost-effective manner may harm our ability to retain our customers and attract new customers. A loss of customers would adversely impact our business and operating results.
The development and introduction of new solutions involve a significant commitment of time and resources and are subject to a number of risks and challenges including but not limited to:
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Lengthy development cycles;
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Evolving industry and regulatory standards and technological developments by our competitors and customers;
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Rapidly changing customer preferences;
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Evolving platforms, operating systems, and hardware products, such as mobile devices;
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Product and service interoperability challenges with customer’s technology and third-party vendors;
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The integration of products and solutions from acquired companies;
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Entering into new or unproven market segments; and
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Executing new product and service strategies.
In addition, third parties, including operating systems and internet browser companies, may take steps to further limit the interoperability of our solutions with their own products and services, in some cases to promote their own offerings. This could delay the development of our solutions or our solutions may be unable to operate effectively. This could also result in decreased demand for our solutions, decreased revenue, and harm to our reputation, and adversely affect our business, financial condition, results of operations, and cash flows.
If we are not successful in managing these risks and challenges, or if our new or improved solutions are not technologically competitive or do not achieve market acceptance, our business and operating results could be adversely affected.
We operate in a highly competitive and dynamic environment, and if we are unable to compete effectively, we could experience a loss in market share and a reduction in revenue.
We operate in intensely competitive and dynamic markets that experience frequent and rapid technological developments, changes in industry and regulatory standards, changes in customer requirements and preferences, and frequent new product introductions and improvements. If we are unable to anticipate or react to these continually evolving conditions, we could experience a loss of market share and a reduction in our revenues, which could materially and adversely affect our business and financial results. To compete successfully, we must maintain an innovative research and development effort to develop new solutions and enhance our existing solutions, effectively adapt to changes in the technology or product rights held by our competitors as well as the ways our information is accessed, used and stored by our customers, and appropriately respond to competitive strategies.
We face competition from a broad range of companies, including software vendors focusing on Cyber Safety solutions, operating system providers such as Apple, Google and Microsoft, and ‘pure play’ companies that currently specialize in one or a few particular segments of the market and many of which are expanding their product portfolios into different segments. Many of these competitors offer solutions or are currently developing solutions that directly compete with our offerings. We also face growing competition from other technology companies, as well as from companies in the identity threat protection space such as
credit bureaus. Further, many of our competitors are increasingly developing and incorporating into their products data protection software and other competing Cyber Safety products such as antivirus protection or VPN, often free of charge, that compete with our offerings. Our competitive position could be adversely affected by the functionality incorporated into these products rendering our existing solutions obsolete. In addition, the introduction of new products or services by competitors, and/or market acceptance of products or services based on emerging or alternative technologies, could make it easier for other products or services to compete with our solutions.
We anticipate facing additional competition as new participants continue to enter the Cyber Safety market and as our current competitors seek to increase their market share and expand their existing offerings. Some of our competitors have greater financial, technical, marketing, or other resources than we do, including in new Cyber Safety and digital life segments, and consequently, may have the ability to influence customers to purchase their products instead of ours, including through investing more in internal innovation than we can and through benefiting from unique access to customer engagement points. Further consolidation among our competitors and within our industry or, in addition to other changes in the competitive environment, such as greater vertical integration from key computing and operating system suppliers could result in larger competitors that compete more frequently with us.
In addition to competing with these vendors directly for sales to end-users of our solutions, we compete with them for the opportunity to have our solutions bundled with the offerings of our strategic partners, such as computer hardware original equipment manufacturers (OEMs) and internet service providers (ISPs) and operating systems. Our competitors could gain market share from us if any of these strategic partners replace our solutions with those of our competitors or with their own solutions; similarly, they could gain market share from us if these partners more actively promote our competitors’ solutions or their own solutions than our solutions. In addition, software vendors who have bundled our solutions with theirs may choose to bundle their solutions with their own or other vendors’ solutions or may limit our access to standard interfaces and inhibit our ability to develop solutions for their platform. In the future, further product development by these vendors could cause our solutions to become redundant, which could significantly impact our sales and operating result
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Item 6. Exhibits
| Exhibit Number | Incorporated by Reference | Filed/Furnished with this 10-Q | ||||||||||||||||||||||||||||||||||||
| Exhibit Description | Form | File Number | Exhibit | File Date | ||||||||||||||||||||||||||||||||||
| 31.01 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||||||||||||||||||
| 31.02 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||||||||||||||||||
| 32.01† | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||||||||||||||||||
| 32.02† | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||||||||||||||||||||||||||
| 101 | The following financial information from Gen Digital Inc.'s Quarterly Report on Form 10-Q for the quarter ended December 30, 2022 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Deficit), (vi) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X |
| † | This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GEN DIGITAL INC. | ||||||||
| (Registrant) | ||||||||
| By: | /s/ Vincent Pilette | |||||||
| Vincent Pilette Chief Executive Officer | ||||||||
| By: | /s/ Natalie Derse | |||||||
| Natalie Derse Chief Financial Officer |
February 6, 2023