Gen Digital Inc.

Good day, ladies and gentlemen. My name is Ian, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the semantic fiscal quarter one 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, simply press the pound key. Thank you. I'd now like to turn the call over to Cynthia Hiponia. Ma'am, you may begin.

Great. Good afternoon, everyone. This is Cynthia Hiponia, Vice President of Investor Relations at Symantec, and I'm pleased to welcome you to our call to discuss our first quarter fiscal year 2020 earnings results and Symantec's divestiture of its enterprise security assets. We've posted the earnings material and slides to our Investor Relations events webpage. Speakers on today's calls are Rick Hill, Symantec's Interim President and CEO, and Vincent Pellet, Executive Vice President and CFO. This call will be available for replay via webcast on our website. I'd like to remind everyone that all references to financial metrics are non-GAAP unless otherwise stated. Please refer to the supplemental materials posted on the Investor Relations website for further definitions of our non-GAAP metrics. Please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP measures in the press release and supplemental materials posted on our website. We believe our presentation of non-GAAP financial measures when taken together with corresponding GAAP financial measures provides meaningful supplemental information regarding our operating performance for reasons discussed below. Our management team uses those non-GAAP financial measures in assessing our operating results as well as when planning and forecasting future periods. We believe our non-GAAP financial measures also facilitate comparisons of our performance to prior periods and that investors benefit from understanding our non-GAAP financial measures. Non-GAAP financial measures are supplemental and should not be considered an substitute for financial information presented in accordance with GAAP. Today's call contains forward-looking statements based on conditions as we currently see them. Those statements are based on current beliefs, assumptions, and expectations, speak only as of the current date, and as such involve risks and certainties that may cause actual results to differ materially from our current expectations. In particular, our statements regarding our proposed sale of our enterprise security assets and plans following completion of the sale are subject to a variety of risks, including the risk that the transaction does not close. Please refer to the cautionary statement in our press release for more information. You will also find detailed discussion about our risk factors in our filings with the SEC and, in particular, in our annual report on Form 10-K for the fiscal year ended March 29, 2019. With that, let me now turn the call over to Rick.

Thank you, Cynthia, and thank all of you for joining us today. When I joined Symantec, I was informed there's never a dull moment at the company. Well, needless to say, it's been quite an inning since I joined Symantec in April, and I have been very fortunate to have Vincent Pellet, who's here with me today, having joined in early May. During that time we as a management team undertook a deep dive of the organization from the products and underlying technology to the go-to-mark strategies for both enterprise and consumer. We implemented cost-cutting initiatives and spend control programs while identifying key growth opportunities for both enterprise and consumer. Despite the leadership and organizational changes, and external noise, our team delivered solid Q1 results with non-GAAP revenue, operating margin, and EPS all above our guidance. We were up both year over year and quarter over quarter. As many have heard me say, I'd rather be lucky than good, and I am lucky to work with this talented group of executives and employees who have the capability of delivering superior results to both our customers and employees and shareholders. Now, let me turn to the big news today. What first attracted me to Symantec was a clear opportunity to unlock the value in both our enterprise and consumer groups. Our announcement today, the sale of the enterprise security assets, to Broadcom for $10.7 billion in cash achieves this by obtaining an attractive valuation for enterprise security. For an asset that produced approximately 50% of our revenue and approximately $2.5 billion in revenue, which is about $2.5 billion, and 10% of our operating income in the first quarter of fiscal 2020. Think about that for a moment. $10.7 billion in cash for approximately 10% of our operating income. As stated on our earnings call last quarter, we're committed to our integrated cyber defense platform, which has produced a strong and competitive portfolio of industry-leading enterprise solutions. Broadcom's acquisition of these solutions validates Symantec's enterprise integrated cyber defense strategy and ensures seamless service for existing customers and the continued development of innovative and market-leading products in a dynamically growing market. Combining Symantec's technology with Broadcom's reach and proven operational excellence will delight customers and create a powerful force in the market and enable our enterprise business to grow without us having to invest in fixing our go-to-market model. As Vincent and I will discuss in our comments, this transaction delivers a superior outcome to our shareholders. And there are four key elements to understand. The attractive valuation we are receiving for our enterprise assets, $10.7 billion for a business that generated 10% of our operating income for quarter one, granted a huge opportunity for growth, but given the go-to-market strategy we had employed, we were consistently falling short of that objective. Second, the size and cash expense of stranded costs in the remaining company and how long it will take us to eliminate those costs. Vincent will discuss this in detail. The third thing is the attractive long-term model for the consumer cyber safety business, also known as Norton LifeLock. And finally, four, our commitment as a board and management team to return capital to shareholders. We believe that the $10.7 billion is an attractive valuation for a business with industry-leading solutions in a fast-growing market. Now, using my reverse Polish HP35 calculator, let me put this in perspective. The $8.2 billion after-tax proceeds is roughly the equivalent of $12 per share. We believe that post the 12-month transition period, as a stand-alone company, our consumer cyber safety business can generate $1.50 in non-GAAP annual earnings per share. Now, you can apply a multiple of 13 to that number, add it to the $12 per share we are getting for our enterprise assets, and you get a share price in excess of $30 a share for Symantec. Now, obviously, a stable dividend-generating company in a low dividend to negative interest rate environment would clearly garner higher than a 13x multiple. We believe this represents a nice premium to the share price prior to our announcement today. Now, once the agreement is closed, the remaining company will have approximately $1.5 billion in stranded costs. which we have determined will cost approximately $1 billion in cash to eliminate. Vincent will address this in more detail, but we believe we can self-fund the majority of these restructuring costs using the value of the underutilized assets, such as real estate, which is located in highly attractive locations. We believe this transition period will take approximately 12 months from the close of this agreement agreement to realize all the cost savings, after which we will have a more nimble and unencumbered pure play consumer safety business. We will be able to use the significant cash generation from operations to fund growth and continued innovation within Norton LifeLock. We have all seen recent breach headlines that affect tens of millions of people These incidences are just one example of what is driving consumers' increasing need for cyber safety. As corporations harden their defenses against cyber crime, cyber criminals will continue to try and infect consumers, making them potential carriers into the business where they work. no different than the proliferation of the flu virus during flu season. It is our job as a consumer company to inoculate these carriers, and our consumer B2B2C strategy will play a major role on the front lines in the battle against cybercrime. Now with a large and growing market, Norton LifeLock addresses consumers' increasing need for cyber safety. Our integrated solutions built around our core technologies across device security, identity protection, privacy, and home and family safety are enhanced value to all our members. Consumer cyber safety delivered solid results in the first quarter. driven by the increasing value we deliver to our members. We increased investments in advertising and promotion at the beginning of fiscal year 2020 and will continue to invest into direct customer acquisition programs to drive direct member additions. Our partner programs continue to grow, members, and our retention rate is approximately 85% across the business. We believe in the long term our consumer cyber safety business can grow revenue in the mid single digits with operating margins of approximately 50% and earnings growth above revenue growth. This model can provide an attractive dividend yield and generate free cash flow of approximately $7 million annually. So let's summarize. We have announced a transaction that we believe delivers an attractive valuation for our enterprise security assets. We've identified our stranded costs and how long it'll take to remove them from the remaining business. And we have provided our view on the long-term financial model that a pure-play consumer cyber safety business can achieve with an optimized cost structure. Now let me outline the signals we have sent on returning capital to shareholders. We intend to deliver a $12 per share special dividend to shareholders after the close of the transaction, which represents approximately 100 percent of the after-tax proceeds from this transaction. We announced an increase in our share repurchase program of $1.6 billion. and we expect to raise our quarterly dividend by 67% to 12.5 cents per share or 50 cents annually after the close of the transaction. And additionally, we are committed to continued return of shareholder capital as the cash flows of the company permit. The sale of our enterprise security assets delivers a win for our enterprise and consumer customers and for our shareholders. Hock Tan, Broadcom's President and CEO, will begin the integration planning process immediately. Hock has built a leading technology company and Symantec Enterprise Security will be another key asset in his software company portfolio. Looking forward, as we work towards closing this agreement in December quarter, we'll continue to focus on the operational discipline and execute on multiple initiatives to drive revenue growth in the consumer cyber safety business. I'd like to thank all of our shareholders for the patience they have shown, and we hope you see the commitment of the board and the management team have to you and our employees. Let me now turn the call over to Vincent. The best hire Symantec has ever made who will review our quarter one results, give our outlook for the second quarter, and provide more details on the agreement.