Gen Digital (GEN) - 2023 Q4 - Annual Report

Part I Business Gen Digital Inc. is a global Cyber Safety company, post-Avast merger, serving 500 million users and 65 million paid customers with security, privacy, and identity protection solutions through diverse channels - On September 12, 2022, the company completed its merger with Avast and subsequently changed its name from NortonLifeLock, Inc. to Gen Digital, Inc. on November 7, 2022[11] - Gen Digital is a global company with a family of brands including Norton, Avast, LifeLock, Avira, AVG, ReputationDefender, and CCleaner, serving approximately 500 million users in over 150 countries[12] - As of March 31, 2023, the company has approximately 65 million paid Cyber Safety customers, including over 38 million direct customers[16] - The company utilizes a three-pronged go-to-market strategy: direct-to-consumer via e-commerce, indirect partner channels (retailers, telecoms, OEMs), and freemium models acquired with Avast and Avira[18][19] - The company's strategic growth levers are: extending international reach, increasing value through cross-selling and up-selling, and growing customer loyalty and retention[22] - The company's solutions are categorized into Security and Performance, Identity Protection, and Online Privacy, offered through comprehensive membership plans or as standalone point solutions[24][27] - Gen Digital holds a portfolio of over 1,000 U.S. and international patents and has cross-license access to an additional 2,100 patents from Broadcom[50][51] - As of March 31, 2023, the company employed just under 3,700 employees in nearly 30 countries, with dual headquarters in Tempe, Arizona, and Prague, Czech Republic[46] Risk Factors The company faces significant risks including intense competition, operational complexities, cybersecurity threats, stringent regulations, intellectual property claims, and substantial indebtedness of approximately $9.9 billion - The company faces intense competition from a wide range of companies, including software vendors (Bitdefender, McAfee), operating system providers (Apple, Google, Microsoft), and specialized 'pure play' companies[63][64] - Acquisitions and divestitures, such as the 2022 merger with Avast and the 2019 sale of enterprise assets to Broadcom, present significant risks including integration challenges, diversion of management attention, and assumption of liabilities[68][69] - The business is subject to cybersecurity events, and despite significant investments, the company expects to remain a target of sophisticated attacks which could harm its reputation and sales[91] - The company processes a large volume of personal information, subjecting it to numerous and evolving privacy laws such as GDPR and CCPA, with non-compliance potentially leading to significant fines and reputational damage[93][94][95] - The company is dependent on Broadcom for critical Engine-Related Services for its Norton branded endpoint security solution, following the sale of its Enterprise Security business[101][102] - The company is subject to a high degree of regulation, including consent decrees with the FTC and state attorneys general, which impose restrictions on its business practices[109] - As of March 31, 2023, the company had an aggregate of $9,899 million in outstanding indebtedness, which requires a substantial portion of cash flow for service payments and exposes the company to interest rate fluctuations[120] - The Amended and Restated Credit Agreement imposes restrictive covenants that limit the company's ability to incur additional debt, create liens, pay dividends, and make other restricted payments[123][128] Unresolved Staff Comments The company reports no unresolved written comments from the SEC staff regarding its periodic or current reports - There are no unresolved staff comments as of the reporting date[140] Properties This item is not applicable for the current reporting period - Item 2 is marked as 'Not applicable'[141] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 18, 'Commitments and Contingencies,' in the Consolidated Financial Statements - Details on legal proceedings are located in Note 18 of the financial statements[142] Mine Safety Disclosures This item is not applicable for the current reporting period - Item 4 is marked as 'Not applicable'[143] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'GEN', with $870 million remaining authorized for future stock repurchases - The company's common stock is traded on the Nasdaq Global Select Market under the ticker symbol "GEN"[146] - As of March 31, 2023, $870 million remained authorized for future stock repurchases with no expiration date[150] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 financial performance was significantly impacted by the Avast merger, leading to $3.34 billion in net revenues, $1.35 billion in net income, and $9.9 billion in total debt, with operating cash flow decreasing to $757 million - The merger with Avast was completed on September 12, 2022, significantly altering the company's size, operations, and financial metrics[156][158] Key Financial Metrics (Fiscal Year 2023 vs 2022) | Metric | FY 2023 (In millions) | FY 2022 (In millions) | Change | | :--- | :--- | :--- | :--- | | Net revenues | $3,338 | $2,796 | +$542M | | Operating income | $1,227 | $1,005 | +$222M | | Net income | $1,349 | $836 | +$513M | | Net cash from operating activities | $757 | $974 | -$217M | - The increase in net revenues was primarily due to the contribution from Avast post-merger and higher sales in consumer security and identity protection products, partially offset by unfavorable foreign currency fluctuations[164][177] - The company's effective tax rate was (68)% in fiscal 2023 compared to 20% in fiscal 2022, mainly due to a tax capital loss and releases of uncertain tax positions[195][196] - Cash from investing activities was a net use of $6.55 billion, primarily for the cash consideration paid for the Avast merger[201][203] - Cash from financing activities was a net provision of $4.68 billion, driven by proceeds from new debt issuance to fund the merger, partially offset by debt repayments and stock repurchases[201][204] - As of March 31, 2023, the company had total debt of $9.9 billion and $870 million remaining under its stock repurchase authorization[216][219] Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from interest rate fluctuations on $7.3 billion variable-rate debt and foreign currency exposure through interest rate swaps and forward contracts - The company is exposed to interest rate risk with $7,292 million in variable-rate debt outstanding as of March 31, 2023, where a hypothetical 100 basis point change in SOFR would result in a $73 million change in annual interest expense[223] - In March 2023, the company entered into interest rate swap agreements to hedge the variability of interest payments on $1 billion of its Term A Facility, effectively converting it to fixed rates of 3.762% and 3.55% until March 2026[224] - The company has significant exposure to foreign currency exchange rate risk due to its global operations and uses monthly foreign exchange forward contracts to hedge balance sheet exposures[226][228] Financial Statements and Supplementary Data This section incorporates by reference the Consolidated Financial Statements and related disclosures from Part IV, Item 15 of the Annual Report - The Consolidated Financial Statements are incorporated by reference from Item 15[231] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting principles, practices, or financial statement disclosure - There were no disagreements with accountants on accounting and financial disclosure[232] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2023, excluding the recently acquired Avast business from the internal control assessment - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023[234] - Management concluded that internal control over financial reporting was effective as of March 31, 2023, based on the COSO framework[235][237] - The recently acquired Avast business was excluded from management's assessment of internal control over financial reporting for the fiscal year ended March 31, 2023[236] Other Information No other information was reported for this period - No other information was reported[240] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable for the current reporting period - Item 9C is marked as 'Not applicable'[241] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2023 Proxy Statement - Required information is incorporated by reference from the forthcoming 2023 Proxy Statement[243] Executive Compensation Information on executive compensation, excluding 'Pay Versus Performance,' is incorporated by reference from the forthcoming 2023 Proxy Statement - Required information is incorporated by reference from the forthcoming 2023 Proxy Statement[244] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the forthcoming 2023 Proxy Statement - Required information is incorporated by reference from the forthcoming 2023 Proxy Statement[245] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the forthcoming 2023 Proxy Statement - Required information is incorporated by reference from the forthcoming 2023 Proxy Statement[246] Principal Accountant Fees and Services Information on principal accountant fees and services by KPMG, LLP is incorporated by reference from the forthcoming 2023 Proxy Statement - The company's independent auditor is KPMG, LLP. Required information on fees and services is incorporated by reference from the forthcoming 2023 Proxy Statement[247] Part IV Exhibits, Financial Statement Schedules This section includes the audited Consolidated Financial Statements, KPMG LLP's report, and exhibits, detailing financial position, operations, and cash flows, significantly impacted by the Avast merger Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the consolidated financial statements and effective internal controls, excluding Avast plc from the internal control audit, highlighting critical audit matters on net revenues and uncertain tax positions - KPMG issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[253] - The audit of internal control over financial reporting excluded the recently acquired Avast plc[254] - Critical Audit Matters identified were: 1) Sufficiency of audit evidence over net revenues, and 2) Assessment of uncertain tax positions[260] Consolidated Financial Statements The consolidated financial statements reflect the Avast merger, showing $15.9 billion in total assets, $13.7 billion in liabilities, $3.34 billion in net revenues, $1.35 billion in net income, and $757 million in operating cash flow for fiscal 2023 Consolidated Balance Sheet Highlights (As of March 31, 2023) | Account | Amount (in millions) | | :--- | :--- | | Total Current Assets | $1,233 | | Goodwill | $10,217 | | Intangible Assets, net | $3,097 | | Total Assets | $15,947 | | Total Current Liabilities | $2,849 | | Long-term Debt | $9,529 | | Total Liabilities | $13,747 | | Total Stockholders' Equity | $2,200 | Consolidated Statement of Operations Highlights (For Fiscal Year Ended March 31, 2023) | Account | Amount (in millions) | | :--- | :--- | | Net Revenues | $3,338 | | Gross Profit | $2,749 | | Operating Income | $1,227 | | Income before income taxes | $804 | | Income tax benefit | $(545) | | Net Income | $1,349 | Consolidated Statement of Cash Flows Highlights (For Fiscal Year Ended March 31, 2023) | Account | Amount (in millions) | | :--- | :--- | | Net cash from Operating Activities | $757 | | Net cash used in Investing Activities | $(6,547) | | Net cash from Financing Activities | $4,681 | | Change in cash and cash equivalents | $(1,137) | Notes to the Consolidated Financial Statements The notes detail financial statements, including the Avast merger's impact on goodwill and intangibles, $1.23 billion in remaining performance obligations, $9.9 billion in debt, a $910 million tax capital loss, and a $237 million accrued loss for a patent infringement case - Note 4 (Business Combinations): The merger with Avast was completed on September 12, 2022, for a net consideration of $8.7 billion, resulting in the recognition of $7.3 billion in goodwill and $2.4 billion in identifiable intangible assets[347][349][353] - Note 5 (Revenues): As of March 31, 2023, the company had $1.23 billion in remaining performance obligations, with 94% expected to be recognized as revenue in the next 12 months[365] - Note 6 (Goodwill and Intangible Assets): Goodwill increased from $2.9 billion in FY22 to $10.2 billion in FY23, primarily due to the Avast merger[367] - Note 10 (Debt): Total principal debt outstanding was $9.9 billion as of March 31, 2023, consisting primarily of term loans and senior notes used to finance the Avast merger[389] - Note 12 (Restructuring): A restructuring plan (September 2022 Plan) was initiated post-merger to achieve cost synergies, with total expected costs up to $150 million[428] - Note 13 (Income Taxes): A legal entity restructuring resulted in a tax capital loss, which is expected to generate a tax refund of $910 million, and the company has gross unrecognized tax benefits of $710 million[441][442] - Note 17 (Segment and Geographic Information): The company operates as a single reportable segment, with FY23 revenues primarily from Consumer Security ($2.0 billion) and Identity/Information Protection ($1.2 billion), and the Americas contributing 68% of revenue[475][477] - Note 18 (Commitments and Contingencies): The company has accrued approximately $237 million for a patent infringement case involving Columbia University, reflecting the jury award and prejudgment interest[490][493] Form 10-K Summary This item is not applicable as no summary is provided - No Form 10-K summary was provided[524]