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 July 1, 2022June 30, 2023
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
NortonLifeLockGen 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 | NLOKGEN | 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 NortonLifeLockGen common stock, $0.01 par value per share, outstanding as of July 29, 202231, 2023 was 571,368,785639,439,103 shares.
NORTONLIFELOCKGEN DIGITAL INC.
FORM 10-Q
Quarterly Period Ended July 1, 2022June 30, 2023
“NortonLifeLock,Gen,” “we,” “us,” “our,” and “the Company” refer to NortonLifeLockGen Digital Inc. and all of its subsidiaries. NortonLifeLock, the NortonLifeLock Logo, the Checkmark Logo,Gen, Norton, Avast,
LifeLock, Avira, AVG, Reputation Defender, CCleaner and the LockMan Logoall related trademarks, service marks and trade names are trademarks or registered trademarks of NortonLifeLock Inc.Gen or its affiliates inother respective owners that have granted Gen the United States (U.S.) and other countries.right to use such marks. Other names may be trademarks of their respective owners.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
NORTONLIFELOCKGEN DIGITAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value per share amounts) | | | July 1, 2022 | | April 1, 2022 | | June 30, 2023 | | March 31, 2023 |
| ASSETS | ASSETS | ASSETS |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,291 | | | $ | 1,887 | | Cash and cash equivalents | $ | 623 | | | $ | 750 | |
| Short-term investments | — | | | 4 | | |
| | Accounts receivable, net | Accounts receivable, net | 102 | | | 120 | | Accounts receivable, net | 145 | | | 168 | |
| Other current assets | Other current assets | 180 | | | 193 | | Other current assets | 297 | | | 284 | |
| Assets held for sale | Assets held for sale | 56 | | | 56 | | Assets held for sale | 22 | | | 31 | |
| Total current assets | Total current assets | 1,629 | | | 2,260 | | Total current assets | 1,087 | | | 1,233 | |
| Property and equipment, net | Property and equipment, net | 56 | | | 60 | | Property and equipment, net | 73 | | | 76 | |
| Operating lease assets | Operating lease assets | 70 | | | 74 | | Operating lease assets | 38 | | | 43 | |
| Intangible assets, net | Intangible assets, net | 993 | | | 1,023 | | Intangible assets, net | 2,982 | | | 3,097 | |
| Goodwill | Goodwill | 2,861 | | | 2,873 | | Goodwill | 10,241 | | | 10,217 | |
| Other long-term assets | Other long-term assets | 638 | | | 653 | | Other long-term assets | 1,366 | | | 1,281 | |
| Total assets | Total assets | $ | 6,247 | | | $ | 6,943 | | Total assets | $ | 15,787 | | | $ | 15,947 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 71 | | | $ | 63 | | Accounts payable | $ | 65 | | | $ | 77 | |
| Accrued compensation and benefits | Accrued compensation and benefits | 48 | | | 81 | | Accrued compensation and benefits | 60 | | | 102 | |
| Current portion of long-term debt | Current portion of long-term debt | 614 | | | 1,000 | | Current portion of long-term debt | 233 | | | 233 | |
| Contract liabilities | Contract liabilities | 1,183 | | | 1,264 | | Contract liabilities | 1,631 | | | 1,708 | |
| Current operating lease liabilities | Current operating lease liabilities | 19 | | | 18 | | Current operating lease liabilities | 24 | | | 26 | |
| Other current liabilities | Other current liabilities | 689 | | | 639 | | Other current liabilities | 735 | | | 703 | |
| Total current liabilities | Total current liabilities | 2,624 | | | 3,065 | | Total current liabilities | 2,748 | | | 2,849 | |
| Long-term debt | Long-term debt | 2,714 | | | 2,736 | | Long-term debt | 9,327 | | | 9,529 | |
| Long-term contract liabilities | Long-term contract liabilities | 37 | | | 42 | | Long-term contract liabilities | 78 | | | 80 | |
| Deferred income tax liabilities | Deferred income tax liabilities | 63 | | | 75 | | Deferred income tax liabilities | 385 | | | 395 | |
| Long-term income taxes payable | Long-term income taxes payable | 996 | | | 996 | | Long-term income taxes payable | 841 | | | 820 | |
| Long-term operating lease liabilities | Long-term operating lease liabilities | 69 | | | 75 | | Long-term operating lease liabilities | 27 | | | 31 | |
| Other long-term liabilities | Other long-term liabilities | 43 | | | 47 | | Other long-term liabilities | 44 | | | 43 | |
| Total liabilities | Total liabilities | 6,546 | | | 7,036 | | Total liabilities | 13,450 | | | 13,747 | |
| Commitments and contingencies (Note 18) | Commitments and contingencies (Note 18) |
| | 00 | Commitments and contingencies (Note 18) |
| | |
| Stockholders’ equity (deficit): | Stockholders’ equity (deficit): | | Stockholders’ equity (deficit): | |
| Common stock and additional paid-in capital, $0.01 par value: 3,000 shares authorized; 571 and 580 shares issued and outstanding as of July 1, 2022 and April 1, 2022, respectively | 1,479 | | | 1,851 | | |
| Common stock and additional paid-in capital, $0.01 par value: 3,000 shares authorized; 639 and 640 shares issued and outstanding as of June 30, 2023 and March 31, 2023, respectively | | Common stock and additional paid-in capital, $0.01 par value: 3,000 shares authorized; 639 and 640 shares issued and outstanding as of June 30, 2023 and March 31, 2023, respectively | 2,697 | | | 2,800 | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (44) | | | (4) | | Accumulated other comprehensive income (loss) | 36 | | | (15) | |
| Retained earnings (accumulated deficit) | Retained earnings (accumulated deficit) | (1,734) | | | (1,940) | | Retained earnings (accumulated deficit) | (396) | | | (585) | |
| Total stockholders’ equity (deficit) | Total stockholders’ equity (deficit) | (299) | | | (93) | | Total stockholders’ equity (deficit) | 2,337 | | | 2,200 | |
| Total liabilities and stockholders’ equity (deficit) | Total liabilities and stockholders’ equity (deficit) | $ | 6,247 | | | $ | 6,943 | | Total liabilities and stockholders’ equity (deficit) | $ | 15,787 | | | $ | 15,947 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NORTONLIFELOCKGEN DIGITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
| | | Three Months Ended | | | Three Months Ended | |
| | | July 1, 2022 | | July 2, 2021 | | | June 30, 2023 | | July 1, 2022 | |
| Net revenues | Net revenues | $ | 707 | | | $ | 686 | | | Net revenues | $ | 946 | | | $ | 707 | | |
| Cost of revenues | Cost of revenues | 102 | | | 102 | | | Cost of revenues | 179 | | | 102 | | |
| Gross profit | Gross profit | 605 | | | 584 | | | Gross profit | 767 | | | 605 | | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | | |
| Sales and marketing | Sales and marketing | 156 | | | 156 | | | Sales and marketing | 181 | | | 156 | | |
| Research and development | Research and development | 61 | | | 68 | | | Research and development | 90 | | | 61 | | |
| General and administrative | General and administrative | 104 | | | 45 | | | General and administrative | 56 | | | 104 | | |
| Amortization of intangible assets | Amortization of intangible assets | 21 | | | 21 | | | Amortization of intangible assets | 61 | | | 21 | | |
| Restructuring and other costs | Restructuring and other costs | 2 | | | 7 | | | Restructuring and other costs | 17 | | | 2 | | |
| Total operating expenses | Total operating expenses | 344 | | | 297 | | | Total operating expenses | 405 | | | 344 | | |
| Operating income (loss) | Operating income (loss) | 261 | | | 287 | | | Operating income (loss) | 362 | | | 261 | | |
| Interest expense | Interest expense | (31) | | | (32) | | | Interest expense | (170) | | | (31) | | |
| Other income (expense), net | Other income (expense), net | (1) | | | (3) | | | Other income (expense), net | 12 | | | (1) | | |
| Income (loss) before income taxes | Income (loss) before income taxes | 229 | | | 252 | | | Income (loss) before income taxes | 204 | | | 229 | | |
| Income tax expense (benefit) | Income tax expense (benefit) | 29 | | | 71 | | | Income tax expense (benefit) | 15 | | | 29 | | |
| Net income (loss) | Net income (loss) | $ | 200 | | | $ | 181 | | | Net income (loss) | $ | 189 | | | $ | 200 | | |
| | Net income (loss) per share - basic | Net income (loss) per share - basic | $ | 0.35 | | | $ | 0.31 | | | Net income (loss) per share - basic | $ | 0.30 | | | $ | 0.35 | | |
| Net income (loss) per share - diluted | Net income (loss) per share - diluted | $ | 0.33 | | | $ | 0.31 | | | Net income (loss) per share - diluted | $ | 0.29 | | | $ | 0.33 | | |
| | Weighted-average shares outstanding: | Weighted-average shares outstanding: | | | Weighted-average shares outstanding: | | |
| Basic | Basic | 578 | | | 580 | | | Basic | 640 | | | 578 | | |
| Diluted | Diluted | 604 | | | 591 | | | Diluted | 643 | | | 604 | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NORTONLIFELOCKGEN DIGITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions)
| | | | Three Months Ended | | | Three Months Ended | |
| | | July 1, 2022 | | July 2, 2021 | | | June 30, 2023 | | July 1, 2022 | |
| Net income (loss) | Net income (loss) | $ | 200 | | | $ | 181 | | | Net income (loss) | $ | 189 | | | $ | 200 | | |
| Other comprehensive income (loss), net of taxes: | Other comprehensive income (loss), net of taxes: | | | Other comprehensive income (loss), net of taxes: | | |
| Foreign currency translation adjustments | (40) | | | 2 | | | |
| Foreign currency translation gain (loss) | | Foreign currency translation gain (loss) | 32 | | | (40) | | |
| Net unrealized gain (loss) on derivative instruments | | Net unrealized gain (loss) on derivative instruments | 19 | | | — | | |
| | Other comprehensive income (loss), net of taxes | Other comprehensive income (loss), net of taxes | (40) | | | 2 | | | Other comprehensive income (loss), net of taxes | 51 | | | (40) | | |
| Comprehensive income (loss) | Comprehensive income (loss) | $ | 160 | | | $ | 183 | | | Comprehensive income (loss) | $ | 240 | | | $ | 160 | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NORTONLIFELOCKGEN DIGITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited, in millions, except share amounts)
| | Three months ended July 1, 2022 | Common Stock and Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity (Deficit) | |
| Three months ended June 30, 2023 | | Three months ended June 30, 2023 | Common Stock and Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity (Deficit) |
| | Shares | | Amount | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity (Deficit) | | Shares | | Amount | |
| Balance as of April 1, 2022 | 582 | | | $ | 1,851 | | | |
| Balance as of March 31, 2023 | | Balance as of March 31, 2023 | 640 | | | $ | 2,800 | | | $ | (15) | | | $ | (585) | | | $ | 2,200 | |
| Net income (loss) | Net income (loss) | — | | | — | | | — | | | 200 | | | 200 | | Net income (loss) | — | | | — | | | — | | | 189 | | | 189 | |
| Other comprehensive income (loss), net of taxes | Other comprehensive income (loss), net of taxes | — | | | — | | | (40) | | | — | | | (40) | | Other comprehensive income (loss), net of taxes | — | | | — | | | 51 | | | — | | | 51 | |
| Common stock issued under employee stock incentive plans | Common stock issued under employee stock incentive plans | 2 | | | — | | | — | | | — | | | — | | Common stock issued under employee stock incentive plans | 3 | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes related to vesting of restricted stock units | (1) | | | (16) | | | — | | | — | | | (16) | | |
| Shares withheld for taxes related to vesting of stock units | | Shares withheld for taxes related to vesting of stock units | (1) | | | (18) | | | — | | | — | | | (18) | |
| Repurchases of common stock | Repurchases of common stock | (12) | | | (300) | | | — | | | — | | | (300) | | Repurchases of common stock | (3) | | | (41) | | | — | | | — | | | (41) | |
| Cash dividends declared ($0.125 per share of common stock) and dividend equivalents accrued | Cash dividends declared ($0.125 per share of common stock) and dividend equivalents accrued | — | | | (73) | | | — | | | — | | | (73) | | Cash dividends declared ($0.125 per share of common stock) and dividend equivalents accrued | — | | | (81) | | | — | | | — | | | (81) | |
| Stock-based compensation | Stock-based compensation | — | | | 24 | | | — | | | — | | | 24 | | Stock-based compensation | — | | | 37 | | | — | | | — | | | 37 | |
| Cumulative effect adjustment from adoption of ASU 2020-06 (1) | — | | | (7) | | | — | | | 6 | | | (1) | | |
| Balance as of July 1, 2022 | 571 | | | $ | 1,479 | | | $ | (44) | | | $ | (1,734) | | | $ | (299) | | |
| | Balance as of June 30, 2023 | | Balance as of June 30, 2023 | 639 | | | $ | 2,697 | | | $ | 36 | | | $ | (396) | | | $ | 2,337 | |
| | Three months ended July 2, 2021 | Common Stock and Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity (Deficit) | |
| Three months ended July 1, 2022 | | Three months ended July 1, 2022 | Common Stock and Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity (Deficit) |
| | Shares | | Amount | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total Stockholders’ Equity (Deficit) | | Shares | | Amount | |
| Balance as of April 2, 2021 | 580 | | | $ | 2,229 | | | |
| Balance as of April 1, 2022 | | Balance as of April 1, 2022 | 582 | | | $ | 1,851 | | | $ | (4) | | | $ | (1,940) | | | $ | (93) | |
| Net income (loss) | Net income (loss) | — | | | — | | | — | | | 181 | | | 181 | | Net income (loss) | — | | | — | | | — | | | 200 | | | 200 | |
| Other comprehensive income (loss), net of taxes | Other comprehensive income (loss), net of taxes | — | | | — | | | 2 | | | — | | | 2 | | Other comprehensive income (loss), net of taxes | — | | | — | | | (40) | | | — | | | (40) | |
| Common stock issued under employee stock incentive plans | Common stock issued under employee stock incentive plans | 2 | | | 1 | | | — | | | — | | | 1 | | Common stock issued under employee stock incentive plans | 2 | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes related to vesting of restricted stock units | (1) | | | (15) | | | — | | | — | | | (15) | | |
| | Shares withheld for taxes related to vesting of stock units | | Shares withheld for taxes related to vesting of stock units | (1) | | | (16) | | | — | | | — | | | (16) | |
| Repurchases of common stock | | Repurchases of common stock | (12) | | | (300) | | | — | | | — | | | (300) | |
| Cash dividends declared ($0.125 per share of common stock) and dividend equivalents accrued | Cash dividends declared ($0.125 per share of common stock) and dividend equivalents accrued | — | | | (74) | | | — | | | — | | | (74) | | Cash dividends declared ($0.125 per share of common stock) and dividend equivalents accrued | — | | | (73) | | | — | | | — | | | (73) | |
| Stock-based compensation | Stock-based compensation | — | | | 20 | | | — | | | — | | | 20 | | Stock-based compensation | — | | | 24 | | | — | | | — | | | 24 | |
| Extinguishment of convertible debt | — | | | (112) | | | — | | | — | | | (112) | | |
| Balance as of July 2, 2021 | 581 | | | $ | 2,049 | | | $ | 49 | | | $ | (2,595) | | | $ | (497) | | |
Cumulative effect adjustment from adoption of ASU 2020-06 (1) | | Cumulative effect adjustment from adoption of ASU 2020-06 (1) | | (7) | | | 6 | | | (1) | |
| | Balance as of July 1, 2022 | | Balance as of July 1, 2022 | 571 | | | $ | 1,479 | | | $ | (44) | | | $ | (1,734) | | | $ | (299) | |
(1) Effective on April 2, 2022, the Company adopted ASU 2020-06 (Debt with Conversion and Other Options, ASC 470-20) using a modified retrospective method. See Note 2 for further information about this recently adopted guidance.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NORTONLIFELOCKGEN DIGITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions) | | | Three Months Ended | | Three Months Ended |
| | July 1, 2022 | | July 2, 2021 | | June 30, 2023 | | July 1, 2022 |
| OPERATING ACTIVITIES: | OPERATING ACTIVITIES: | | | | OPERATING ACTIVITIES: | | | |
| Net income (loss) | $ | 200 | | | $ | 181 | | |
| Net income | | Net income | $ | 189 | | | $ | 200 | |
| Adjustments: | Adjustments: | | Adjustments: | |
| Amortization and depreciation | Amortization and depreciation | 29 | | | 36 | | Amortization and depreciation | 125 | | | 29 | |
| | Stock-based compensation expense | Stock-based compensation expense | 24 | | | 20 | | Stock-based compensation expense | 37 | | | 24 | |
| Deferred income taxes | Deferred income taxes | (32) | | | 1 | | Deferred income taxes | (59) | | | (32) | |
| Loss (gain) on extinguishment of debt | — | | | 5 | | |
| | Gain on sale of property | | Gain on sale of property | (4) | | | — | |
| Non-cash operating lease expense | Non-cash operating lease expense | 4 | | | 5 | | Non-cash operating lease expense | 6 | | | 4 | |
| Other | Other | (26) | | | 7 | | Other | 18 | | | (26) | |
| Changes in operating assets and liabilities, net of acquisitions: | Changes in operating assets and liabilities, net of acquisitions: | | Changes in operating assets and liabilities, net of acquisitions: | |
| Accounts receivable, net | Accounts receivable, net | 13 | | | 12 | | Accounts receivable, net | 20 | | | 13 | |
| Accounts payable | Accounts payable | 9 | | | 24 | | Accounts payable | (12) | | | 9 | |
| Accrued compensation and benefits | Accrued compensation and benefits | (32) | | | (42) | | Accrued compensation and benefits | (42) | | | (32) | |
| Contract liabilities | Contract liabilities | (53) | | | (34) | | Contract liabilities | (68) | | | (53) | |
| Income taxes payable | Income taxes payable | 60 | | | 21 | | Income taxes payable | 28 | | | 60 | |
| Other assets | Other assets | — | | | 41 | | Other assets | (27) | | | — | |
| Other liabilities | Other liabilities | 19 | | | (19) | | Other liabilities | 15 | | | 19 | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | 215 | | | 258 | | Net cash provided by (used in) operating activities | 226 | | | 215 | |
| INVESTING ACTIVITIES: | INVESTING ACTIVITIES: | | INVESTING ACTIVITIES: | |
| Purchases of property and equipment | Purchases of property and equipment | (2) | | | (1) | | Purchases of property and equipment | (4) | | | (2) | |
| | Proceeds from the maturities and sales of short-term investments | Proceeds from the maturities and sales of short-term investments | 4 | | | 4 | | Proceeds from the maturities and sales of short-term investments | — | | | 4 | |
| | Other | Other | 2 | | | (4) | | Other | (2) | | | 2 | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | 4 | | | (1) | | Net cash provided by (used in) investing activities | (6) | | | 4 | |
| FINANCING ACTIVITIES: | FINANCING ACTIVITIES: | | FINANCING ACTIVITIES: | |
| Repayments of debt | Repayments of debt | (410) | | | (372) | | Repayments of debt | (208) | | | (410) | |
| Proceeds from issuance of debt, net of issuance costs | — | | | 512 | | |
| Net proceeds from sales of common stock under employee stock incentive plans | — | | | 1 | | |
| Tax payments related to vesting of restricted stock units | (16) | | | (13) | | |
| | Tax payments related to vesting of stock units | | Tax payments related to vesting of stock units | (18) | | | (16) | |
| Dividends and dividend equivalents paid | Dividends and dividend equivalents paid | (81) | | | (84) | | Dividends and dividend equivalents paid | (83) | | | (81) | |
| Repurchases of common stock | Repurchases of common stock | (300) | | | — | | Repurchases of common stock | (41) | | | (300) | |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | (807) | | | 44 | | Net cash provided by (used in) financing activities | (350) | | | (807) | |
| Effect of exchange rate fluctuations on cash and cash equivalents | Effect of exchange rate fluctuations on cash and cash equivalents | (8) | | | (4) | | Effect of exchange rate fluctuations on cash and cash equivalents | 3 | | | (8) | |
| Change in cash and cash equivalents | Change in cash and cash equivalents | (596) | | | 297 | | Change in cash and cash equivalents | (127) | | | (596) | |
| Beginning cash and cash equivalents | Beginning cash and cash equivalents | 1,887 | | | 933 | | Beginning cash and cash equivalents | 750 | | | 1,887 | |
| Ending cash and cash equivalents | Ending cash and cash equivalents | $ | 1,291 | | | $ | 1,230 | | Ending cash and cash equivalents | $ | 623 | | | $ | 1,291 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NORTONLIFELOCKGEN DIGITAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business and Significant Accounting Policies
Business
NortonLifeLock,Gen Digital Inc. is a global leading providercompany powering Digital Freedom with a family of trusted consumer brands including Norton, Avast, LifeLock, Avira, AVG, ReputationDefender and CCleaner. Our Cyber Safety solutions. Our portfolio provides protection across three Cyber Security categories:multiple channels and geographies, including security and performance, identity protection, and online privacy. Our technology platforms bring together software and service capabilities into comprehensive and easy-to-use products and solutions across our brands. We help customers protect their computer and mobile devices from online threats, safeguard theirhave also evolved beyond traditional Cyber Safety to offer adjacent trust-based solutions, including digital identity and personalaccess management, digital reputation, and restoration support services.
On September 12, 2022, we completed our acquisition of Avast, plc (Avast). Avast has been included in our consolidated results of operations since the acquisition date. See Note 4 for further information and strengthen online privacy capabilities and functionalities.about this business combination.
Basis of presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America for interim financial information. In the opinion of management, the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 1, 2022.March 31, 2023. The results of operations for the three months ended July 1, 2022June 30, 2023 are not necessarily indicative of the results expected for the entire fiscal year.
Fiscal calendar
We have a 52/53-week fiscal year ending on the Friday closest to March 31. Unless otherwise stated, references to three month periods in this report relate to fiscal periods ended June 30, 2023 and July 1, 2022 and July 2, 2021.2022. The three months ended June 30, 2023 and July 1, 2022 and July 2, 2021 each consisted of 13 weeks.weeks, respectively. Our 20232024 fiscal year consists of 52 weeks and ends on March 31, 2023.29, 2024.
Use of estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying Notes. Such estimates include, but are not limited to, valuation of business combinations including acquired intangible assets and goodwill, loss contingencies, the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions, and valuation of assets and liabilities. On an ongoing basis, management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Third-party valuation specialists are also utilized for certain estimates. Actual results could differ from such estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment as a result of macroeconomic factors such as inflation, fluctuations in foreign currency exchange rates relative to the COVID-19 pandemicU.S. dollars, our reporting currency, changes in interest rates, and continuing Russia-Ukraine conflict,Russia’s invasion of Ukraine, and such differences may be material to the Condensed Consolidated Financial Statements.
Significant accounting policies
With the exception of those discussed in Note 2, there have been no material changes to our significant accounting policies as of and for the three months ended July 1, 2022,June 30, 2023, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 1, 2022.
Note 2. Recent Accounting Standards
Recently adopted authoritative guidance
Debt with Conversion and Other Options. In August 2020,There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K for the FASB issued Accounting Standards Update 2020-06 (ASU 2020-06) which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments. The new guidance removes from GAAP the separation models for convertible debt with embedded conversion features. As a result, entities will no longer separately present embedded conversion features in equity. A convertible debt instrument will be accounted for wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. In addition, the debt discount, which is equal to the carry value of the embedded conversion feature upon issuance, will no longer be amortized as interest expense over the life of the instrument. The new guidance also requires the use of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share and include the effect of share settlement for instruments that may be settled in cash or shares. See Note 16 for further information related to the diluted earnings per share calculation.
We adopted this standard as of April 2, 2022, the first day of fiscal 2023, using a modified retrospective method of transition, under which, financial results and earnings per share amounts reported in prior periods were not adjusted or restated in the Condensed Consolidated Financial Statements. As such, the new guidance was applied to the convertible debt instruments outstanding as of the beginning of this fiscal year with the cumulative effect of adoption recognized through an adjustment to the opening balance of retained earnings. We increased the carrying amount of the New 2.00% Convertible Notes (as defined in Note 10) by approximately $1 million and reduced additional paid-in capital by approximately $7 million, net of tax. The net effect of these adjustments was recorded as an increase to retained earnings as of April 2, 2022.
Recently issued authoritative guidance not yet adopted
Reference Rate Reform. Inended March 2020, the FASB issued new guidance providing temporary optional expedients and exceptions to ease the financial reporting burden of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. The standard was effective upon issuance and may generally be applied through December 31, 2022, to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. We continue to evaluate our contractual arrangements and hedging relationships that reference LIBOR.2023.
Although there are several other new accounting pronouncements issued or proposed by the FASB that we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had, or will have, a material impact on our Condensed Consolidated Financial Statements and disclosures.
Note 3. Assets Held for Sale
Assets held for sale
During fiscal 2020, we reclassified certain land and buildings previously reported as property and equipment to assets held for sale when the properties were approved for immediate sale in their present condition and the sale was expected to be completed within one year.
We continue to actively market the remaining properties for sale; however, during fiscal 2023, However, the commercial real estate market continues to bewas adversely affected by the COVID-19 pandemic, which delayed the expected timing of such sales.
On June 28, 2023, we completed the sale of certain land and buildings in Dublin, Ireland, which was previously classified as held for sale as of March 31, 2023, for cash consideration of $13 million, net of selling costs, and recognized a gain on sale of $4 million.
We continue to actively market the remaining properties for sale. We have taken into consideration the current real estate values and demand and continue to execute plans to sell these properties. As of July 1, 2022,June 30, 2023, these assets are classified as assets held for sale. During the three months ended July 1, 2022June 30, 2023, there were no impairments because the fair value of the properties less costs to sell either equals or exceeds their carrying value.
On July 28, 2023, we entered into an agreement to sell certain land and buildings in Tucson, Arizona, which were previously classified as held for sale as of June 30, 2023 and March 31, 2023, for cash consideration of $13 million, net of selling costs. The transaction is expected to close during the third quarter of fiscal 2024.
Note 4. Business Combinations
Proposed Merger withFiscal 2023 Avast acquisition
On August 10, 2021,During the second quarter of fiscal 2023, we announced a transaction under which we intendacquired all of the outstanding common stock of Avast. Prior to acquire the entire issued and to be issued ordinary share capital ofacquisition, Avast plc, a public company incorporated in England and Wales andwas a global leader in consumer cybersecurity, offering a comprehensive range of digital security and privacy headquartered in Prague, Czech Republic (Avastproducts and such transaction,services that protected and enhanced users’ online experiences. With this acquisition, we are positioned to provide a broad and complementary consumer product portfolio with greater geographic diversification and access to a larger user base. The total consideration for the Proposed Merger). acquisition of Avast was approximately $8,688 million, net of cash acquired.
Our current allocation of the aggregate purchase price, based on the estimated fair values of the assets acquired and liabilities assumed, as of the acquisition date, inclusive of measurement period adjustments, is as follows:
| | | | | |
| (In millions) | September 12, 2022 |
| Assets: | |
| Accounts receivable | $ | 63 | |
| Other current assets | 17 | |
| Property and equipment | 33 | |
| Operating lease assets | 18 | |
| Intangible assets | 2,383 | |
| Goodwill | 7,349 | |
| Other long-term assets | 11 | |
| Total assets acquired | 9,874 | |
| Liabilities: | |
| Current liabilities | 180 | |
| Contract liabilities | 509 | |
| Operating lease liabilities | 18 | |
| Long-term deferred tax liabilities | 433 | |
| Other long-term obligations | 46 | |
| Total liabilities assumed | 1,186 | |
| Total purchase price | $ | 8,688 | |
The Proposed Merger willallocation of the purchase price is based upon a preliminary valuation, and as additional information becomes available, our estimates and assumptions may be implemented by means of a court-sanctioned scheme of arrangement under the UK Companies Act 2006, as amended (the Scheme), and remains subject to a certain number of conditions. Underrefinement within the terms ofmeasurement period, which may be up to one year from the Proposed Merger, Avast shareholders will be entitledacquisition date. Adjustments to elect to receive, for each ordinary share of Avast held, in respect of their entire holding of Avast shares, either: (i) $7.61 in cash and 0.0302 of a new share of our common stock (such option, the Majority Cash Option); or (ii) $2.37 in cash and 0.1937 of a new share of our common stock (such option, the Majority Stock Option). Based on our undisturbed closing share price of $27.20 on July 13, 2021, and depending on the Avast shareholder elections, the estimated purchase price range formay require adjustments to goodwill prospectively. The primary area of preliminary purchase price allocation that is not yet finalized are certain tax matters. There were immaterial measurement period adjustments during the Avast shares under the Proposed Merger is $8.1 billion to $8.6 billion. Each of the directors of Avast who holds shares has undertaken to elect for the Majority Stock Option in respect of their entire beneficial holdings of Avast shares. We plan to finance the Proposed Merger with existing cash, cash to be generated by operations and new debt financing.three months ended June 30, 2023.
In conjunction with the Proposed Merger, on August 10, 2021, we entered into an agreement (as amended, the Interim Facilities Agreement) with certain financial institutions, in which they agreed to provide us with (i) a $3,600 million term loan interim facility B (the Interim Facility B), (ii) $750 million term loan interim facility A1 (the Interim Facility A1) and $3,500 million term loan interim facility A2 (the Interim Facility A2), and (iii) a $1,500 million interim revolving facility (the Interim Revolving
Facility) (collectively, the Interim Facilities) and a commitment letter (as amended, the Commitment Letter) with certain financial institutions, in which they agreed to provide us with financing no less than the financing available under the Interim Facilities (the Definitive Facilities and, together with the Interim Facilities, the Facilities) to finance the cash consideration payable in connection with the Proposed Merger. The Definitive Facilities will be financed by a syndicate of lenders led by Bank of America, N.A. and Wells Fargo Bank N.A. On January 28, 2022, Bank of America N.A. and Wells Fargo Bank N.A. agreed to arrange, on a best efforts basis, additional term loans under the Definitive Facilities in an amount up to $500 million. The Interim Facilities Agreement contains, and any definitive financing documentation for the Definitive Facilities entered into in connection with the Commitment Letter (the Facilities Agreement) will contain, customary representations and warranties, events of default and covenants for transactions of this type. The Facilities Agreement will replace the existing credit facility agreement upon the close of the transaction.
In conjunction with the Proposed Merger, on August 10, 2021, we entered into a Co-operation Agreement (the Co-operation Agreement) with Nitro Bidco Limited, our wholly-owned subsidiary (Bidco), and Avast, pursuant to which we and Bidco agreed to, among other things, use all reasonable endeavors for the purposes of obtaining any regulatory authorizations which are required to implement the Proposed Merger, and we, Bidco and Avast agreed to cooperate with each other in preparing required transaction documents and certain other matters in connection with the Proposed Merger. The Co-operation Agreement also contains certain termination rights. The Co-operation Agreement also provides that, subject to certain exceptions, if we fail to receive approval from the U.K. Competition and Markets Authority and cannot consummate the Proposed Merger, we may be required to pay Avast a break fee of up to $200 million.
The Proposed Merger was approved by our Board of Directors and by our shareholders, the Board of Directors and shareholders of Avast, and regulators including the Federal Trade Commission under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act) and in Europe, the German Federal Cartel Office and the Spanish National Markets and Competition Commission. On August 3, 2022, the U.K. Competition and Markets Authority (CMA) provisionally cleared the Proposed Merger. Subject to final approval by the CMA and changes based on operational considerations mutually agreed upon by the parties and other requirements, the closing is anticipated to be between mid-September to early October 2022, given the CMA’s published schedule and the currently scheduled U.K. Court Hearing to approve the scheme.
Note 5. Revenues
Contract liabilities
During the three months ended June 30, 2023, we recognized $700 million from the contract liabilities balances as of March 31, 2023. During the three months ended July 1, 2022, we recognized $508 million from the contract liabilities balancebalances as of April 1, 2022. During the three months ended July 2, 2021, we recognized $498 million from the contract liabilities balance as of April 2, 2021.
Remaining performance obligations
Remaining performance obligations represent contract revenue that has not been recognized, which include contract liabilities and amounts that will be billed and recognized as revenue in future periods. As of July 1, 2022,June 30, 2023, we had $783$1,219 million of remaining performance obligations, excluding customer deposit liabilities of $437$490 million, of which we expect to recognize approximately 94% as revenue over the next 12 months.
See Note 17 for tabular disclosures of disaggregated revenue by solution and geographic region.
Note 6. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill were as follows:
| | | | | |
| (In millions) | |
Balance as of April 1, 2022March 31, 2023 | $ | 2,87310,217 | |
| |
| |
| Translation adjustments | (12)24 | |
Balance as of July 1, 2022June 30, 2023 | $ | 2,86110,241 | |
Intangible assets, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 1, 2022 | | April 1, 2022 |
| (In millions) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer relationships | $ | 583 | | | $ | (403) | | | $ | 180 | | | $ | 583 | | | $ | (382) | | | $ | 201 | |
| Developed technology | 217 | | | (148) | | | 69 | | | 217 | | | (143) | | | 74 | |
| Other | 8 | | | (3) | | | 5 | | | 8 | | | (3) | | | 5 | |
| Total finite-lived intangible assets | 808 | | | (554) | | | 254 | | | 808 | | | (528) | | | 280 | |
| Indefinite-lived trade names | 739 | | | — | | | 739 | | | 743 | | | — | | | 743 | |
| Total intangible assets | $ | 1,547 | | | $ | (554) | | | $ | 993 | | | $ | 1,551 | | | $ | (528) | | | $ | 1,023 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | March 31, 2023 |
| (In millions) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer relationships | $ | 1,643 | | | $ | (608) | | | $ | 1,035 | | | $ | 1,641 | | | $ | (549) | | | $ | 1,092 | |
| Developed technology | 1,464 | | | (337) | | | 1,127 | | | 1,462 | | | (279) | | | 1,183 | |
| Other | 91 | | | (10) | | | 81 | | | 91 | | | (8) | | | 83 | |
| Total finite-lived intangible assets | 3,198 | | | (955) | | | 2,243 | | | 3,194 | | | (836) | | | 2,358 | |
| Indefinite-lived trade names | 739 | | | — | | | 739 | | | 739 | | | — | | | 739 | |
| Total intangible assets | $ | 3,937 | | | $ | (955) | | | $ | 2,982 | | | $ | 3,933 | | | $ | (836) | | | $ | 3,097 | |
Amortization expense for purchased intangible assets is summarized below: | | | Three Months Ended | | | Condensed Consolidated Statements of Operations Classification | | Three Months Ended | | Condensed Consolidated Statements of Operations Classification |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | | (In millions) | June 30, 2023 | | | Condensed Consolidated Statements of Operations Classification |
| Customer relationships and other | Customer relationships and other | $ | 21 | | | $ | 21 | | | | Operating expenses | Customer relationships and other | $ | 61 | | | $ | 21 | | |
| Developed technology | Developed technology | 5 | | | 10 | | | | Cost of revenues | Developed technology | 57 | | | 5 | | | Cost of revenues |
| Total | Total | $ | 26 | | | $ | 31 | | | | | Total | $ | 118 | | | $ | 26 | | |
As of July 1, 2022,June 30, 2023, future amortization expense related to intangible assets that have finite lives is as follows by fiscal year: | | (In millions) | (In millions) | | (In millions) | |
| Remainder of 2023 | $ | 79 | | |
| 2024 | 93 | | |
| Remainder of 2024 | | Remainder of 2024 | $ | 344 | |
| 2025 | 2025 | 32 | | 2025 | 401 | |
| 2026 | 2026 | 26 | | 2026 | 395 | |
| 2027 | 2027 | 12 | | 2027 | 382 | |
| 2028 | | 2028 | 379 | |
| Thereafter | Thereafter | 12 | | Thereafter | 342 | |
| Total | Total | $ | 254 | | Total | $ | 2,243 | |
Note 7. Supplementary Information
Cash and cash equivalents:
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| Cash | Cash | $ | 509 | | | $ | 609 | | Cash | $ | 542 | | | $ | 576 | |
| Cash equivalents | Cash equivalents | 782 | | | 1,278 | | Cash equivalents | 81 | | | 174 | |
| Total cash and cash equivalents | Total cash and cash equivalents | $ | 1,291 | | | $ | 1,887 | | Total cash and cash equivalents | $ | 623 | | | $ | 750 | |
Accounts receivable, net:
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| Accounts receivable | Accounts receivable | $ | 103 | | | $ | 121 | | Accounts receivable | $ | 146 | | | $ | 169 | |
| Allowance for doubtful accounts | Allowance for doubtful accounts | (1) | | | (1) | | Allowance for doubtful accounts | (1) | | | (1) | |
| Total accounts receivable, net | Total accounts receivable, net | $ | 102 | | | $ | 120 | | Total accounts receivable, net | $ | 145 | | | $ | 168 | |
Other current assets:
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| Prepaid expenses | Prepaid expenses | $ | 113 | | | $ | 107 | | Prepaid expenses | $ | 118 | | | $ | 122 | |
| Income tax receivable and prepaid income taxes | Income tax receivable and prepaid income taxes | 26 | | | 35 | | Income tax receivable and prepaid income taxes | 86 | | | 123 | |
| Other tax receivable | Other tax receivable | 19 | | | 27 | | Other tax receivable | 45 | | | 16 | |
| Other | Other | 22 | | | 24 | | Other | 48 | | | 23 | |
| Total other current assets | Total other current assets | $ | 180 | | | $ | 193 | | Total other current assets | $ | 297 | | | $ | 284 | |
Property and equipment, net:
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| Land | Land | $ | 2 | | | $ | 2 | | Land | $ | 13 | | | $ | 13 | |
| Computer hardware and software | Computer hardware and software | 464 | | | 462 | | Computer hardware and software | 498 | | | 498 | |
| Office furniture and equipment | Office furniture and equipment | 26 | | | 27 | | Office furniture and equipment | 17 | | | 17 | |
| Buildings | Buildings | 25 | | | 27 | | Buildings | 28 | | | 28 | |
| Leasehold improvements | Leasehold improvements | 54 | | | 56 | | Leasehold improvements | 28 | | | 28 | |
| Construction in progress | Construction in progress | 1 | | | 1 | | Construction in progress | 4 | | | 1 | |
| Total property and equipment, gross | Total property and equipment, gross | 572 | | | 575 | | Total property and equipment, gross | 588 | | | 585 | |
| Accumulated depreciation and amortization | Accumulated depreciation and amortization | (516) | | | (515) | | Accumulated depreciation and amortization | (515) | | | (509) | |
| Total property and equipment, net | Total property and equipment, net | $ | 56 | | | $ | 60 | | Total property and equipment, net | $ | 73 | | | $ | 76 | |
Other long-term assets:
| | | | | | | | | | | |
| (In millions) | June 30, 2023 | | March 31, 2023 |
| Non-marketable equity investments | $ | 176 | | | $ | 176 | |
| Long-term income tax receivable and prepaid income taxes | 691 | | | 669 | |
| Deferred income tax assets | 401 | | | 353 | |
| Long-term prepaid royalty | 32 | | | 36 | |
| Other | 66 | | | 47 | |
| Total other long-term assets | $ | 1,366 | | | $ | 1,281 | |
Short-term contract liabilities:
| | | | | | | | | | | |
| (In millions) | June 30, 2023 | | March 31, 2023 |
| Deferred revenue | $ | 1,141 | | | $ | 1,153 | |
| Customer deposit liabilities | 490 | | | 555 | |
| Total short-term contract liabilities | $ | 1,631 | | | $ | 1,708 | |
Other long-term assets:
| | | | | | | | | | | |
| (In millions) | July 1, 2022 | | April 1, 2022 |
| Non-marketable equity investments | $ | 178 | | | $ | 178 | |
| Long-term income tax receivable and prepaid income taxes | 23 | | | 25 | |
| Deferred income tax assets | 344 | | | 351 | |
| Long-term prepaid royalty | 48 | | | 53 | |
| Other | 45 | | | 46 | |
| Total other long-term assets | $ | 638 | | | $ | 653 | |
Short-term contract liabilities:
| | | | | | | | | | | |
| (In millions) | July 1, 2022 | | April 1, 2022 |
| Deferred revenue | $ | 746 | | | $ | 743 | |
| Customer deposit liabilities | 437 | | | 521 | |
| Total short-term contract liabilities | $ | 1,183 | | | $ | 1,264 | |
Other current liabilities:
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| Income taxes payable | Income taxes payable | $ | 148 | | | $ | 109 | | Income taxes payable | $ | 188 | | | $ | 172 | |
| Other taxes payable | Other taxes payable | 70 | | | 87 | | Other taxes payable | 90 | | | 76 | |
| Accrued legal fees | Accrued legal fees | 330 | | | 273 | | Accrued legal fees | 270 | | | 284 | |
| Accrued royalties | Accrued royalties | 46 | | | 49 | | Accrued royalties | 46 | | | 48 | |
| Accrued interest | | Accrued interest | 39 | | | 27 | |
| Other | Other | 95 | | | 121 | | Other | 102 | | | 96 | |
| Total other current liabilities | Total other current liabilities | $ | 689 | | | $ | 639 | | Total other current liabilities | $ | 735 | | | $ | 703 | |
Long-term income taxes payable:
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| Deemed repatriation tax payable | Deemed repatriation tax payable | $ | 437 | | | $ | 437 | | Deemed repatriation tax payable | $ | 310 | | | $ | 310 | |
| Other long-term income taxes | Other long-term income taxes | 3 | | | 3 | | Other long-term income taxes | 1 | | | 1 | |
| Uncertain tax positions (including interest and penalties) | Uncertain tax positions (including interest and penalties) | 556 | | | 556 | | Uncertain tax positions (including interest and penalties) | 530 | | | 509 | |
| Total long-term income taxes payable | Total long-term income taxes payable | $ | 996 | | | $ | 996 | | Total long-term income taxes payable | $ | 841 | | | $ | 820 | |
Other income (expense), net:
| | | Three Months Ended | | | Three Months Ended |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | (In millions) | June 30, 2023 | | July 1, 2022 |
| Interest income | Interest income | $ | 2 | | | $ | — | | | Interest income | $ | 6 | | | $ | 2 | |
| Foreign exchange gain (loss) | Foreign exchange gain (loss) | (1) | | | 1 | | | Foreign exchange gain (loss) | 1 | | | (1) | |
| Gain (loss) on early extinguishment of debt | — | | | (5) | | | |
| | Gain on sale of properties | | Gain on sale of properties | 4 | | | — | |
| Other | Other | (2) | | | 1 | | | Other | 1 | | | (2) | |
| Other income (expense), net | Other income (expense), net | $ | (1) | | | $ | (3) | | | Other income (expense), net | $ | 12 | | | $ | (1) | |
Supplemental cash flow information:
| | | | | | | | | | | |
| Three Months Ended |
| (In millions) | July 1, 2022 | | July 2, 2021 |
| Income taxes paid, net of refunds | $ | 1 | | | $ | 14 | |
| Interest expense paid | $ | 46 | | | $ | 44 | |
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 6 | | | $ | 8 | |
| | | |
| | | |
| | | |
| Non-cash investing and financing activities: | | | |
| | | |
| Extinguishment of debt with borrowings from same creditors | $ | — | | | $ | 494 | |
| | | | | | | | | | | |
| Three Months Ended |
| (In millions) | June 30, 2023 | | July 1, 2022 |
| Income taxes paid, net of refunds | $ | 21 | | | $ | 1 | |
| Interest expense paid | $ | 155 | | | $ | 46 | |
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 8 | | | $ | 6 | |
| Non-cash operating activities: | | | |
| | | |
| Reduction of operating lease assets as a result of lease terminations and modifications | $ | (1) | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
Note 8. Financial Instruments and Fair Value Measurements
For financial instruments measured at fair value, fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability.
The three levels of inputs that may be used to measure fair value are:
•Level 1: Quoted prices in active markets for identical assets or liabilities.
•Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets or model-derived valuations. All significant inputs used in our valuations, such as discounted cash flows, are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Assets measured and recorded at fair value on a recurring basis
The following table summarizes our financial instruments measured at fair value on a recurring basis:
| | | July 1, 2022 | | April 1, 2022 | | June 30, 2023 | | March 31, 2023 |
| (In millions) | (In millions) | Fair Value | | Level 1 | | Level 2 | | Fair Value | | Level 1 | | Level 2 | (In millions) | Fair Value | | Level 1 | | Level 2 | | Fair Value | | Level 1 | | Level 2 |
| Assets: | Assets: | | | | | | | | | | | | Assets: | | | | | | | | | | | |
| Money market funds | Money market funds | $ | 782 | | | $ | 782 | | | $ | — | | | $ | 1,278 | | | $ | 1,278 | | | $ | — | | Money market funds | $ | 81 | | | $ | 81 | | | $ | — | | | $ | 174 | | | $ | 174 | | | $ | — | |
| | Corporate bonds | — | | | — | | | — | | | 4 | | | — | | | 4 | | |
Interest rate swaps (1) | | Interest rate swaps (1) | 19 | | | — | | | 19 | | | — | | | — | | | — | |
| Total | Total | $ | 782 | | | $ | 782 | | | $ | — | | | $ | 1,282 | | | $ | 1,278 | | | $ | 4 | | Total | $ | 100 | | | $ | 81 | | | $ | 19 | | | $ | 174 | | | $ | 174 | | | $ | — | |
(1) The fair value of our interest rate swaps is less than $1 million as of March 31, 2023.
Financial instruments not recorded at fair value on a recurring basis include our non-marketable equity investments and long-term debt.
Non-marketable equity investments
As of July 1, 2022June 30, 2023 and April 1, 2022,March 31, 2023, the carrying value of our non-marketable equity investments was $178 million.$176 million and $176 million, respectively.
Current and long-term debt
As of July 1, 2022June 30, 2023 and April 1, 2022,March 31, 2023, the total fair value of our current and long-term fixed rate debt was $1,597$2,578 million and $2,021$2,593 million, respectively. The fair value of our variable rate debt approximated its carrying value. The fair values of all our debt obligations were based on Level 2 inputs.
Note 9. Leases
We lease certain of our facilities, equipment and data center co-locations under operating leases that expire on various dates through fiscal 2029. Our leases generally have terms that range from 1 year to 8 years for our facilities, 1 year to 3 years for equipment and 1 year to 5 years for data center co-locations. Some of our leases contain renewal options, escalation clauses, rent concessions and leasehold improvement incentives.
The following summarizes our lease costs:
| | | Three Months Ended | | | Three Months Ended |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | (In millions) | June 30, 2023 | | July 1, 2022 |
| Operating lease costs | Operating lease costs | $ | 4 | | | $ | 4 | | | Operating lease costs | $ | 4 | | | $ | 4 | |
| Short-term lease costs | Short-term lease costs | 1 | | | 1 | | | Short-term lease costs | — | | | 1 | |
| Variable lease costs | Variable lease costs | 1 | | | 1 | | | Variable lease costs | 1 | | | 1 | |
| Total lease costs | Total lease costs | $ | 6 | | | $ | 6 | | | Total lease costs | $ | 5 | | | $ | 6 | |
Other information related to our operating leases was as follows:
| | | Three Months Ended | | Three Months Ended |
| | July 1, 2022 | | July 2, 2021 | | June 30, 2023 | | July 1, 2022 |
| Weighted-average remaining lease term | Weighted-average remaining lease term | 4.6 years | | 4.2 years | Weighted-average remaining lease term | 3.0 years | | 4.6 years |
| Weighted-average discount rate | Weighted-average discount rate | 4.05 | % | | 4.11 | % | Weighted-average discount rate | 4.49 | % | | 4.05 | % |
See Note 7 for cash flow information related to our operating leases.
As of July 1, 2022,June 30, 2023, the maturities of our lease liabilities by fiscal year are as follows: | | (In millions) | (In millions) | | (In millions) | |
| Remainder of 2023 | $ | 16 | | |
| 2024 | 26 | | |
| Remainder of 2024 | | Remainder of 2024 | $ | 20 | |
| 2025 | 2025 | 21 | | 2025 | 16 | |
| 2026 | 2026 | 15 | | 2026 | 8 | |
| 2027 | 2027 | 15 | | 2027 | 7 | |
| 2028 | | 2028 | 2 | |
| Thereafter | Thereafter | 3 | | Thereafter | 1 | |
| Total lease payments | Total lease payments | 96 | | Total lease payments | 54 | |
| Less: Imputed interest | Less: Imputed interest | (8) | | Less: Imputed interest | (3) | |
| Present value of lease liabilities | Present value of lease liabilities | $ | 88 | | Present value of lease liabilities | $ | 51 | |
Note 10. Debt
The following table summarizes components of our debt:
| | (In millions, except percentages) | (In millions, except percentages) | July 1, 2022 | | April 1, 2022 | | Effective
Interest Rate | (In millions, except percentages) | June 30, 2023 | | March 31, 2023 | | Effective
Interest Rate |
| 3.95% Senior Notes due June 15, 2022 | $ | — | | | $ | 400 | | | 4.05 | % | |
| New 2.00% Convertible Unsecured Notes due August 15, 2022 | 525 | | | 525 | | | 2.62 | % | |
| 5.00% Senior Notes due April 15, 2025 | 5.00% Senior Notes due April 15, 2025 | 1,100 | | | 1,100 | | | 5.00 | % | 5.00% Senior Notes due April 15, 2025 | $ | 1,100 | | | $ | 1,100 | | | 5.00 | % |
| Initial Term Loan due May 7, 2026 | 1,009 | | | 1,010 | | | LIBOR plus (1) | |
| Delayed Term loan due May 7, 2026 | 694 | | | 703 | | | LIBOR plus (1) | |
| 0.95% Avira Mortgage due December 30, 2030 | 4 | | | 4 | | | 0.95 | % | |
| 1.29% Avira Mortgage due December 30, 2029 | 4 | | | 5 | | | 1.29 | % | |
| Term A Facility due September 12, 2027 | | Term A Facility due September 12, 2027 | 3,812 | | | 3,861 | | | SOFR + % (2) |
| 6.75% Senior Notes due September 30, 2027 | | 6.75% Senior Notes due September 30, 2027 | 900 | | | 900 | | | 6.75 | % |
| Term B Facility due September 12, 2029 | | Term B Facility due September 12, 2029 | 3,272 | | | 3,431 | | | SOFR + % (3) |
1.29% Avira Mortgage due December 30, 2029 (1) | | 1.29% Avira Mortgage due December 30, 2029 (1) | 4 | | | 4 | | | 1.29 | % |
| 7.125% Senior Notes due September 30, 2030 | | 7.125% Senior Notes due September 30, 2030 | 600 | | | 600 | | | 7.13 | % |
0.95% Avira Mortgage due December 30, 2030 (1) | | 0.95% Avira Mortgage due December 30, 2030 (1) | 3 | | | 3 | | | 0.95 | % |
| Total principal amount | Total principal amount | 3,336 | | | 3,747 | | | Total principal amount | 9,691 | | | 9,899 | | |
| Less: unamortized discount and issuance costs | Less: unamortized discount and issuance costs | (8) | | | (11) | | | Less: unamortized discount and issuance costs | (131) | | | (137) | | |
| Total debt | Total debt | 3,328 | | | 3,736 | | | Total debt | 9,560 | | | 9,762 | | |
| Less: current portion | Less: current portion | (614) | | | (1,000) | | | Less: current portion | (233) | | | (233) | | |
| Total long-term debt | Total long-term debt | $ | 2,714 | | | $ | 2,736 | | | Total long-term debt | $ | 9,327 | | | $ | 9,529 | | |
(1) The term loans bearAvira Mortgages are denominated in a foreign currency so the balances of these mortgages may fluctuate based on changes in foreign currency exchange rates.
(2) Term A Facility due 2027 bears interest at a rate equal to LIBORTerm SOFR plus a credit spread adjustment (CSA) plus a margin based either on the current debt rating of our non-credit-enhanced, senior unsecured long-term debt or consolidated adjusted leverage as defined in the underlying loan agreement.
(3) Term B Facility due 2029 bears interest at a rate equal to Term SOFR plus CSA plus 2.00%.
The interest rates for the outstanding term loans are as follows:
| | | | | | | | | | | |
| July 1, 2022 | | April 1, 2022 |
| Initial Term Loan due May 7, 2026 | 2.94 | % | | 1.75 | % |
| Delayed Term Loan due May 7, 2026 | 2.94 | % | | 1.75 | % |
| | | | | | | | | | | |
| June 30, 2023 | | March 31, 2023 |
| Term A Facility due September 12, 2027 | 6.95 | % | | 6.66 | % |
| Term B Facility due September 12, 2029 | 7.20 | % | | 6.91 | % |
As of July 1, 2022,June 30, 2023, the future contractual maturities of debt by fiscal year are as follows:
| | (In millions) | (In millions) | | (In millions) | |
| Remainder of 2023 | $ | 592 | | |
| 2024 | 89 | | |
| Remainder of 2024 | | Remainder of 2024 | $ | 175 | |
| 2025 | 2025 | 89 | | 2025 | 234 | |
| 2026 | 2026 | 1,189 | | 2026 | 1,333 | |
| 2027 | 2027 | 1,374 | | 2027 | 233 | |
| 2028 | | 2028 | 4,017 | |
| Thereafter | Thereafter | 3 | | Thereafter | 3,699 | |
| Total future maturities of debt | Total future maturities of debt | $ | 3,336 | | Total future maturities of debt | $ | 9,691 | |
Senior credit facilities
On September 12, 2022, 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 close of the acquisition of Avast. The Credit Agreement provides that we have the right at any time, subject to customary conditions, to request incremental revolving commitments and incremental term loans up to an unlimited amount, subject to certain customary conditions precedent and other provisions. The lenders under these facilities will not be under any obligation to provide any such incremental loans or commitments. 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 and accrued interest of the existing credit facilities. The Credit Agreement replaced the existing credit facilities upon the close of the transaction. The Revolving Facility and Term A Facility will mature in September 2027, and the Term Facility B will mature in September 2029; the senior credit facilities remain senior secured.
Credit facility
We have a credit agreement with financial institutions, which provides a revolving line of credit of $1 billion, a 5-year term loan of $500 million (the Initial Term Loan) and a delayed draw 5-year term loan commitment of $750 million (the Delayed Draw Term Loan). An amendment to the agreement (the First Amendment) also provides for an incremental increase under the Initial Term Loan of $525 million. All term loans and revolver credit facilities mature in May 2026, and the credit facilities remain senior secured.
The principal amountamounts of the Initial Term Loan and the additional borrowings under the First AmendmentFacility A must be repaid in quarterly installments on the last business day of each calendar quarter in an amount equal to 1.25% of the aggregate principal amount as of the date of the First Amendment.Credit Agreement. The principal amountamounts of the Delayed Draw Term LoanFacility B must be repaid in quarterly installments on the last business day of each calendar quarter in an amount equal to 1.25%0.25% of the aggregate principal amount as of the borrowing date of the Delayed Draw Term Loan.Credit Agreement. Quarterly installment payments commenced on March 31, 2023. We may voluntarily repay outstanding principal balances under the Revolving Facility and both Term Loan facilities without penalty. As of July 1, 2022,June 30, 2023, there were no borrowings outstanding under our revolvingRevolving Facility; however, from time to time we utilize letters of credits as part of our ordinary course of business. Letters of credit facilities.reduce our Revolving Facility commitment amounts.
Interest on borrowings under the credit agreementCredit Agreement can be based on a base rate or the LIBORSOFR at our election. Based on our debt ratings and our consolidated leverage ratios as determined in accordance with the credit agreement,Credit Agreement, loans borrowed bear interest, in the case of base rate loans, at a per annum rate equal to the applicable base rate plus CSA plus a margin ranging from 0.125% to 0.75%, and in the case of LIBORthe SOFR loans, LIBOR,SOFR, as adjusted for statutory reserves, plus a margin ranging from 1.125% to 1.75%. The unused revolving line of credit is subject to a commitment fee ranging from 0.125% to 0.30% per annum.
Debt covenant compliance
The credit agreementCredit Agreement contains customary representations and warranties, non-financial covenants for financial reporting, affirmative and negative covenants, includingcovenants. Each of the Revolving Facility and Term A Facility are subject to a covenant that we maintain a consolidated leverage ratio less than or equal to (i) 6.0 to 1.0 from the second quarter of not more thanfiscal 2023 through the last day of the second quarter of fiscal 2024, (ii) 5.75 to 1.0 following the last day of the second quarter of fiscal 2024 through the last day of the second quarter of fiscal 2025 and (iii) 5.25 to 1.0 orfor each fiscal quarter thereafter; provided that such maximum consolidated leverage ratio will increase to 5.75 to 1.0 iffor the four fiscal quarters ending immediately should we acquire assetsproperty, business or businessassets in an aggregate amount greater than $250 million,million.
In addition, the Credit Agreement contains customary events of default under which our payment obligations may be accelerated, including, among others, non-payment of principal, interest or other amounts when due, inaccuracy of representations and restrictions onwarranties, violation of certain covenants, payment and acceleration cross defaults with certain other indebtedness, liens, investments, stock repurchases,certain undischarged judgments, bankruptcy, insolvency or inability to pay debts, change of control, the occurrence of certain events related to the Employee Retirement Income Security Act of 1974 (ERISA), and dividends (with exceptions permitting our regular quarterly dividend and other specific capital returns).the Company experiencing a change of control. As of July 1, 2022June 30, 2023, we were in compliance with all debt covenants.
Interim facilitiesSenior notes
On February 9, 2017, we issued $1,100 million aggregate principal amount of our 5.0% Senior Notes due April 15, 2025 (the 5.0% Senior Notes). The 5.0% Senior Notes bear interest at a rate of 5.00% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2017. On or after April 15, 2020, we may redeem some or all of the 5.0% Senior Notes at the applicable redemption prices set forth in the supplemental indenture, plus accrued and unpaid interest.
On August 10, 2021, in conjunction with the Proposed Merger, we entered into the Interim Facilities Agreement with certain financial institutions, in which they agreed to provide us with (i) a 7-year term loan interim facility B of $3,600 million (the Interim Facility B), (ii) a 60-day term loan interim facility A1 of $750 million (the Interim Facility A1) and 5-year term loan interim facility A2 of $3,500 million (the Interim Facility A2), and (iii) a 5-year interim revolving facility of $1,500 million (the Interim Revolving Facility) (collectively, the Interim Facilities) and the Commitment Letter (as amended, the Commitment Letter) with certain financial institutions, in which the agreed to provide us with financing no less than the financing available under the Interim Facilities (the Definitive Facilities and, together with the Interim Facilities, the Facilities) to finance the cash consideration payable in connection with the Proposed Merger. The Definitive Facilities will be financed by a syndicate of lenders led by Bank of America, N.A. and Wells Fargo Bank N.A. On January 28, 2022, Bank of America, N.A. and Wells Fargo Bank N.A. agreed to arrange, on a best efforts basis, additional term loans under the Definitive Facilities in an amount up to $500 million. The Interim Facilities Agreement contains, and any definitive financing documentation for the Definitive Facilities entered into in connection with the Commitment Letter (the Facilities Agreement) will contain, customary representations and warranties, events of default and covenants for transactions of this type. The Facilities Agreement will replace the existing credit facility agreement upon the close of the transactions contemplated thereby.
Senior notes
On June 1,September 19, 2022, we fully repaid the principal and accrued interest under the 3.95%issued two series of senior notes, consisting of 6.75% Senior Notes due June 2022, which had2027 and 7.125% Senior Notes due 2030, for an aggregate principal amount outstanding of $400$1,500 million. In addition, we paid $7 millionThey are senior unsecured obligations that rank equally in right of accruedpayment with all of our existing and unpaid interest through the redemption date.
Accounting for the New 2.00% Convertible Notes
As described in Note 2, on April 2, 2022, we adopted ASU 2020-06 using the modified retrospective method. Priorfuture senior, unsecured, unsubordinated obligations and may be redeemed at any time, subject to the adoptionmake-whole provisions contained in the applicable indenture relating to such series of this guidance, we accountednotes. Interest on these series of notes is payable semi-annually in arrears on March 31 and September 30 for our convertible debt instruments underboth the cash conversion model, requiring the convertible notes to be separated into an equity6.75% Senior Notes and liability component. We recognized $56 million in equity, net of tax, which consisted of $9 million in debt discount, representing the difference between the fair value7.125% Senior Notes, commencing on March 31, 2023. We may redeem some or all of the liability component6.75% Senior Notes due 2027 and par value, and $47 million in substantial premium7.125% Senior Notes due 2030 at any time, subject to a prepayment penalty that expires one year prior to the fiscal year 2020 amendment, which was accounted for as a debt extinguishment and resulted in the recognitionmaturity of each respective note. The First Call Dates of the New 2.00% Convertible Notes.6.75% Senior Notes due 2027 and 7.125% Senior Notes due 2030 are September 30, 2024 and September 30, 2025, respectively.
Upon adoption of ASU 2020-06, the cash conversion model is now eliminated. We de-recognized the remaining unamortized debt discount of $1 million on the New 2.00% Convertible Notes and therefore will no longer recognize the related amortization as interest expense. Additionally, we recorded a cumulative adjustment to retained earnings of $6 million, net of tax, for the debt discount amortization incurred from issuance through April 2, 2022. The remaining $47 million of substantial premium will remain in equity, as the new guidance did not eliminate the substantial premium model for convertible instruments. Under this new guidance, the New 2.00% Convertible Notes included in our Condensed Consolidated Balance Sheet reflect the par value of the liability
In accordance with the New 2.00% Convertible Notes agreement, we communicated our intent to the convertible note holders to settle the principal and conversion rights in cash upon maturity in August 2022. This election did not have a material impact on our financial results.
As of July 1, 2022 and April 1, 2022, our Convertible Senior Notes consisted of the following:
| | | | | | | | | | | |
| July 1, 2022 | | April 1, 2022 |
| (In millions) | New 2.00% Convertible Notes | | New 2.00% Convertible Notes |
| Liability components: | | | |
| Principal | $ | 525 | | | $ | 525 | |
| Unamortized debt discount | — | | | (1) | |
| Net carrying amount | $ | 525 | | | $ | 524 | |
Based on the closing price of our common stock of $22.28 on July 1, 2022, the if-converted value of the New 2.00% Convertible Notes exceeded the principal amount by approximately $48 million.
The following table sets forth total interest expense recognized related to our Convertible Senior Notes:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| (In millions) | July 1, 2022 | | July 2, 2021 | | | | |
| Contractual interest expense | $ | 3 | | | $ | 3 | | | | | |
| Amortization of debt discount | $ | — | | | $ | 1 | | | | | |
Payments in lieu of conversion price adjustments (1) | $ | 1 | | | $ | 2 | | | | | |
| | | | | | | | | |
| Three Months Ended | | |
| (In millions) | July 1, 2022 | | | | |
| Contractual interest expense | $ | 3 | | | | | |
| Amortization of debt discount | — | | | | | |
Payments in lieu of conversion price adjustments (1) | $ | 1 | | | | | |
(1) Payments in lieu of conversion price adjustments consist of amounts paid to holders of the Convertible Senior Notes when our quarterly dividend to our common stockholders exceeds the amounts defined in the Convertible Senior Notes agreements.
During the three months ended June 30, 2023, we did not recognize any interest expense related to our Convertible Senior Notes as they were settled during the second quarter of fiscal year 2023.
Note 11. Derivatives
Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flow associated with changes in foreign currency exchange rates and interest rates. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign exchange rate and interest rate movements. We do not use our derivative instruments for speculative trading purposes. By using derivative financial instruments to hedge exposures to changes in foreign exchange and interest rates, we are exposed to credit risk; however, we mitigate this risk by entering into hedging instruments with highly rated institutions that can be expected to fully perform under the terms of the applicable contracts.
Foreign currency exchange forward contracts
We conduct business in numerous currencies throughout 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. As a result, we are exposed to foreign exchange gains or losses, which impactimpacts our operating results. As part of our foreign currency risk mitigation strategy, we have entered into monthly foreign exchange forward contracts.contracts to hedge foreign currency balance sheet exposure. These forward contracts are not designated as hedging instruments. 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.
We enterInterest rate swap
In March 2023, we entered into foreign currency forward contractsinterest rate swap agreements to hedge foreign currency balance sheet exposure.mitigate risks associated with the variable interest rate of our Term A Facility. These forward contractspay-fixed, receive-floating rate interest rate swaps have the economic effect of hedging the variability of forecasted interest payments until their maturity on March 31, 2026. Pursuant to the agreements, we have effectively converted $1 billion of our variable rate borrowings under Term A Facility to fixed rates, with $500 million at a fixed rate of 3.762% and $500 million at a fixed rate of 3.55%.
These arrangements are not designated as hedging instruments. As of July 1, 2022cash flow hedges for accounting purposes and April 1, 2022,as such, we will recognize the changes in the fair value of these interest rate swaps in Accumulated other comprehensive income (loss) (AOCI), and the periodic settlements or accrued settlements of the swap will be recognized within or against interest expense in our Condensed Consolidated Statements of Operations. Cash flows related to these hedges are classified under operating activities in our Condensed Consolidated Statement of Cash Flows.
Summary of derivative instruments
The following table summarizes our outstanding derivative instruments as of June 30, 2023 and March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Fair Value of Derivative Assets | | Fair Value of Derivative Liabilities |
| (In millions) | June 30, 2023 | | March 31, 2023 | | June 30, 2023 | | March 31, 2023 | | June 30, 2023 | | March 31, 2023 |
Foreign exchange contracts not designated as hedging instrument (1) | $ | 249 | | | $ | 291 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Interest rate swap contracts designed as cash flow hedge | 1,000 | | | 1,000 | | | 19 | | | 1 | | | — | | | 2 | |
| Total | $ | 1,249 | | | $ | 1,291 | | | $ | 19 | | | $ | 1 | | | $ | — | | | $ | 2 | |
(1) The fair values of the foreign exchange contracts was immaterial. are less than $1 million as of June 30, 2023 and March 31, 2023.
The following table summarizes the effect of our cash flow hedges on AOCI during the periods indicated:
| | | | | | | | | | | |
| Three Months Ended |
| (In millions) | June 30, 2023 | | July 1, 2022 |
| Interest rate swap contracts designed as cash flow hedge | $ | (22) | | | $ | — | |
The related gain (loss) recognized in Other income (expense), net in our Condensed Consolidated Statements of Operations, with presentation location was as follows: | | | Three Months Ended | | | Three Months Ended | | Condensed Consolidated Statements of Operations Classification |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | (In millions) | June 30, 2023 | | | Condensed Consolidated Statements of Operations Classification |
| Foreign exchange forward contracts gain (loss) | $ | (7) | | | $ | 3 | | | |
| Foreign exchange contracts not designated as hedging instrument | | Foreign exchange contracts not designated as hedging instrument | $ | (3) | | | $ | (7) | | | Other income (expense), net |
| Interest rate swap contracts designed as cash flow hedge | | Interest rate swap contracts designed as cash flow hedge | 3 | | | — | | | Interest expense |
| Total | | Total | $ | — | | | $ | (7) | | |
The notional amountAs of June 30, 2023, we estimate that $15 million of net deferred gains related to our outstanding foreign exchange forward contractsinterest rate hedges will be recognized in U.S. dollar equivalent was as follows: | | | | | | | | | | | |
| (In millions) | July 1, 2022 | | April 1, 2022 |
| Foreign exchange forward contracts purchased | $ | 156 | | | $ | 155 | |
| Foreign exchange forward contracts sold | $ | 82 | | | $ | 191 | |
Note 12. Restructuring and Other Costs
Our restructuring and other costs consist primarily of severance and termination benefits, contract cancellation charges, asset write-offs and impairments and other exit and disposal costs. Severance costs generally include severance payments, outplacement services, health insurance coverage and legal costs. Contract cancellation charges primarily include penalties for early termination of contracts and write-offs of related prepaid assets. Other exit and disposal costs include costs to exit and consolidate facilities in connection with restructuring events. Separation costs primarily consist of consulting costs incurred in connection with our divestitures.
December 2020September 2022 Plan
In December 2020,connection with our acquisition of Avast, our Board of Directors approved a restructuring plan (the December 2020September 2022 Plan) to consolidaterealize cost savings and operational synergies, which became effective upon the close of acquisition on September 12, 2022. Actions under this plan include the reduction of our workforce, contract terminations, facilities closures, and reduce operatingthe sale of underutilized facilities as well as stock-based compensation charges for accelerated equity awards to certain terminated employees. We expect that we will incur total costs in connectionup to $150 million, with our acquisition$120 million and $30 million estimated to be incurred within the first and second full years, respectively, following the completion of Avira.acquisition. These actions wereare expected to be completed inby fiscal 2022. Any remaining costs or adjustments are immaterial. We2024. As of June 30, 2023, we have incurred total costs of $24$86 million underrelated to the December 2020September 2022 Plan.
Our activities and liabilities related to our September 2022 Plan are presented in the table below: | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Liability Balance as of March 31, 2023 | | Costs, Net of Adjustments | | Cash Payments | | | | Liability Balance as of June 30, 2023 |
| Severance and termination benefit costs | $ | 7 | | | $ | 11 | | | $ | (7) | | | | | $ | 11 | |
| Contract cancellation charges | — | | | 1 | | | (1) | | | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Other exit and disposal costs | — | | | 5 | | | (5) | | | | | — | |
| Total | $ | 7 | | | $ | 17 | | | $ | (13) | | | | | $ | 11 | |
The restructuring liabilities are included in Other current liabilities in our Condensed Consolidated Balance Sheets.
Restructuring and other costs summary
DuringOur restructuring and other costs are presented in the three months ended July 1, 2022 and July 2, 2021, we incurred total restructuring costs of $2 million and $7 million, respectively.table below: | | | | | | | | | | | |
| Three Months Ended |
| (In millions) | June 30, 2023 | | July 1, 2022 |
| Severance and termination benefit costs | $ | 11 | | | $ | — | |
| Contract cancellation charges | 1 | | | — | |
| | | |
| | | |
| Other exit and disposal costs | 5 | | | 2 | |
| | | |
| | | |
| Total restructuring and other costs | $ | 17 | | | $ | 2 | |
Note 13. Income Taxes
The following table summarizes our effective tax rate for the periods presented:
| | | Three Months Ended | | | Three Months Ended |
| (In millions, except percentages) | (In millions, except percentages) | July 1, 2022 | | July 2, 2021 | | (In millions, except percentages) | June 30, 2023 | | July 1, 2022 |
| Income (loss) before income taxes | Income (loss) before income taxes | $ | 229 | | | $ | 252 | | | Income (loss) before income taxes | $ | 204 | | | $ | 229 | |
| Income tax expense (benefit) | Income tax expense (benefit) | $ | 29 | | | $ | 71 | | | Income tax expense (benefit) | $ | 15 | | | $ | 29 | |
| Effective tax rate | Effective tax rate | 13 | % | | 28 | % | | Effective tax rate | 7 | % | | 13 | % |
Our effective tax rate for the three months ended June 30, 2023, differs from the federal statutory income tax rate primarily due to tax benefits related to the set up and write-off of deferred tax items from an internal restructuring, partially offset by state taxes and the U.S. taxation on foreign earnings.
Our effective tax rate for the three months ended July 1, 2022, differs from the federal statutory income tax rate primarily due to tax benefits related to the foreign currency remeasurement of an Irish deferred tax asset and discrete legal expenses booked during the quarter, partially offset by state taxes.
Our effective tax rate for the three months ended July 2, 2021 differs from the federal statutory income tax rate primarily due to state taxes, partially offset by the benefits of lower-tax international earnings and various permanent differences.
We are a U.S.-based multinational company dual headquartered in the U.S. and Czech Republic, although our principal executive offices remain in Tempe, Arizona, and we are 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 is therefore difficult to predict.
In connection with our Avast integration plan, in July 2023, we executed a legal entity restructuring as part of an ongoing effort to simplify our business operational and tax structure. We are evaluating the impact of this transaction on our Condensed Consolidated Financial Statements, however, an estimate of the impact cannot be made at this time.
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 theAlthough 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 ourthe gross unrecognized tax benefits related to these audits could decrease (whether by payment, release, or a combination of both) in the next 12 months. Depending on the nature of the settlement or expiration of statutes of limitations, it could affect our income tax provision and therefore benefit the resulting effective tax rate.
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.
Note 14. Stockholders' Equity
Dividends
On August 4, 2022,3, 2023, we announced that our Board of Directors declared a cash dividend of $0.125 per share of common stock to be paid in September 2022.2023. All shares of common stock issued and outstanding and all restricted stock units (RSUs) and performance-based restricted stock units (PRUs) as of the record date will be entitled to the dividend and dividend equivalent rights, (DERs), respectively, which will be paid out if and when the underlying shares are released. However, the 4 million unvested RSUs assumed in connection with the acquisition of Avast will not be entitled to DERs. See Note 15 for further information about these equity awards. Any future dividends and DERs will be subject to the approval of our Board of Directors.
Stock repurchase program
Under our stock repurchase program, we may purchase shares of our outstanding common stock on the open market and through accelerated stock repurchase transactions. As of July 1, 2022,June 30, 2023, we had $1,474$829 million remaining under the authorization to be completed in future periods with no expiration date. No shares were repurchased during the three months ended July 2, 2021.
The following table summarizes activity related to this program during the three months ended June 30, 2023 and July 1, 2022:
| | | | | | | |
| Three Months Ended | | |
(In millions, except per share amounts) | July 1, 2022 | | |
Number of shares repurchased | 12 | | | |
Average price per share | $ | 24.35 | | | |
Aggregate purchase price | $ | 300 | | | |
| | | | | | | | | | | |
| | Three Months Ended |
| (In millions, except per share amounts) | June 30, 2023 | | July 1, 2022 |
| Number of shares repurchased | 3 | | | 12 | |
| Average price per share | $ | 16.71 | | | $ | 24.35 | |
| Aggregate purchase price | $ | 41 | | | $ | 300 | |
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss), net of taxes, consisted of foreign currency translation adjustments:adjustments and unrealized gain (loss) on derivative instruments:
| | | | | |
(In millions) | Foreign Currency
Translation Adjustments |
Balance as of April 1, 2022 | $ | (4) | |
Other comprehensive income (loss), net of taxes | (40) | |
| |
Balance as of July 1, 2022 | $ | (44) | |
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | Foreign Currency
Translation Adjustments | | Unrealized Gain (Loss) On
Derivative Instruments | | Total | | | |
| Balance as of March 31, 2023 | $ | (15) | | | $ | — | | | $ | (15) | | | | |
| Other comprehensive income (loss), net of taxes | 32 | | | 19 | | | 51 | | | | |
| Balance as of June 30, 2023 | $ | 17 | | | $ | 19 | | | $ | 36 | | | | |
Note 15. Stock-Based Compensation
Avast equity awards
In connection with our acquisition of Avast, we assumed the outstanding equity awards under two of Avast’s equity incentive plans (the Avast Holding B.V. 2014 Share Option Plan and the Rules of the Avast plc Long Term Incentive Plan (collectively, the Avast Plans)), which consisted of 4 million shares of unvested RSUs. The assumed RSUs generally retain the terms and conditions under which they were originally granted. We intend to grant all additional shares that remain available for issuance under the Avast Plans. Upon vesting, these assumed RSUs and any additional shares granted will settle into shares of our common stock. See Note 4 for further information about this business combination.
The following table sets forth the stock-based compensation expense recognized for our equity incentive plans:
| | | | Three Months Ended | | | Three Months Ended |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | (In millions) | June 30, 2023 | | July 1, 2022 |
| Cost of revenues | Cost of revenues | $ | 1 | | | $ | — | | | Cost of revenues | $ | 1 | | | $ | 1 | |
| Sales and marketing | Sales and marketing | 7 | | | 5 | | | Sales and marketing | 9 | | | 7 | |
| Research and development | Research and development | 6 | | | 6 | | | Research and development | 11 | | | 6 | |
| General and administrative | General and administrative | 10 | | | 9 | | | General and administrative | 16 | | | 10 | |
| | Total stock-based compensation expense | Total stock-based compensation expense | $ | 24 | | | $ | 20 | | | Total stock-based compensation expense | $ | 37 | | | $ | 24 | |
| Income tax benefit for stock-based compensation expense | Income tax benefit for stock-based compensation expense | $ | (4) | | | $ | (4) | | | Income tax benefit for stock-based compensation expense | $ | (5) | | | $ | (4) | |
As of July 1, 2022,June 30, 2023, the total unrecognized stock-based compensation costsexpense related to our unvested stock-based awards was $213$307 million, which will be recognized over an estimated weighted-average amortization period of 2.42.2 years.
The following table summarizes additional information related to our stock-based awards: | | | | Three Months Ended | | | Three Months Ended | |
| (In millions, except per grant data) | (In millions, except per grant data) | July 1, 2022 | | July 2, 2021 | | (In millions, except per grant data) | June 30, 2023 | | July 1, 2022 | |
| Restricted stock units (RSUs): | Restricted stock units (RSUs): | | | | | Restricted stock units (RSUs): | | | | |
| Weighted-average fair value per award granted | Weighted-average fair value per award granted | $ | 24.51 | | | $ | 21.29 | | | Weighted-average fair value per award granted | $ | 17.24 | | | $ | 24.51 | | |
| Awards granted | Awards granted | 2 | | | 3 | | | Awards granted | 5 | | | 2 | | |
| Total fair value of awards released | Total fair value of awards released | $ | 46 | | | $ | 49 | | | Total fair value of awards released | $ | 35 | | | $ | 46 | | |
| Outstanding and unvested | Outstanding and unvested | 6 | | | 6 | | | Outstanding and unvested | 11 | | | 6 | | |
| Performance-based restricted stock units (PRUs): | Performance-based restricted stock units (PRUs): | | | Performance-based restricted stock units (PRUs): | | |
| Weighted-average fair value per award granted | Weighted-average fair value per award granted | $ | 33.04 | | | $ | 28.84 | | | Weighted-average fair value per award granted | $ | 22.79 | | | $ | 33.04 | | |
| Awards granted | Awards granted | 1 | | | 1 | | | Awards granted | 2 | | | 1 | | |
| Total fair value of awards released | Total fair value of awards released | $ | 2 | | | $ | — | | | Total fair value of awards released | $ | 19 | | | $ | 2 | | |
| Outstanding and unvested at target payout | Outstanding and unvested at target payout | 4 | | | 2 | | | Outstanding and unvested at target payout | 6 | | | 4 | | |
|
Dividend equivalent rights (DERs)
Our RSUs and PRUs, except the $4 million unvested RSUs assumed under the Avast Plans, contain DERs that entitles the recipient of an award to receive cash dividend payments if and when the underlying shares are released. The amount of DERs equals the amount of cumulated dividends on the issued number of common stock that would have been payable since the date the associated award was granted. As of July 1, 2022June 30, 2023 and April 1, 2022,March 31, 2023, current dividends payable related to DER was $3 million and $11$5 million, respectively, recorded as part of Other current liabilities in the Condensed Consolidated Balance Sheets, and long-term dividends payable related to DER was $2 million and $2 million, respectively, recorded as part of Other long-term liabilities.
Note 16. Net Income Per Share
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share also includes the incremental effect of dilutive potentially issuable common shares outstanding. Dilutive potentially issuable common shares include the dilutive effect of the shares underlying convertible debt and employee equity awards. Our remaining convertible debt was extinguished on August 15, 2022.
The components of basic and diluted net income (loss) per share are as follows:
| | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| (In millions, except per share amounts) | July 1, 2022 | | July 2, 2021 | | | | |
| Net income (loss) | $ | 200 | | | $ | 181 | | | | | |
| | | | | | | |
| Net income (loss) per share - basic | $ | 0.35 | | | $ | 0.31 | | | | | |
| Net income (loss) per share - diluted | $ | 0.33 | | | $ | 0.31 | | | | | |
| | | | | | | |
| Weighted-average shares outstanding - basic | 578 | | | 580 | | | | | |
| Dilutive potentially issuable shares: | | | | | | | |
| Convertible debt | 22 | | | 7 | | | | | |
| Employee equity awards | 4 | | | 4 | | | | | |
| Weighted-average shares outstanding - diluted | 604 | | | 591 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Upon adoption of ASU 2020-06 under the modified retrospective method, we are required to apply the if-converted method to our calculation of diluted earnings per share. For the three months ended July 1, 2022, we adjust for the dilutive effect of the maximum number of potential shares to be issued upon settlement of our outstanding convertible debt instruments. Prior period earnings per share amounts are not restated under the modified retrospective method. For the three months ended July 2, 2021, the dilutive effect of our debt instruments is calculated using the treasury stock method, under which our convertible debt instruments generally had a dilutive impact on net income per share when our average stock price for the period exceeds the conversion prices for the convertible debt instruments. The adoption of ASU 2020-06 had a $0.01 impact on dilutive earnings per share for the three months ended July 1, 2022, with the dilutive shares underlying the convertible debt increasing by 18 million shares.
The conversion price of each convertible debt instrument applicable in the periods presented is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| July 1, 2022 | | July 2, 2021 | | | | |
| New 2.00% Convertible Senior Notes due August 15, 2022 | $ | 20.41 | | | $ | 20.41 | | | | | |
| | | | | | | | | | | |
| | Three Months Ended |
| (In millions, except per share amounts) | June 30, 2023 | | July 1, 2022 |
| Net income (loss) | $ | 189 | | | $ | 200 | |
| | | |
| Net income (loss) per share - basic | $ | 0.30 | | | $ | 0.35 | |
| Net income (loss) per share - diluted | $ | 0.29 | | | $ | 0.33 | |
| | | |
| Weighted-average shares outstanding - basic | 640 | | | 578 | |
| Dilutive potentially issuable shares: | | | |
| Convertible debt | — | | | 22 | |
| Employee equity awards | 3 | | | 4 | |
| Weighted-average shares outstanding - diluted | 643 | | | 604 | |
| | | |
| Anti-dilutive shares excluded from diluted net income per share calculation: | | | |
| | | |
| Employee equity awards | 6 | | | — | |
| Total | 6 | | | — | |
Note 17. Segment and Geographic Information
We operate as 1one reportable segment. Our Chief Operating Decision Maker reviews financial information presented on a consolidated basis to evaluate company performance and to allocate and prioritize resources.
The following table summarizes net revenues for our major solutions: | | | Three Months Ended | | | Three Months Ended |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | (In millions) | June 30, 2023 | | July 1, 2022 |
| Consumer security | $ | 413 | | | $ | 412 | | | |
| Identity and information protection | 294 | | | 274 | | | |
| Consumer security revenues | | Consumer security revenues | $ | 599 | | | $ | 402 | |
| Identity and information protection revenues | | Identity and information protection revenues | 330 | | | 294 | |
| Total Cyber Safety revenues | | Total Cyber Safety revenues | 929 | | | 696 | |
| Legacy revenues | | Legacy revenues | 17 | | | 11 | |
Total net revenues (1) | Total net revenues (1) | $ | 707 | | | $ | 686 | | | Total net revenues (1) | $ | 946 | | | $ | 707 | |
(1) During the three months ended July 1, 2022,June 30, 2023, total net revenues include an unfavorable foreign exchange impact of $27 million, consisting of $26$9 million from our consumer security solutions and $1 million fromsolutions.
From time to time, changes in our identity and information protection solutions.
product hierarchy cause changes to the product categories above. When changes occur, we recast historical amounts to match the current product hierarchy. The changes have been reflected for all periods presented above. Consumer security products includeincludes revenues from our Norton 360 Security offerings, Norton Security, Avast Security offerings, Norton Secure VPN, Avira Security and other consumer security solutions.and device performance solutions through our direct, partner and small business channels. Identity and information protection products includeincludes revenues from our Norton 360 with LifeLock offerings, LifeLock identity theft protection and other information protection and privacy solutions. Legacy includes revenues from products or solutions from markets that we have exited and in which we no longer operate, have been discontinued or identified to be discontinued, or remain in maintenance mode as a result of integration and product portfolio decisions.
Geographic information
Net revenues by geography are based on the billing addresses of our customers. The following table represents net revenues by geographic area forat the periodsend of each period presented:
| | | Three Months Ended | | | Three Months Ended |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | (In millions) | June 30, 2023 | | July 1, 2022 |
| Americas | Americas | $ | 508 | | | $ | 477 | | | Americas | $ | 622 | | | $ | 508 | |
| EMEA | EMEA | 120 | | | 127 | | | EMEA | 225 | | | 120 | |
| APJ | APJ | 79 | | | 82 | | | APJ | 99 | | | 79 | |
Total net revenues (1) | Total net revenues (1) | $ | 707 | | | $ | 686 | | | Total net revenues (1) | $ | 946 | | | $ | 707 | |
Note: The Americas include U.S., Canada and Latin America; EMEA includes Europe, Middle East and Africa; APJ includes Asia Pacific and Japan.
(1) During the three months ended July 1, 2022,June 30, 2023, total net revenues include an unfavorable foreign exchange impact of $27$9 million, consisting of $16$7 million from EMEA and $11$2 million from APJ.
Revenues from customers inside the U.S. were $479$565 million and $456$479 million during the three months ended June 30, 2023 and July 1, 2022, and July 2, 2021, respectively. No other individual country accounted for more than 10% of revenues.
The table below represents cash, cash equivalents and short-term investments held in the U.S. and internationally in various foreign subsidiaries.
| | | | | | | | | | | |
| (In millions) | July 1, 2022 | | April 1, 2022 |
| U.S. | $ | 597 | | | $ | 1,220 | |
| International | 694 | | | 671 | |
| Total cash, cash equivalents and short-term investments | $ | 1,291 | | | $ | 1,891 | |
| | | | | | | | | | | |
| (In millions) | June 30, 2023 | | March 31, 2023 |
| U.S. | $ | 103 | | | $ | 178 | |
| International | 520 | | | 572 | |
| Total cash, cash equivalents and short-term investments | $ | 623 | | | $ | 750 | |
The table below represents our property and equipment, net of accumulated depreciation and amortization, by geographic area,areas, based on the physical location of the asset, at the end of each period presented.
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| U.S. | U.S. | $ | 16 | | | $ | 16 | | U.S. | $ | 38 | | | $ | 38 | |
| Ireland | 25 | | | 27 | | |
| | Czech Republic | | Czech Republic | 13 | | | 16 | |
| Germany | Germany | 12 | | | 13 | | Germany | 13 | | | 13 | |
Other countries (1) | Other countries (1) | 3 | | | 4 | | Other countries (1) | 9 | | | 9 | |
| Total property and equipment, net | Total property and equipment, net | $ | 56 | | | $ | 60 | | Total property and equipment, net | $ | 73 | | | $ | 76 | |
(1) No other individual country represented more than 10% of the respective totals.
Our operating lease assets by geographic area, based on the physical location of the asset, at the end of each period presented, are as follows:
| | (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| U.S. | U.S. | $ | 63 | | | $ | 66 | | U.S. | $ | 23 | | | $ | 25 | |
| Czech Republic | | Czech Republic | 9 | | | 12 | |
Other countries (1) | Other countries (1) | 7 | | | 8 | | Other countries (1) | 6 | | | 6 | |
| Total operating lease assets | Total operating lease assets | $ | 70 | | | $ | 74 | | Total operating lease assets | $ | 38 | | | $ | 43 | |
(1) No other individual country represented more than 10% of the respective totals.
Significant customers and channel partners
No individual, end-user customer accounted for 10% or more of our net revenues during the three months ended June 30, 2023 and July 1, 2022 and July 2, 2021. Customers which are distributors2022.
Distributors that accounted for over 10% of our nettotal billed and unbilled accounts receivable were as follows: | | | | | | | | | | | |
| July 1, 2022 | | April 1, 2022 |
| Customer A | 40 | % | | 41 | % |
| Customer B | 10 | % | | 13 | % |
| | | | | | | | | | | |
| June 30, 2023 | | March 31, 2023 |
| Distributor A | 15 | % | | 13 | % |
| Distributor B | 17 | % | | 14 | % |
Note 18. Commitments and Contingencies
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries and other parties with respect to certain matters, including, but not limited to, product warranties and losses arising out of our breach of agreements or representations and warranties made by us.us, including claims alleging that our software infringes on the intellectual property rights of a third party. In addition, our bylaws contain indemnification obligations to our directors, officers, employees, and agents, and we have entered into indemnification agreements with our directors and certain of our officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in our bylaws and to provide additional procedural protections. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. We monitor the conditions that are subject to indemnification to identify if a loss has occurred. Historically, we have not incurred material costs as a result of obligations under these agreements, and we have not accrued any material liabilities related to such indemnification obligations in our Condensed Consolidated Financial Statements.
In connection with the sale of Veritas and the sale of our Enterprise Security business to Broadcom, we assigned several leases to Veritas Technologies LLCBroadcom or Broadcom and/or their relatedcertain of its subsidiaries. As a condition to consenting to the assignments, certain lessors required us to agree to indemnify the lessor under the applicable lease with respect to certain matters, including, but not limited to, losses arising out of Veritas Technologies LLC, Broadcom,Broadcom’s or their relatedsuch subsidiaries’ breach of payment obligations under the terms of thesuch lease. As with our other indemnification obligations discussed above and in general, it is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. As with our other indemnification obligations, such indemnification agreements might not be subject to maximum loss clauses, and to date, generally under our real estate obligations, we have not incurred material costs as a result of such obligations under our leases and have not accrued any liabilities related to such indemnification obligations in our Condensed Consolidated Financial Statements.
We provide limited product warranties, and the majority of our software license agreements contain provisions that indemnify licensees of our software from damages and costs resulting from claims alleging that our software infringes on the intellectual property rights of a third party. Such indemnification provisions may not be subject to maximum loss clauses. Historically, payments made under these provisions have been immaterial. We monitor the conditions that are subject to indemnification to identify if a loss has occurred.
Litigation contingencies
Trustees of the University of Columbia in the City of New York v. NortonLifeLock
As previously disclosed, in our public filings, on May 2, 2022, a jury returned its verdict in a patent infringement case filed in 2013 by the Trustees of Columbia University in the City of New York (Columbia) in the U.S. District Court for the Eastern District of Virginia. Columbia originally brought suit alleging infringement of 6six patents owned by the university. The CompanyWe won a favorable claim construction order on all six patents, and the claim construction was upheld by the Federal Circuit in 2016 on all but U.S. Patent Nos. 8,601,322 and 8,074,115. The CompanyWe also sought inter partes review by the Patent Trial and Appeal Board of the claims of the ‘322 and ‘115 Patents and all but 2two claims of the ‘322 Patent and 3three claims of the ‘115 Patent were invalidated. The remaining claims of the ‘322 and ‘115 Patents were the only claims that remained in suit at trial.
The jury found that the Company’sour Norton Security products and Symantec Endpoint Protection products (the latter of which were sold by us to Broadcom as part of an Asset Purchase Agreement with NortonLifeLock dated November 4, 2019) willfully infringe the ‘322 and ‘115 Patents through the use of SONAR/BASH behavioral protection technology. The jury awarded damages in the amount of $185 million. Columbia did not seek injunctive relief against us. We believe that we have ceased the Company. The Company intends to cease use of the technology found by the jury to infringe. The jury also found that the Companywe did not fraudulently conceal its prosecution of U.S. Patent No. 8,549,643 but did find that two Columbia professors were coinventors of this patent. No damages were awarded related to this patent.
A formal judgment has not yet been entered in the case. Post-verdict motions have been filed, and the Company intendswe intend to file an appeal challenging the verdict.
At this time, our current estimate of the low end of the range of probable estimated losses from this matter is approximately $230$239 million, reflecting the jury award and prejudgment interest, which we have accrued. The jury’s verdict may be enhanced and, should it be upheld on appeal, could ultimately result in the payment of somewhere between 1one and 3three times the jury’s verdict, plus interest and attorneys’ fees. There is a reasonable possibility that a loss may be incurred in excess of our accrual for this matter; however, such loss cannot be reasonably estimated.
SEC Investigation
As previously disclosed in our public filings, the Audit Committee of our Board of Directors (the Audit Committee) completed its internal investigation (the Audit Committee Investigation) in September 2018. In connection with the Audit Committee Investigation, we voluntarily contacted the U.S. Securities and Exchange Commission (SEC) in April 2018. The SEC commenced a formal investigation with which we cooperated. In April 2022, the SEC Staff informed the Company that it concluded its investigation and does not intend to recommend an enforcement action by the Commission against us.
Securities Class Action and Derivative Litigation
Securities class action lawsuits, which have since been consolidated, were filed in May 2018 against us and certain of our former officers, in the U.S. District Court for the Northern District of California. The lead plaintiff’s consolidated amended complaint alleged that, during a purported class period of May 11, 2017 to August 2, 2018, defendants made false and misleading statements in violation of Sections 10(b) and 20(a), and that certain individuals violated Section 20A, of the Securities Exchange Act. Defendants filed motions to dismiss, which the Court granted in an order dated June 14, 2019. Pursuant to that order, plaintiff filed a motion seeking leave to amend and a proposed firstAct of 1934, as amended complaint on July 11, 2019. The Court granted the motion in part on October 2, 2019, and the first amended complaint was filed on October 11, 2019. The Court’s order dismissed certain claims against certain of our former officers. Defendants filed answers on November 7, 2019. On April 20, 2021, to resolve an alleged conflict of interest raised with respect to the lead plaintiff and its counsel, the Court ordered a second Class Notice disclosing the circumstances of the alleged conflict and providing a further period for class members to opt out, which closed on July 2, 2021. The initial class opt out period closed on August 25, 2020.(the Exchange Act).
On May 24, 2021, the parties reached a proposed settlement and release of all claims in the class action, for $70 million, and on June 8, 2021, the parties executed a Stipulation and Agreement of Settlement, subject to Court approval and exclusive of any claims that may be brought by shareholders who opted out of the class action. Of the $70 million, $67.1$67 million was covered under the applicable insurance policy with the remainder to be paid by the Company.us. The Court approved the settlement on February 12, 2022.
On November 22, 2021, investment funds managed by Orbis Investment Management Ltd. which previously opted out of the securities class action, filed suit under the Securities and Exchange Act of 1934, the Arizona Securities Act, the Arizona Consumer Fraud Act
and certain common law causes of action to recover alleged damages for losses incurred by the funds for their purchases or acquisitions of our common stock during the class period. In the fourth quarter of fiscal 2022, we made an immaterial settlement offer in this matter, for which we have accrued. The Company’sOn February 7, 2023, our Motion to Dismiss iswas granted in part and denied in part. The parties have now pending.settled the matter and the action was dismissed with prejudice on April 26, 2023. The impact of settlement was not material.
Purported shareholder derivative lawsuits have been filed against us and certain of our former officers and current and former directors in the U.S.Delaware Court of Chancery (In re Symantec Corp. S’holder. Deriv. Litig.), Northern District Courts forof California (Lee v. Clark et al.,), and the District of Delaware and the Northern District of California, Delaware Chancery Court, and Delaware Superior Court, arising(Milliken vs. Clark et al.). These assert generally out of the same facts and circumstances as alleged in the securities class action and allegingallege claims for breach of fiduciary duty and related claims; theseclaims. On January 4, 2023, after reaching an agreement on the terms of the proposed settlement, which provides for, among other things, a payment of $12 million to the Company by the insurers of the Company’s directors and officers, the parties to the Chancery action filed a Stipulation and Agreement of Settlement, Compromise and Release in that Court, which was approved by the Court on May 4, 2023, over the objection of the Lee and Milliken plaintiffs, and releases all claims in the Chancery, Lee, and Milliken actions, as well as any other claims based on the same operative facts. The parties in the Milliken action stipulated to a dismissal with prejudice, which was entered by the Court on May 12, 2023. The parties in the Lee action stipulated to a dismissal with prejudice, which was entered by the Court on June 12, 2023. All three shareholder derivative lawsuits include an action broughtare now resolved.
A fourth lawsuit filed in the Delaware Superior Court, Kukard v. Symantec, brings claims derivatively on behalf of our 2008 Employee Stock Purchase Plan. No specific amount of damages has been alleged in these lawsuits. We have also received demands from purported stockholders to inspect corporate books and records under Delaware law. At this stage, we are unable to assess whether any material loss or adverse effect is reasonably possible as a result of the derivative lawsuitsKukard action or estimate the range of any potential loss.
We will continue to incur legal fees in connection with these pending cases and demands,the Kukard matter, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations. The expense of continuing to defend such litigation may be significant. We intend to defend these lawsuitsthis claim vigorously, but there can be no assurance that we will be successful in any defense. If any of the lawsuits arethis lawsuit is decided adversely, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations, and cash flows.
GSA
During the first quarter of fiscal 2013, we were advised by the Commercial Litigation Branch of the Department of Justice’s (DOJ) Civil Division and the Civil Division of the U.S. Attorney’s Office for the District of Columbia that the government is investigating our compliance with certain provisions of our U.S. General Services Administration (GSA) Multiple Award Schedule Contract No. GS-35F-0240T effective January 24, 2007, including provisions relating to pricing, country of origin, accessibility, and the disclosure of commercial sales practices.
As reported on the GSA’s publicly-available database, our total sales under the GSA Schedule contract were approximately $222 million from the period beginning January 2007 and ending September 2012. We fully cooperated with the government throughout its investigation, and in January 2014, representatives of the government indicated that their initial analysis of our actual damages exposure from direct government sales under the GSA Schedule contract was approximately $145 million; since the initial meeting, the government’s analysis of our potential damages exposure relating to direct sales has increased. The government also indicated they would pursue claims for certain sales to California, Florida, and New York as well as sales to the federal government through reseller GSA Schedule contracts, which could significantly increase our potential damages exposure.
In 2012, a sealed civil lawsuit was filed against us related to compliance with the GSA Schedule contract and contracts with California, Florida, and New York. On July 18, 2014, the Court-imposed seal expired, and the government intervened in the lawsuit. On September 16, 2014, the states of California and Florida intervened in the lawsuit, and the state of New York notified the Court that it would not intervene. On October 3, 2014, the DOJ filed an amended complaint, which did not state a specific damages amount. On October 17, 2014, California and Florida combined their claims with those of the DOJ and the relator on behalf of New York in an Omnibus Complaint, and a First Amended Omnibus Complaint was filed on October 8, 2015; the state claims also do not state specific damages amounts. On June 6, 2019, we filed a motion seeking summary judgment on all claims asserted by all plaintiffs, and the plaintiffs filed a motion for partial summary judgment on elements of liability on their claims. On October 21, 2019, the DOJ moved for a Prejudgment Writ of Sequestration for the Company to set aside $1,090 million to pay a judgment, should the United States prevail in this litigation, under the Federal Debt Collection Procedures Act. The Writ was sought in response to the Company’s announcement of its plans to distribute the after-tax proceeds of the sale of the Symantec enterprise business to Broadcom to its shareholders via a special dividend. The Court denied the Writ on December 12, 2019, on the basis of the Government’s failure to establish the “probable validity” of the debt, the amount sought to be sequestered, and the Company’s available cash, cash equivalents and short-term investments. The Court permitted the DOJ limited discovery of facts relevant to the Company’s financial state and financial projections and the option to renew its motion if appropriate and supported by the analysis of its own financial expert. That discovery period has now closed. On March 30, 2020, the Court issued an Order granting in part and denying in part our motion for summary judgment and granting in part and denying in part the United States’ motion for partial summary judgment. On September 30, 2020, the Company filed a Motion for Reconsideration of certain rulings in the Court’s March 30 Summary Judgment Order. A second Motion for Reconsideration of certain rulings in the Summary Judgement Order based on significant change in the law was filed on July 23, 2021. Both Motions for Reconsideration were denied. Court ordered mediations in July 2020 and February 2021 were not successful.
On March 23, 2021, Plaintiffs withdrew their demand for a jury trial and the Companywe consented to proceed with a bench trial, which concluded on March 24, 2022. On January 19, 2023, the Court issued its Findings of Facts and Conclusions of Law in which it found in favor of the United States in part and awarded damages and penalties in the amount of $1.3 million. The Court has not yet issued its judgmentalso found in favor of the State of California in part and post-trial motions are pending.awarded penalties in the amount of $0.4 million. The resulting Judgment was filed by the Court on January 20, 2023. On February 16, 2023, Plaintiffs filed Motions to Amend Judgment to revive the damages claimed at trial. We have opposed and the motion is now fully briefed before the Court.
On May 13, 2021, we reached a settlement in principle with the State of Florida to resolve all claims it asserted in the litigation for $0.5 million, plus Relator’sthe relator’s statutory attorney’s fees with respect to the State of Florida’s claims. On February 28, 2022, we reached a settlement in principle with the State of New York and Relatorthe relator to resolve all of the New York claims asserted in the litigation for $5 million.
AtThe January 2023 Judgment has been paid, and at this time, our current estimate of the low end of the range of probable estimated losses from this matter is $50was reduced to $1.4 million, inclusive of the settlement with the States of Florida and New York, which we have accrued. It is possible that the litigationCourt could grant Plaintiffs’ Motions to Amend Judgment, in whole or in part, or an appeal of the Court’s Judgment by the Plaintiffs, if brought, could lead to further claims or findings of violations of the False Claims Act and could be material to our results of operations and cash flows for any period. Resolution of False Claims Act investigations can ultimately result in the payment of somewhere between 1one and 3three times the actual damages proven by the government, plus civil penalties. There is a reasonable possibility that a loss may have been incurred in excess of our accrual for this matter; however, such loss cannot be reasonably estimated.
Jumpshot Matters
At the end of 2019, Avast came under media scrutiny for provision of Avast customer data to its data analytics subsidiary Jumpshot Inc. Jumpshot was a subsidiary of Avast with its own management team and technical experts. Avast announced the decision to terminate its provision of data to, and wind down, Jumpshot on January 30, 2020. As Avast has previously disclosed, it has been in communication with certain regulators and authorities prior to completion of the acquisition of Avast, and we will continue cooperating fully in respect of all regulatory enquiries.
On December 23, 2019, the United States Federal Trade Commission (FTC) issued a Civil Investigative Demand (CID) to Avast seeking documents and information related to its privacy practices, including Jumpshot's past use of consumer information that was provided to it by Avast. Avast responded cooperatively to the CID and related follow-up requests from the FTC. On October 29, 2021, staff at the FTC sent Avast a draft complaint and proposed settlement order. We have been engaged in ongoing negotiations with the FTC staff regarding the scope and terms of the proposed settlement. Any negotiated settlement with the FTC, or absent settlement, any litigation or other legal proceeding between us and the FTC could result in material monetary remedies and/or compliance requirements that impose significant and material cost and resource burdens on us, and may impact our ability to use data in the future. There can be no assurance that we will be successful in negotiating a favorable settlement or in litigation. Any remedies or compliance requirements could adversely affect our ability to operate our business or have a materially adverse impact on our financial results. At this stage, we are unable to assess whether any material loss or adverse effect is reasonably possible as a result of this investigation or estimate the range of any potential loss. On February 27, 2020, the Czech Office for Personal Data Protection (the Czech DPA) initiated offense proceedings concerning Avast`s practices with respect to Jumpshot, which remain ongoing and we continue to evaluate our options.
In addition, we received a letter and notification before action from Stichting CUIC – Privacy Foundation for Collective Redress, a Dutch foundation (the Foundation). The Foundation has asserted it represents the interests of Avast customers in the Netherlands whose data was provided to Jumpshot and that by doing so Avast violated the requirements of the GDPR and other provisions in Dutch and European Union privacy and consumer law entitling those customers to damages and other compensation, all of which we dispute. No specific amount of damages has been alleged and to date, no action has been filed. At this stage, we are unable to assess whether any material loss or adverse effect is reasonably possible as a result of this notification before action or estimate the range of any potential loss.
On December 12, 2022, a putative class action, Lau v. Gen Digital Inc. and Jumpshot Inc., was filed in the Northern District of California alleging violations of the Electronic Communications Privacy Act, California Invasion of Privacy Act, statutory larceny, unfair competition and various common law claims related to the provision of customer data to Jumpshot. On February 24, 2023, we filed a Motion to Dismiss, which is still pending. At this stage, we are unable to assess whether any material loss or adverse effect is reasonably possible as a result of this action or estimate the range of any potential loss. We dispute these claims and intend to defend them vigorously.
The outcome of the regulatory proceedings, government enforcement actions and litigation is difficult to predict, and the cost to defend, settle or otherwise resolve these matters may be significant. Plaintiffs or regulatory agencies or authorities in these matters may seek recovery of large or indeterminate amounts or seek to impose sanctions, including significant monetary penalties, as well as equitable relief. The monetary and other impact of these litigations, proceedings or actions may remain unknown for substantial periods of time. Further, an unfavorable resolution of litigations, proceedings or actions could have a material adverse effect on our business, financial condition, and results of operations and cash flows. The amount of time that will be required to resolve these matters is unpredictable, and these matters may divert management’s attention from the day-to-day operations of our business. Any future investigations or additional lawsuits may also adversely affect our business, financial condition, results of operations and cash flows.
Other
We are involved in a number of other judicial and administrative proceedings that are incidental to our business. Although adverse decisions (or settlements) may occur in one or more of the cases, it is not possible to estimate the possible loss or losses from each of these cases. The final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our business, results of operations, financial condition or cash flows.
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 of 1934, as amended (the Exchange Act).Act. Forward-looking statements include statements that represent our expectations or beliefs concerning future events, including, without limitation, 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,” “forecast,” “outlook,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” and similar expressions. In addition, projections of our future financial performance; anticipated growth and trends in our businesses and in our industries; the consummation of or anticipated impacts of acquisitions (including the recentour ability to achieve synergies from our acquisition of Avira and the Proposed Merger with Avast and related financing)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 the COVID-19 pandemicinflation, fluctuations in foreign currency exchange rates, changes in interest rates, Russia’s invasion of Ukraine 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.10-Q and the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023. We encourage you to read those sections carefully. There may also be other factors that section carefully.have not been anticipated or that are not described in our periodic filings with the SEC, generally because we did not believe them to be significant at the time, which could cause actual results to differ materially from our projections and expectations. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
OVERVIEW
NortonLifeLock Inc. has the largestGen is a global company powering Digital Freedom with a family of trusted consumer brands including Norton, Avast, LifeLock, Avira, AVG, ReputationDefender and CCleaner. Our core Cyber Safety portfolio provides protection across three key categories in multiple channels and geographies, including security and performance, identity protection, and online privacy. We have built a technology platform that brings together software and service capabilities within these three categories into a comprehensive and easy-to-use integrated platform across our brands. We bring award-winning products and services in the world, empowering nearly 80cybersecurity, privacy and identity protection to approximately 500 million users in more than 150 countries. We are the trustedcountries so they can live their digital lives safely, privately, and number one top of mind brand in consumer Cyber Safety, accordingconfidently today and for generations to the 2022 NortonLifeLock brand tracking study. We help prevent, detect and restore potential damages caused by many cyber criminals.come.
Fiscal calendar
We have a 52/53-week fiscal year ending on the Friday closest to March 31. The three months ended June 30, 2023 and July 1, 2022 and July 2, 2021 each consisted of 13 and 13 weeks, respectively.weeks. Our 20232024 fiscal year consists of 52 weeks and ends on March 31, 2023.29, 2024.
Key financial metrics
The following tables provide our key financial metrics for the periods presented: | | | Three Months Ended | | | Three Months Ended |
| (In millions, except for per share amounts) | (In millions, except for per share amounts) | July 1, 2022 | | July 2, 2021 | | (In millions, except for per share amounts) | June 30, 2023 | | July 1, 2022 |
| Net revenues | Net revenues | $ | 707 | | | $ | 686 | | | Net revenues | $ | 946 | | | $ | 707 | |
| Operating income (loss) | Operating income (loss) | $ | 261 | | | $ | 287 | | | Operating income (loss) | $ | 362 | | | $ | 261 | |
| Net income (loss) | Net income (loss) | $ | 200 | | | $ | 181 | | | Net income (loss) | $ | 189 | | | $ | 200 | |
| Net income (loss) per share - diluted | Net income (loss) per share - diluted | $ | 0.33 | | | $ | 0.31 | | | Net income (loss) per share - diluted | $ | 0.29 | | | $ | 0.33 | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | 215 | | | $ | 258 | | | Net cash provided by (used in) operating activities | $ | 226 | | | $ | 215 | |
| | | As Of | | As Of |
| (In millions) | (In millions) | July 1, 2022 | | April 1, 2022 | (In millions) | June 30, 2023 | | March 31, 2023 |
| Cash, cash equivalents and short-term investments | $ | 1,291 | | | $ | 1,891 | | |
| Cash and cash equivalents | | Cash and cash equivalents | $ | 623 | | | $ | 750 | |
| Contract liabilities | Contract liabilities | $ | 1,220 | | | $ | 1,306 | | Contract liabilities | $ | 1,709 | | | $ | 1,788 | |
Below are our financial highlights for the first quarter of fiscal 2023,2024, compared to the corresponding period in the prior year:
•Net revenues increased $21$239 million and Operating income increased $101 million, primarily due to revenue contribution from Avast, which was acquired during the second quarter of fiscal 2023, and higher sales in both our consumer security products and our identity and information protection products.products, partially offset by unfavorable foreign currency fluctuations.
•Net income increased $19decreased $11 million primarily due to a decrease in income tax expense.
•and Net income per share - diluted increased $0.02,decreased 0.04, primarily due to the increase in net income,increased interest expense associated with our new senior credit facilities and two senior notes. This was partially offset by the adoptionincreased Operating income as a result of ASU 2020-06.our merger with Avast.
•Cash and cash equivalents and short-term investments decreased by $600$127 million compared to April 1, 2022,March 31, 2023, primarily due to the repaymentcash interest paid, dividends paid to shareholders, voluntary prepayments of our Senior 3.95% Senior NotesTerm B facility, a mandatory principal amortization payment of our Term A facility, and repurchases of our common stock during the first three months of fiscal 2023.stock.
•Contract liabilities decreased $86$79 million compared to April 1, 2022,March 31, 2023, primarily due to a seasonal decline in billings due to seasonality and fluctuations in foreign currency rates.
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, changes in interest rates, as well as recession risks, which may persist for an extended period. Additionally, our international results are impacted by the economic conditions in the foreign markets in which we operate and by fluctuations in foreign currency exchange rates. We conduct business in numerous currencies throughout 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. As a result, we are exposed to foreign exchange gains or losses, which impact our operating results. As part of our foreign currency risk mitigation strategy, we have entered into monthly foreign exchange forward contracts to hedge foreign currency balance sheet exposure.
Proposed Merger with Avast
On August 10, 2021, we announced a transaction under which we intendIn addition, in early 2022, worldwide inflation began to acquireincrease. In response to the entire issuedheightened levels of inflation, central banks, including the U.S. Federal Reserve and the European Central Bank, raised interest rates significantly in 2022, resulting in an increase in our cost of debt. Interest rates continued to be issued ordinary share capitalincrease in 2023, and while inflation rates have slowed, global inflation remains high and has impacted our results due to higher costs. Volatile market conditions related to Russia’s invasion of Avast plc, a public company incorporatedUkraine and retaliatory sanctions against the Russian Federation and Belarus, and other macroeconomic events have, at times, and may in England and Wales and a global leaderthe future negatively impact our results of digital security and privacy headquartered in Prague, Czech Republic (Avast and such transaction, the Proposed Merger). The Proposed Merger will be implemented by means of a court-sanctioned scheme of arrangement under the UK Companies Act 2006, as amended (the Scheme), and remains subject to a certain number of conditions. Under the terms of the Proposed Merger, Avast shareholders will be entitled to elect to receive, for each ordinary share of Avast held, in respect of their entire holding of Avast shares, either: (i) $7.61 in cash and 0.0302 of a new share of our common stock (such option, the Majority Cash Option); or (ii) $2.37 in cash and 0.1937 of a new share of our common stock (such option, the Majority Stock Option). Based on our undisturbed closing share price of $27.20 on July 13, 2021, and depending on the Avast shareholder elections, the estimated purchase price range for the Avast shares under the Proposed Merger is $8.1 billion to $8.6 billion. Each of the directors of Avast who holds shares has undertaken to elect for the Majority Stock Option in respect of their entire beneficial holdings of Avast shares. We plan to finance the Proposed Merger with existing cash, cash to be generated by operations and new debt financing.
In conjunction with the Proposed Merger, on August 10, 2021,cash flows. Conversely, we entered into an agreement (as amended, the Interim Facilities Agreement) with certain financial institutions, in which they agreedhave seen and may continue to provide us with (i) a $3,600 million term loan interim facility B (the Interim Facility B), (ii) $750 million term loan interim facility A1 (the Interim Facility A1) and $3,500 million term loan interim facility A2 (the Interim Facility A2), and (iii) a $1,500 million interim revolving facility (the Interim Revolving Facility) (collectively, the Interim Facilities) and a commitment letter (as amended, the Commitment Letter) with certain financial institutions, in which they agreed to provide us with financing no less than the financing available under the Interim Facilities (the Definitive Facilities and, together with the Interim Facilities, the Facilities) to finance the cash consideration payable in connection with the Proposed Merger. The Definitive Facilities will be financed by a syndicate of lenders led by Bank of America, N.A. and Wells Fargo Bank N.A. On January 28, 2022, Bank of America, N.A. and Wells Fargo Bank N.A. agreed to arrange, on a best efforts basis, additional term loans under the Definitive Facilities in an amount up to $500 million. The Interim Facilities Agreement contains, and any definitive financing documentation for the Definitive Facilities entered into in connection with the Commitment Letter (the Facilities Agreement) will contain, customary representations and warranties, events of default and covenants for transactions of this type. The Facilities Agreement will replace the existing credit facility agreement upon the close of the transaction.
In conjunction with the Proposed Merger, on August 10, 2021, we entered into a Co-operation Agreement (the Co-operation Agreement) with Nitro Bidco Limited, our wholly-owned subsidiary (Bidco), and Avast, pursuant to which we and Bidco agreed to, among other things, use all reasonable endeavors for the purposes of obtaining any regulatory authorizations which are required to implement the Proposed Merger, and we, Bidco and Avast agreed to cooperate with each other in preparing required transaction documents and certain other matters in connection with the Proposed Merger. The Co-operation Agreement also contains certain termination rights. The Co-operation Agreement also provides that, if we fail to receive approvalsee cost savings from the U.K Competitionshift to remote and Markets Authority and cannot consummate the Proposed Merger, we may be required to pay Avast a break fee of up to $200 million.
The Proposed Merger was approved by our Board of Directors and by our shareholders, the Board of Directors and shareholders of Avast and regulators including the Federal Trade Commission under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act) and in Europe, the German Federal Cartel Office and the Spanish National Markets and Competition Commission. On August 3, 2022, the U.K. Competition and Markets Authority (CMA) provisionally cleared the Proposed Merger. Subject to final approval by the CMA and changes based on operational considerations mutually agreed upon by the parties and other requirements, the closing is anticipated to be between mid-September to early October 2022, given the CMA’s published schedule and the currently scheduled U.K. Court Hearing to approve the scheme.
COVID-19 UPDATE
The COVID-19 pandemic has had widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. At the onset of the pandemic, to protect the health and well-beingdistributed work for certain of our employees partnersin areas including real estate, events, travel, utilities and third-party service providers,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.
The U.S. banking market has also recently experienced increased volatility as a result of several distressed or closed banks. While we facilitatedhave not realized any losses as a work-from-home requirement for most employees and established site-specific COVID-19 prevention protocols. Weresult of this increased market volatility, we continue to monitor the situation and overwill take appropriate measures, as necessary, to minimize potential risk exposure to our customers’ and our cash and investment balances.
While inflation, interest rates and foreign currency exchange rates may be less volatile in the past several months have adjusted our policiessecond half of 2023, fluctuations in these indicators are uncertain and protocols to reflect changes to public health regulations and guidance. Our offices are now open to employees on a voluntary basis. To date, we have not seen any meaningful negative impact on our employee productivity. Nevertheless, as more employees, partners or third-party services providers return to work during the COVID-19 pandemic, the risk of inadvertent transmission of COVID-19 through human contact could still occur and result in litigation.
While the COVID-19 pandemic has negatively impacted many sectorsfurther adverse impacts to our reported results. For a further discussion of the U.S. and global economies, the consumer Cyber Safety market experienced increased demand as the pandemic greatly accelerated the digital lives of people around the world. However, with the extended duration of the pandemic and the easing of prevention protocols and restrictions, we are seeing decreasing demand and increased competition. In addition, while we did not experience a material increase in cancellations by customers or a material reduction in retention rate in fiscal 2022 or in the first quarter of fiscal 2023, should the negative macroeconomicpotential impacts of the COVID-19 pandemic persist or worsen, we may experience continued slowdowns inglobal macroeconomic conditions on our business, activity and an increase in cancellations by customers or a material reduction in our retention rate in the future, especially in the event of a prolonged recession. A prolonged recession could adversely affect demand for our offerings, retention rates and harm our business and results of operations, particularly in light of the fact that our solutions are discretionary purchases and thus may be more susceptible to macroeconomic pressures, as well impact the value of our common stock, ability to refinance our debt and our access to capital.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time, such as the severity and transmission rate of new variants of the disease, the extent, effectiveness and acceptance of containment actions, such as vaccination programs, and the impact of these and other factors on our employees, customers, partners and third-party service providers. For more information on the risks associated with the COVID-19 pandemic, please see Part I, Item III and “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.March 31, 2023. 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 months ended July 1, 2022.June 30, 2023.
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 | | | Three Months Ended |
| | July 1, 2022 | | July 2, 2021 | | | June 30, 2023 | | July 1, 2022 |
| Net revenues | Net revenues | 100 | % | | 100 | % | | Net revenues | 100 | % | | 100 | % |
| Cost of revenues | Cost of revenues | 14 | | | 15 | | | Cost of revenues | 19 | | | 14 | |
| Gross profit | Gross profit | 86 | | | 85 | | | Gross profit | 81 | | | 86 | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | |
| Sales and marketing | Sales and marketing | 22 | | | 23 | | | Sales and marketing | 19 | | | 22 | |
| Research and development | Research and development | 9 | | | 10 | | | Research and development | 10 | | | 9 | |
| General and administrative | General and administrative | 15 | | | 7 | | | General and administrative | 6 | | | 15 | |
| Amortization of intangible assets | Amortization of intangible assets | 3 | | | 3 | | | Amortization of intangible assets | 6 | | | 3 | |
| Restructuring and other costs | Restructuring and other costs | 0 | | | 1 | | | Restructuring and other costs | 2 | | | 0 | |
| Total operating expenses | Total operating expenses | 49 | | | 43 | | | Total operating expenses | 43 | | | 49 | |
| Operating income (loss) | Operating income (loss) | 37 | | | 42 | | | Operating income (loss) | 38 | | | 37 | |
| Interest expense | Interest expense | (4) | | | (5) | | | Interest expense | (18) | | | (4) | |
| Other income (expense), net | Other income (expense), net | 0 | | | 0 | | | Other income (expense), net | 1 | | | 0 | |
| Income (loss) before income taxes | Income (loss) before income taxes | 32 | | | 37 | | | Income (loss) before income taxes | 22 | | | 32 | |
| Income tax expense (benefit) | Income tax expense (benefit) | 4 | | | 10 | | | Income tax expense (benefit) | 2 | | | 4 | |
| Net income (loss) | Net income (loss) | 28 | % | | 26 | % | | Net income (loss) | 20 | % | | 28 | % |
Note: Percentages may not add due to rounding.
Net revenues | | | Three Months Ended | | | Three Months Ended |
| (In millions, except for percentages) | (In millions, except for percentages) | July 1, 2022 | | July 2, 2021 | | Change in % | | (In millions, except for percentages) | June 30, 2023 | | July 1, 2022 | | Change in % |
| Net revenues | Net revenues | $ | 707 | | | $ | 686 | | | 3 | % | | Net revenues | $ | 946 | | | $ | 707 | | | 34 | % |
Net revenues increased $21$239 million, primarily due to a $20$197 million increase in sales of our consumer security products and a $36 million increase in sales of our identity and information protection products. Net revenues were impacted by $27This is inclusive of $9 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 | | Three Months Ended (2) |
| (In millions, except for per user amounts) | (In millions, except for per user amounts) | July 1, 2022 | | July 2, 2021 | (In millions, except for per user amounts) | June 30, 2023 (3) | | July 1, 2022 |
Direct customer revenues (1) | Direct customer revenues (1) | $ | 620 | | | $ | 611 | | Direct customer revenues (1) | $ | 832 | | | $ | 624 | |
| Partner revenues | Partner revenues | $ | 88 | | | $ | 80 | | Partner revenues | $ | 97 | | | $ | 72 | |
| Average direct customer count | 23.4 | | | 23.0 | | |
| Total Cyber Safety revenues | | Total Cyber Safety revenues | $ | 929 | | | $ | 696 | |
| Legacy revenues | | Legacy revenues | $ | 17 | | | $ | 12 | |
| | Direct customer count (at quarter end) | Direct customer count (at quarter end) | 23.3 | | | 23.1 | | Direct customer count (at quarter end) | 38.2 | | | 24.1 | |
| Direct average revenue per user (ARPU) | Direct average revenue per user (ARPU) | $ | 8.82 | | | $ | 8.84 | | Direct average revenue per user (ARPU) | $ | 7.26 | | | $ | 8.58 | |
(1) Non-GAAP Direct customer revenues differ from GAAP direct customer revenue during the three months ended July 1, 2022, and July 2, 2021as it excludes a $1 million and $5 million reduction of revenue respectively, from a contract liability purchase accounting adjustment.adjustments. We believe that eliminating the impact of this adjustmentthese 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 customer revenue currently includes Mobile App Store customers, and legacy revenues includes revenues from products or solutions from markets that we have exited and in which we no longer operate, have been discontinued or identified to be discontinued, or remain in maintenance mode as a result of integration and product portfolio decisions. As such, prior period performance metrics have been recast to conform to the current period presentation for all periods presented above.
(3) The performance metrics for three months ended June 30, 2023 include the revenues earned and customers acquired through our acquisition 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 definecount as active paid users of our products and solutions who have a direct billing and/or registration relationship with the Companyus at the end of the reported period. Average direct customer count presents the average of the total number of direct customers at the beginning and end of the applicable period. We exclude users on free trials and usersfrom our direct customer count. Users who have indirectly purchased and/or registered for our productproducts or servicessolutions through partners are excluded unless such users convert or renew their subscription directly with us or sign up for a paid membership through our web store.
Average direct customer count presents the average of the total number of direct customers at the beginningstores or third-party app stores. The methodologies used to measure these metrics require judgment and end of the fiscal quarter.are subject to change due to improvements or revisions to our methodology. From time to time, we review our metrics and may discover inaccuracies or make adjustments to improve their accuracy, which can result in adjustments to our historical metrics. Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for such adjustments. We generally do not intend to update previously disclosed metrics for any such inaccuracies or adjustments that are deemed not material.
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 | | | Three Months Ended |
| | July 1, 2022 | | July 2, 2021 | | | June 30, 2023 | | July 1, 2022 |
| Americas | Americas | 72 | % | | 70 | % | | Americas | 66 | % | | 72 | % |
| EMEA | EMEA | 17 | % | | 19 | % | | EMEA | 24 | % | | 17 | % |
| APJ | APJ | 11 | % | | 11 | % | | APJ | 10 | % | | 11 | % |
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 months ended July 1, 2022 remained consistent with the corresponding periodJune 30, 2023 remains primarily in the prior year.Americas but is beginning to shift more into the EMEA markets, as the acquisition with Avast has contributed to a stronger presence in those regional countries.
Cost of revenues | | | Three Months Ended | | | Three Months Ended |
| (In millions, except for percentages) | (In millions, except for percentages) | July 1, 2022 | | July 2, 2021 | | Change in % | | (In millions, except for percentages) | June 30, 2023 | | July 1, 2022 | | Change in % |
| Cost of revenues | Cost of revenues | $ | 102 | | | $ | 102 | | | — | % | | Cost of revenues | $ | 179 | | | $ | 102 | | | 75 | % |
Our cost of revenues remained relatively flat.
Operating expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| (In millions, except for percentages) | July 1, 2022 | | July 2, 2021 | | Change in % | | | | | | |
| Sales and marketing | $ | 156 | | | $ | 156 | | | — | % | | | | | | |
| Research and development | 61 | | | 68 | | | (10) | % | | | | | | |
| General and administrative | 104 | | | 45 | | | 131 | % | | | | | | |
| Amortization of intangible assets | 21 | | | 21 | | | — | % | | | | | | |
| Restructuring and other costs | 2 | | | 7 | | | (71) | % | | | | | | |
| Total operating expenses | $ | 344 | | | $ | 297 | | | 16 | % | | | | | | |
Sales and marketing expense, research and development expense and amortization of intangible assets remained relatively flat.
General and administrative expense increased $59$77 million, primarily due to a $52 million increase in the amortization of a legal accrual, of which $45acquired intangible assets, $15 million was prejudgment interest, relatingincrease in payment processing fees, and $8 million increase in revenue share costs.
Operating expenses
| | | | | | | | | | | | | | | | | |
| Three Months Ended |
| (In millions, except for percentages) | June 30, 2023 | | July 1, 2022 | | Change in % |
| Sales and marketing | $ | 181 | | | $ | 156 | | | 16 | % |
| Research and development | 90 | | | 61 | | | 48 | % |
| General and administrative | 56 | | | 104 | | | (46) | % |
| Amortization of intangible assets | 61 | | | 21 | | | 190 | % |
| Restructuring and other costs | 17 | | | 2 | | | 750 | % |
| Total operating expenses | $ | 405 | | | $ | 344 | | | 18 | % |
Sales and marketing expense increased $25 million, primarily due to an ongoing patent infringement lawsuit$11 million increase in headcount and the corresponding legal fees. See Note 18IT costs, an $8 million increase in outside services and software expenses, a $3 million increase in our investment in advertising, and a $2 million increase of stock-based compensation expense.
Research and development expense increased $29 million, primarily due to a $15 million increase in headcount costs, a $9 million increase in outside services and software expense, and a $5 million increase of stock-based compensation expense.
General and administrative expense decreased $48 million, primarily due to a $53 million decrease in litigation cost and an $8 million decrease in IT and occupancy costs. This was partially offset by an $8 million increase in headcount costs and a $6 million increase of stock-based compensation expense.
Amortization of intangible assets increased $40 million as a result of the Notes to the Condensed Consolidated Financial Statements for further information.acquisition with Avast.
Restructuring and other costs decreased $5increased $15 million, primarily due to severance, termination benefits and other exit and disposal costs in connection with the December 2020 Plan, which was completed in the fourth quarter of fiscalSeptember 2022 .Plan. See Note 12 of the Notes to the Condensed Consolidated Financial Statements for details of ourthe fiscal 2024 restructuring activities.
Non-operating income (expense), net
| | | Three Months Ended | | | Three Months Ended |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | | (In millions) | June 30, 2023 | | July 1, 2022 |
| Interest expense | Interest expense | $ | (31) | | | $ | (32) | | | Interest expense | $ | (170) | | | $ | (31) | |
| Interest income | Interest income | 2 | | | — | | | Interest income | 6 | | | 2 | |
| Foreign exchange gain (loss) | Foreign exchange gain (loss) | (1) | | | 1 | | | Foreign exchange gain (loss) | 1 | | | (1) | |
| Gain (loss) on early extinguishment of debt | — | | | (5) | | | |
| | Gain on sale of properties | | Gain on sale of properties | 4 | | | — | |
| Other | Other | (2) | | | 1 | | | Other | 1 | | | (2) | |
| Total non-operating income (expense), net | Total non-operating income (expense), net | $ | (32) | | | $ | (35) | | | Total non-operating income (expense), net | $ | (158) | | | $ | (32) | |
Non-operating income (expense), net, remained relatively flat.increased by $126 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. This is partially offset by a $4 million increase in interest income from higher interest rates on our money market funds, a
$4 million increase in rental income related to a rent review settlement with our tenant, and a $4 million gain on the sale of certain land and buildings in Dublin, Ireland.
Provision for income taxes
| | | Three Months Ended | | | Three Months Ended |
| (In millions, except for percentages) | (In millions, except for percentages) | July 1, 2022 | | July 2, 2021 | | (In millions, except for percentages) | June 30, 2023 | | July 1, 2022 |
| Income (loss) before income taxes | Income (loss) before income taxes | $ | 229 | | | $ | 252 | | | Income (loss) before income taxes | $ | 204 | | | $ | 229 | |
| Income tax expense (benefit) | Income tax expense (benefit) | $ | 29 | | | $ | 71 | | | Income tax expense (benefit) | $ | 15 | | | $ | 29 | |
| Effective tax rate | Effective tax rate | 13 | % | | 28 | % | | Effective tax rate | 7 | % | | 13 | % |
Our effective tax rate for income for the three months ended June 30, 2023 differs from the federal statutory income tax rate primarily due to tax benefits related to the set up and write-off of deferred tax items from an internal restructuring, partially offset by state taxes and the U.S. taxation on foreign earnings.
Our effective tax rate for the three months ended July 1, 2022 differs from the federal statutory income tax rate primarily due to tax benefits related to the foreign currency remeasurement of an Irish deferred tax asset and discrete legal expenses booked during the quarter, partially offset by state taxes.
Our effective tax rate for the three months ended July 2, 2021 differs from the federal statutory income tax rate primarily due to state taxes, partially offset by the benefits of lower-tax international earnings and various permanent differences.
We are a U.S.-based multinational company dual headquartered in the U.S. and Czech Republic, although our principal executive offices remain in Tempe, Arizona, and we are 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 is therefore is difficult to predict.
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 acquisition with Avast 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 June 30, 2023, 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:
| | | Three Months Ended | | Three Months Ended |
| (In millions) | (In millions) | July 1, 2022 | | July 2, 2021 | (In millions) | June 30, 2023 | | July 1, 2022 |
| Net cash provided by (used in): | Net cash provided by (used in): | | | | Net cash provided by (used in): | | | |
| Operating activities | Operating activities | $ | 215 | | | $ | 258 | | Operating activities | $ | 226 | | | $ | 215 | |
| Investing activities | Investing activities | $ | 4 | | | $ | (1) | | Investing activities | $ | (6) | | | $ | 4 | |
| Financing activities | Financing activities | $ | (807) | | | $ | 44 | | Financing activities | $ | (350) | | | $ | (807) | |
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 $43 million, primarily due to a decrease in accounts payable as a resultremained relatively flat.
Cash from investing activities
Our cash flows provided by and used in investing activities remained relatively flat.
Cash from financing activities
Our cash flows used in financing activities decreased $851$457 million, primarily due to the absence of proceeds from issuance of debt and the continuationrepayment of our stock repurchase program.3.95% Senior Notes. The first three months of fiscal 20232024 reflects $150 million voluntary prepayment of Term B Facility, $83 million of dividends and dividend equivalent paid, $58 million principal amortization payments of our Term Loans and mortgages, and $41 million of repurchases of common stock, compared to the $400$400 million repayment of our 3.95% Senior Notes and $300 million of repurchases of common stock compared to the $512 million of proceeds from the issuance of our Initial Term Loan which was partially offset by the $364 million settlement of our New 2.5% Convertible Notes during the first three months of fiscal 2022.2023.
Cash and cash equivalents
As of July 1, 2022,June 30, 2023, we had cash, cash equivalents and short-term investments of $1,291$623 million, of which $694$520 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
We have an undrawn revolving credit facility of $1 billion,$1,500 million, which expires in May 2026.September 2027.
OnStock repurchases
During the three months ended June 1, 2022,30, 2023, we fully repaid the principal and accrued interestexecuted repurchases of 3 million of our common stock under the 3.95% Senior Notes due June 2022, which hadour existing stock repurchase program for an aggregate principal amount outstanding of $400$41 million. In addition, we paid $7 million of accrued and unpaid interest through the redemption date.
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.
Proposed Merger with Avast
On August 10, 2021, the Company announced a transaction under which we intend to acquire the entire issued and to be issued ordinary share capital of Avast plc, a public company incorporated in England and Wales and a global leader of digital security and privacy headquartered in Prague, Czech Republic (Avast and such transaction, the Proposed Merger). Based on our undisturbed closing share price of $27.20 on July 13, 2021, and depending on the Avast shareholder elections, the estimated purchase price range for the Avast shares under the Proposed Merger is $8.1 billion to $8.6 billion. In conjunction with the Proposed Merger, we and certain financial institution parties entered into an Interim Facilities Agreement, under which Bank of America, N.A. and Wells Fargo Bank N.A., as interim lenders, agreed to provide us with certain term loan and revolving facilities in order to finance the cash consideration payable and based on the terms and conditions set forth in a commitment letter. The Interim Facilities Agreement includes (i) the Interim Facility B, (ii) the Interim Facility A1 and the Interim Facility A2, and (iii) the Interim Revolving Facility which, on or before the final repayment date, are to be repaid/replaced in full by loans made under the definitive financing documentation for the Definitive Facilities (the Facilities Agreement). The obligations under the Facilities Agreement will be guaranteed, jointly and severally, by all of our present and future domestic subsidiaries, with certain exceptions, as applicable. The Facilities Agreement will replace the existing credit facility agreement upon the close of the transaction.
Debt instruments
As of July 1, 2022,June 30, 2023, 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) | July 1, 2022June 30, 2023 |
| Term Loans | $ | 1,7037,084 | |
| Senior Notes | 1,100 | |
Convertible Senior Notes | 5252,600 | |
| Mortgage Loans | 87 | |
| Total debt | $ | 3,3369,691 | |
Our credit agreement maturing in May 2026The Credit Agreement contains customary representations and warranties non-financial covenants for financial reporting and affirmative and negative covenants, including compliance with specified financial ratios. As of July 1, 2022,June 30, 2023, 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 August 4, 2022,3, 2023, we announced a cash dividend of $0.125 per share of common stock to be paid in September 2022.2023. Any future dividends and dividend equivalents will be subject to the approval of our Board of Directors.
ShareStock 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 July 1, 2022,June 30, 2023, the remaining balance of our stock repurchase authorization was $1,474$829 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 acquisition with Avast, 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 acquisition 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. We expect that we will incur total costs up to $150 million, with $120 million and $30 million estimated to be incurred within the first and second full years, respectively, following the completion of the acquisition. These actions are expected to be completed by fiscal 2024. During the three months ended June 30, 2023, we made $13 million in cash payments related to the September 2022 Plan. See Note 12of 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
Our principal commitments consist of principal and interest payments related to our debt instruments, obligations under our purchase agreements, repatriation tax payments under the Tax Cuts and Jobs Acts and obligations under various non-cancellable 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 July 1, 2022,June 30, 2023, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $556$530 million in long-term income taxes payable has been excluded from our quarterly review of timing of contractual obligations.
Commitments related to the principal payments of our debt instruments decreased $411 million from our Annual Report on Form 10-K for the fiscal year ended April 1, 2022 primarily due to the repayment of our 3.95% Senior Notes. There have been no other material changes, outside the ordinary course of business, to the contractual obligations reported in our Annual Report. For additional information about our debt obligations and certain other contingencies, see Note 10 and Note 18, respectively, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Under the terms of the Proposed Merger, we expect to pay a purchase price for the Avast shares ranging from $8.1 billion to $8.6 billion upon the completion of the transaction in late calendar year 2022. In conjunction with the Proposed Merger, we have secured debt under the Interim Facilities which will be available upon the close of the transaction. If the Proposed Merger is completed, our debt obligations will include principal and interest payments related to these credit facilities. See Note 4 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding this business combination and the related debt instruments.
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 credit facility, will be sufficient to meet our working capital needs and support on-going business activities through at least the next 12 months and to meet our known long-term contractual obligations. We plan to finance the cash consideration payable to Avast primarily with borrowings under our Interim Facilities. We believe that our existing cash and cash to be generated by operations, along with amounts available under the new credit facility, will satisfy our long-term cash requirements for this transaction. However, our future liquidity and capital requirements may vary materially from those as of July 1, 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.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us. In connection with the sale of Veritas and the sale of our Enterprise Security business to Broadcom, we assigned several leases to Veritas Technologies LLC or Broadcom and/or their related subsidiaries. See Note 18 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information on our indemnifications.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
ThereWe are exposed to various market risks related to fluctuations in interest rates and foreign currency exchange rates. We may use derivative and non-derivative financial instruments to reduce the volatility of earnings and cash flow that may result from adverse economic conditions and events or changes in interest rates and foreign currency exchange rates.
Interest rate risk
As of June 30, 2023, we had $2,600 million in aggregate principal amount of fixed-rate Senior Notes outstanding, with a carrying amount and a fair value of $2,578 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, the 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 June 30, 2023, we also had $7,084 million outstanding debt with variable interest rates based on the Secured Overnight Financing Rate (SOFR). A hypothetical 100 basis point change in SOFR would have been noresulted in a $71 million increase in interest expense on an annualized basis.
In March 2023, we entered into interest rate swap agreements to mitigate risks associated with the variable interest rate of our Term A Facility. These pay-fixed, receive-floating rate interest rate swaps have the economic effect of hedging the variability of forecasted interest payments until their maturity on March 31, 2026. Pursuant to the agreements, we have effectively converted $1 billion of our variable rate borrowings under Term A Facility to fixed rates, with $500 million at a fixed rate of 3.762% and $500 million at a fixed rate of 3.55%. A hypothetical 100 basis point increase or decrease in interest rates would have resulted in a $23 million increase or $24 million decrease in the fair values of our floating to fixed rate interest swaps on June 30, 2023.
The objective of our interest rate swaps, all of which are designated as cash flow hedges, is to manage the variability of future interest expense.
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 by executing monthly foreign exchange forward contracts to hedge foreign currency balance sheet exposures. The gains and losses on these foreign exchange contracts are recorded in Other income (expense), net in the Condensed 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 market risk exposures duringdebt and derivative instruments is included in Note 10 and Note 11, respectively, of the first three months of fiscal 2023, as comparedNotes to those discussedthe Condensed Consolidated Financial Statements included in Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II, Item 7A, of our Annualthis Quarterly Report on Form 10-K for the fiscal year ended April 1, 2022.10-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 Securities 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
There was no change in our internal control over financial reporting or in other factors that occurred during the first quarter of fiscal 2023,2024, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
(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.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 THE PROPOSED MERGER
We may fail to consummate the Proposed Merger with Avast plc, may not consummate the Proposed Merger on the expected terms, or may not achieve the anticipated benefits.
It is currently anticipated that the Proposed Merger will be consummated in late calendar year 2022. Completion of the Proposed Merger is subject to, among other things, approval from the U.K. Competition and Markets Authority (the CMA) and other customary closing conditions for the acquisition of a UK public company, including the sanction of the UK’s High Court. All necessary regulatory approvals have been satisfied, with the exception of final approval required from the CMA, which has provisionally cleared the Proposed Merger on August 3, 2022. As a result, the possible timing and likelihood of completion are uncertain, and, accordingly, there can be no assurance that the Proposed Merger will be completed on the expected terms, on the anticipated schedule or at all. In addition, the CMA may require, in connection with granting its approval of the transaction, divestitures or ongoing restrictions on the operation of the combined business, each of which could have a material impact on the anticipated strategic benefits and synergies from the combination. Any delay in consummation of the Proposed Merger will result in greater transaction costs and professional fees and continue to expose us to market risk. If we fail to receive final approval from the CMA and cannot consummate the Proposed Merger, we may be required to pay Avast a break fee of up to $200 million under the Co-operation Agreement. If consummated, the success of the Proposed Merger will depend, in significant part, on our ability to successfully integrate Avast and its subsidiaries, grow the revenue of the combined company and realize the anticipated strategic benefits and synergies from the combination. We believe that the addition of Avast and its subsidiaries represents an attractive opportunity to create a new, industry leading consumer Cyber Safety business, leveraging the established brands, technical expertise and innovation of both groups to deliver substantial benefits to consumers, shareholders and other stakeholders. Achieving these goals requires growth of the revenue of the combined company and realization of the targeted synergies expected from the Proposed Merger. This growth and the anticipated benefits of the Proposed Merger may not be realized fully or at all, or may take longer to realize than we expect. Actual operating, technological, strategic and revenue opportunities, if achieved at all, may be less significant than we expect or may take longer to achieve than anticipated. If we are not able to achieve these objectives and realize the anticipated benefits and synergies expected from the Proposed Merger within a reasonable time, our business, financial condition and operating results may be adversely affected.
Litigation filed against us could prevent or delay the completion of the Proposed Merger or result in the payment of damages following completion of the Proposed Merger.
As previously reported in our Form 8-K dated October 29, 2021, we received letters on behalf of our purported stockholders, in each case stating the stockholder’s belief that the proxy statement filed by us on October 4, 2021 omitted material information with respect to the Merger and demanding that we make additional and supplemental disclosures regarding the Merger. Additionally, six complaints have been filed by our purported stockholders in connection with the Merger (collectively, the Merger Complaints). The Merger Complaints were brought by the plaintiffs individually and also allege that the proxy statement omitted material information with respect to the Merger. After the Company issued its October 29, 2021 Form 8-K, the plaintiffs in the Merger Complaints dismissed their actions as moot while reserving the right to seek a fee in connection with their respective litigations.
RISKS RELATED TO COVID-19
The COVID-19 pandemic has affected how we are operating our business, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
The COVID-19 pandemic has had widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. At the onset of the pandemic, to protect the health and well-being of our employees, partners and third-party service providers, we facilitated a work-from-home requirement for most employees and established site-specific COVID-19 prevention protocols. We continue to monitor the situation and over the past several months have adjusted our policies and protocols to reflect changes to public health regulations and guidance. Our offices are now open to employees on a voluntary basis. To date, we have not seen any meaningful negative impact on our customer success efforts, sales and marketing efforts, or employee productivity. Nevertheless, as more employees, partners or third-party services providers return to work during the COVID-19 pandemic, the risk of inadvertent transmission of COVID-19 through human contact could still occur and result in litigation.
While the COVID-19 pandemic has negatively impacted many sectors of the U.S. and global economies, the consumer Cyber Safety market experienced increased demand as the pandemic greatly accelerated the digital lives of people around the world. However, with the extended duration of the pandemic and the easing of prevention protocols and restrictions, we are seeing decreasing demand and increased competition. In addition, should the negative macroeconomic impacts of the COVID-19 pandemic persist or worsen, we may experience continued slowdowns in our business activity and an increase in cancellations
by customers or a material reduction in our retention rate in the future, especially in the event of a prolonged recession. A prolonged recession could adversely affect demand for our offerings, retention rates and harm our business and results of operations, particularly in light of the fact that our solutions are discretionary purchases and thus may be more susceptible to macroeconomic pressures, as well impact the value of our common stock, ability to refinance our debt and our access to capital.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time, such as the severity and transmission rate of new variants of the disease, the extent, effectiveness and acceptance of containment actions, such as vaccination programs, and the impact of these and other factors on our employees, customers and the overall demand for our products, partners and third-party service providers. If we are not able to respond to and manage the impact of such events effectively and if the macroeconomic conditions of the general economy or the industries in which we operate do not improve, or deteriorate further, our business, operating results, financial condition and cash flows could be adversely affected.
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 In the past, we have 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 reliancedeliver innovative market competitive products and avoid being reliant on third parties.third-party technology and products. 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, weWe 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 commitmentcommitments of time and resources and are subject to a number of risks and challenges including but not limited to:
•Lengthy development cycles;
•Evolving industry and regulatory standards and technological developments by our competitors and customers;
•Rapidly changing customer preferences;
•Evolving platforms, operating systems, and hardware products, such as mobile devices;
•Product and service interoperability challenges with customer’s technology and third-party vendors;
•The integration of products and solutions from acquired companies;
•Availability of engineering and technical talent;
•Entering into new or unproven market segments; and
•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, evolving market trends, 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, privacy and data protection standards 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.trends.
We face competition from a broad range of companies, including software vendors focusing on Cyber Safety solutions such as Bitdefender, Kapersky, McAfee and Trend Micro, operating system providers such as Apple, Google and Microsoft, and ‘pure play’ companies such as Nord, Life360, Last Pass and others 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 some or all of 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.obsolete and therefore causing us to fail to meet customer expectations. 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,segments. Consequently, those competitors 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 fromtheir 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), operating systems and operating systems.telecom service providers. 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,solutions. Similarly, they could gain market share from us if these partners more actively promote our competitors’ solutions or their own solutions more 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, furtherFurther product development by these vendors could cause our solutions to become redundant, which could significantly impact our sales and operating results.
We may need to change our pricing modelscannot be sure that we will accurately predict how the markets in which we compete or intend to compete successfully.
The intense competition we face, in addition to general and economic business conditions, can put pressure on us to change our pricing practices. If our competitors offer deep discounts on certain solutions or provide offerings, or offer free introductory products that compete with ours, we may need to lower prices or offer similar free introductory products in order to compete successfully. Similarly, if external factors, such as economic conditions or market trends, require us to raise our prices, our ability to acquire new customers and retain existing customers may be diminished. Any such changes may reduce revenue and margins and could adversely affect our financial results.
Additionally, our business may be affected by changes in the macroeconomic environment. Our solutions are discretionary purchases, and customers may reduce or eliminate their discretionary spendingwill evolve. Failure on our solutions during a difficult macroeconomic environment. Although we did not experience a material increase in cancellations by customers or a material reduction in our retention rate in fiscal 2022 or in the first quarter of fiscal 2023, we may experience such an increase or reduction in the future, especially in the event of a prolonged recession or a worsening of current conditions as a result of the COVID-19 pandemic. In addition, during a recession, consumers may experience a decline in their credit or disposable income, which may result in less demand for our solutions. As a result, we may havepart to lower our prices or make otheranticipate changes to our pricing model to address these dynamics, any of which could adversely affect our business and financial results.
In addition, in January 2021, we acquired Germany-based Avira. Many of Avira’s users are freemium subscribers, meaning they do not pay for its basic services. Much of our anticipated growth in connection with the Avira acquisition is attributable to attracting and converting Avira’s freemium users to a paid subscription option. Numerous factors, however, may impede our ability to attract, retain and convert these users into paying customers.
If we fail to manage our sales and distribution channels effectively, or if our partners choose not to market and sell our solutions to their customers, our operating results could be adversely affected.
A portion of our revenues is derived from sales through indirect channels, including, but not limited to, distributors that sell our products to end-users and other resellers, and OEM partners that incorporate our products into, or bundle our products with, their products. These channels involve a number of risks, including:
•Our resellers, distributors and OEMs are generally not subject to minimum sales requirements or any obligation to market our solutions to their customers;
•Our reseller and distributor agreements are generally nonexclusive and may be terminated at any time without cause and our OEM partners may terminate or renegotiate their arrangements with us and new terms may be less favorable due to competitive conditions in our markets and other factors;
•Our resellers, distributors and OEMs may encounter issues or have violations of applicable law or regulatory requirements or otherwise cause damage to our reputation through their actions;
•Our resellers and distributors frequently market and distribute competingdevelop solutions and may, from timeenhancements that meet the demands of those markets or to time, place greater emphasis on the saleeffectively compete against our competitors will significantly impair our business, financial condition, results of these competing solutions due to pricing, promotions,operations, and other terms offered by our competitors;
•Any consolidation of electronics retailers can increase their negotiating power with respect to software providers such as us and any decline in the number of physical retailers could decrease the channels of distribution for us;
•The continued consolidation of online sales through a small number of larger channels has been increasing, which could reduce the channels available for online distribution of our solutions; and
•Sales through our partners are subject to changes in general economic conditions, strategic direction, competitive risks, and other issues that could result in a reduction of sales, or cause our partners to suffer financial difficulty which could delay payments to us, affecting our operating results.
If we fail to manage our sales and distribution channels successfully, these channels may conflict with one another or otherwise fail to perform as we anticipate, which could reduce our sales and increase our expenses as well as weaken our competitive position.
Our revenue and operating results depend significantly on our ability to retain our existing customers, convert existing non-paying customers to paying customers, and add new customers.
We generally sell our solutions to our customers on a monthly or annual subscription basis. Customers may choose not to renew their membership with us at any time. Renewing customers may require additional incentives to renew, may not renew for the same contract period, or may change their subscriptions. We therefore may be unable to retain our existing customers on the same or on more profitable terms, if at all. In addition, we may not be able to accurately predict or anticipate future trends in customer retention or effectively respond to such trends.
Our customer retention rates may decline or fluctuate due to a variety of factors, including the following:
•Our customers’ levels of satisfaction or dissatisfaction with our solutions and the value they place on our solutions;
•The quality, breadth, and prices of our solutions;
•Our general reputation and events impacting that reputation;
•The services and related pricing offered by our competitors; including increasing availability and efficacy of free solutions;
•Disruption by new services or changes in law or regulations that impact the need for efficacy of our products and services;
•Changes in auto-renewal regulations;
•Our customers’ dissatisfaction with our efforts to market additional products and services;
•Our customer service and responsiveness to the needs of our customers; and
•Changes in our target customers’ spending levels as a result of general economic conditions, inflationary pressures or other factors.
Declining customer retention rates could cause our revenue to grow more slowly than expected or decline; and our operating results, gross margins and business will be harmed.cash flows.
Our acquisitions and divestitures create special risks and challenges that could adversely affect our financial results.
As part of our business strategy, we may acquire or divest businesses or assets. For example, in 2019, we completed the sale of certain of our enterprise security assets to Broadcom Inc. (the Broadcom sale) and, in January 2021, we completed the acquisition of Avira.Avira, and in September 2022, we completed the acquisition with Avast. These activities canhave and may continue to involve a number of risks and challenges, including:
•Complexity, time and costs associated with managing these transactions, including the integration of acquired and the winding down of divested business operations, workforce, products, IT systems and technologies;
•Challenges in retaining customers of acquired businesses, or providing the same level of service to existing customers with reduced resources;
•Diversion of management time and attention;
•Loss or termination of employees, including costs associated with the termination or replacement of those employees;
•Assumption of liabilities of the acquired and divested business or assets, including pending or future litigation, investigations or claims related to the acquired business or assets;
•The additionAddition of acquisition-related debt;
•Difficulty in entering into or expanding in new markets or geographies;
•Increased or unexpected costs and working capital requirements;
•Dilution of stock ownership of existing stockholders;
•UnanticipatedOngoing contractual obligations and unanticipated delays or failure to meet contractual obligations;
•Substantial accounting charges for acquisition-related costs, asset impairments, amortization of intangible assets and higher levels of stock-based compensation expense; and
•Difficulty in realizing potential benefits, including cost savings and operational efficiencies, synergies and growth prospects from integrating acquired businesses.
Macroeconomic factors, such as rising inflation, interest rates, and volatility in foreign currency exchange rates and capital markets could negatively influence our future acquisition opportunities. Moreover, to be successful, large complex acquisitions depend on large-scale product, technology, and sales force integrations that are difficult to complete on a timely basis or at all and may be more susceptible to the special risks and challenges described above. Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of profitability or other financial benefits from our acquired or divested businesses, product lines or assets or to realize other anticipated benefits of divestitures or acquisitions.
Our revenue and operating results depend significantly on our ability to retain our existing customers and expand sales to them, convert existing non-paying customers to paying customers and add new customers.
We generally sell our solutions to our customers on a monthly or annual subscription basis. It is important to our business that we retain existing customers and that our customers expand their use of our solutions over time. Customers may choose not to renew their membership with us at any time. Renewing customers may require additional incentives to renew, may not renew for the same contract period, or may change their subscriptions. We therefore may be unable to retain our existing customers on the same or more profitable terms, if at all. In addition, we may not be able to accurately predict or anticipate future trends in customer retention or effectively respond to such trends.
Our customer retention rates may decline or fluctuate due to a variety of factors, including the following:
•Our customers’ levels of satisfaction or dissatisfaction with our solutions and the value they place on our solutions;
•The quality, breadth, and prices of our solutions;
•Our general reputation and events impacting that reputation;
•The services and related pricing offered by our competitors; including increasing availability and efficacy of free solutions;
•Disruption by new services or changes in law or regulations that impact the need for efficacy of our products and services;
•Changes in auto-renewal and other consumer protection regulations;
•Our customers’ dissatisfaction with our efforts to market additional products and services;
•Our customer service and responsiveness to the needs of our customers;
•Changes in our target customers’ spending levels as a result of general economic conditions, inflationary pressures or other factors; and
•The quality and efficacy of our third-party partners who assist us in renewing customers’ subscriptions.
Declining customer retention rates could cause our revenue to grow more slowly than expected or decline, and our operating results, gross margins and business will be harmed. In addition, our ability to generate revenue and maintain or improve our results of operations partly depends on our ability to cross-sell our solutions to our existing customers and to convert existing non-paying customers to paying customers. We may not be successful in cross-selling our solutions because our customers may find our additional solutions unnecessary or unattractive. Our failure to sell additional solutions to our existing customers could adversely affect our ability to grow our business.
An important part of our growth strategy involves continued investment in direct marketing efforts, indirect partner distribution channels, freemium channels, our sales force, and infrastructure to add new customers. The number and rate at which new customers purchase our products and services depends on a number of factors, including those outside of our control, such as customers’ perceived need for our solutions, competition, general economic conditions, market transitions, product obsolescence, technological change, public awareness of security threats to IT systems, macroeconomic conditions, and other factors. New customers, if any, may subscribe or renew their subscriptions at lower rates than we have experienced in the past, introducing uncertainty about their economic attractiveness and potentially impacting our financial results.
Additionally, there are inherent challenges in measuring the usage of our products and solutions across our brands, platforms, regions, and internal systems, and therefore, calculation methodologies for direct customer counts may differ, which may impact our ability to measure the addition of new customers. The methodologies used to measure these metrics require judgment and are also susceptible to algorithms or other technical errors. We continually seek to improve our estimates of our user base, and these estimates are subject to change due to improvements or revisions to our methodology. From time to time, we review our metrics and may discover inaccuracies or make adjustments to improve their accuracy, which can result in adjustments to our historical metrics. Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for such adjustments.
We may need to change our pricing models to compete successfully.
The intense competition we face, in addition to general and economic business conditions (including economic volatility, recent bank failures, and increased inflation and interest rates, among other things), may put pressure on us to change our pricing practices. If our competitors offer deep discounts on certain solutions or provide offerings, or offer free introductory products that compete with ours, we may need to lower prices or offer similar free introductory products to compete successfully. Similarly, if external factors, such as economic conditions, market trends, or business combinations require us to raise our prices, our ability to acquire new customers and retain existing customers may be diminished. Any such changes may reduce revenue and margins and could adversely affect our financial results.
Additionally, our business may be affected by changes in the macroeconomic environment. Our solutions are discretionary purchases, and customers may reduce or eliminate their discretionary spending on our solutions during a difficult macroeconomic environment. We may experience a material increase in cancellations by customers or a material reduction in our retention rate in the future, especially in the event of a prolonged recession or a worsening of current conditions as a result of inflation, changes in interest rates, or other macroeconomic events. We may have to lower our prices or make other changes to our pricing model to address these dynamics, any of which could adversely affect our business and financial results. Additionally, 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, and changes in interest rates. 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. Volatile market conditions related to Russia’s invasion of Ukraine and retaliatory sanctions against the Russian Federation and Belarus, and other global or macroeconomic events have, at times, and may in the future negatively impact our results of operations and cash flows.
Finally, in January 2021, we acquired Germany-based Avira and in September 2022, we completed the acquisition with Avast. Many of Avira’s and Avast’s users are freemium subscribers, meaning they do not pay for its basic services. Much of our anticipated growth in connection with the Avira acquisition and the acquisition with Avast is attributable to attracting and converting Avira’s and Avast’s freemium users to a paid subscription option. Numerous factors, however, may impede our ability to attract free users, convert these users into paying customers and retain them.
If we fail to manage our sales and distribution channels effectively, or if our partners choose not to market and sell our solutions to their customers, our operating results could be adversely affected.
A portion of our revenues is derived from sales through indirect channels, including, but not limited to, distributors that sell our products to end-users and other resellers, and partners that incorporate our products into, or bundle our products with, their products. These channels involve risks, including:
•Our resellers, distributors and telecom service providers are generally not subject to minimum sales requirements or any obligation to market our solutions to their customers;
•Our reseller and distributor agreements are generally nonexclusive and may be terminated at any time without cause and our partners may terminate or renegotiate their arrangements with us and new terms may be less favorable due to competitive conditions in our markets and other factors;
•Our resellers, distributors and OEMs may encounter issues or have violations of applicable law or regulatory requirements or otherwise cause damage to our reputation through their actions;
•Our resellers and distributors frequently market and distribute competing solutions and may, from time to time, place greater emphasis on the sale of competing solutions due to pricing, promotions, and other terms offered by our competitors;
•Any consolidation of electronics retailers can increase their negotiating power with respect to software providers such as us and any decline in the number of physical retailers could decrease the channels of distribution for us;
•The consolidation of online sales through a small number of larger channels has been increasing, which could reduce the channels available for online distribution of our solutions; and
•Sales through our partners are subject to changes in general economic conditions, strategic direction, competitive risks, and other issues that could result in fewer sales, or cause our partners to suffer financial difficulty which could delay payments to us, affecting our operating results.
If we fail to manage our sales and distribution channels successfully, these channels may conflict with one another or otherwise fail to perform as we anticipate, which could reduce our sales and increase our expenses as well as weaken our competitive position.
Changes in industry structure and market conditions couldhave and may continue to lead to charges related to discontinuance of certain of our products or businesses and asset impairments.
In response to changes in industry structure and market conditions, we have been and may continue to be required to strategically reallocate our resources and consider restructuring, disposing of, or otherwise exiting certain businesses. Any decision to limit investment in or dispose of or otherwise exit businesses has and may continue to result in the recording of special charges, such as technology-related write-offs, workforce reduction costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products. Our estimates with respect to the useful life or ultimate recoverability of our carrying basis of assets, including purchased intangible assets, could change as a result of such assessments and decisions. Although in certain instances our vendor agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs, ourOur loss contingencies have and may continue to include liabilities for contracts that we cannot cancel, reschedule or adjust with suppliers.
Further, our estimates relating to the liabilities for excess facilities are affected by changes in real estate market conditions. Additionally, we are required to evaluate goodwill impairment on an annual basis and between annual evaluations in certain circumstances, and future goodwill impairment evaluations may result in a charge to earnings.
RISKS RELATED TO OUR OPERATIONS
We are dependent upon Broadcom for certain engineering and threat response services, which are critical toOur international operations involve risks that could increase our products and business.
Our endpoint security solution has historically relied upon certain threat analytics software engines and other software (the Engine-Related Services) that have been developed and provided by engineering teams that have transferred to Broadcom as part of the Broadcom sale. The technology, including source code, at issue is shared, and pursuant to the terms of the Broadcom sale, we retain rights to use, modify, enhance and create derivative works from such technology. Broadcom has committed to provide these Engine-Related Services substantially to the same extent and in substantially the same manner, as has been historically provided under a license agreement with a limited term.
As a result, we are dependent on Broadcom for services and technology that are critical toexpenses, adversely affect our Norton business, and if Broadcom fails to deliver these Engine-Related Services it would result in significant business disruption, and our business and operating results and financial conditionrequire increased time and attention of our management.
Following the acquisition with Avast, we derive a significant portion of our revenues from customers located outside of the U.S., and we have substantial operations outside of the U.S., including engineering, finance, sales and customer support. Our international operations are subject to risks in addition to those faced by our domestic operations, including:
•Difficulties staffing, managing, and coordinating the activities of our geographically dispersed and culturally diverse operations;
•Potential loss of proprietary information due to misappropriation or laws that may be less protective of our intellectual property rights than U.S. laws or that may not be adequately enforced;
•Requirements of foreign laws and other governmental controls, including tariffs, trade barriers and labor restrictions, and related laws that reduce the flexibility of our business operations;
•Fluctuations in currency exchange rates, economic instability, and inflationary conditions could be materiallymake our solutions more expensive or could increase our costs of doing business in certain countries;
•Potential changes in trade relations arising from policy initiatives or other political factors;
•Regulations or restrictions on the use, import, or export of encryption technologies that could delay or prevent the acceptance and adversely affected. Furthermore, ifuse of encryption products and public networks for secure communications;
•Local business and cultural factors that differ from our current sources become unavailable,normal standards and ifpractices, including business practices that we are unable to develop or obtain alternatives to integrate or deploy themprohibited from engaging in time,by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations;
•Central bank and other restrictions on our ability to repatriate cash from our international subsidiaries or to exchange cash in international subsidiaries into cash available for use in the United States;
•Limitations on future growth or inability to maintain current levels of revenues from international sales if we do not invest sufficiently in our international operations;
•Difficulties in staffing, managing, and operating our international operations;
•Costs and delays associated with developing software and providing support in multiple languages;
•Political, social or economic unrest, war, or terrorism, regional natural disasters, or export controls and trade restrictions, particularly in areas in which we have facilities; and
•Multiple and possibly overlapping tax regimes.
The expansion of our existing international operations and entry into additional international markets has required and will continue to require significant management attention and financial resources. These increased costs may increase our cost of acquiring international customers, which may delay our ability to achieve profitability or reduce our profitability in the future. We may also face pressure to lower our prices in order to compete effectively could be impacted and have a material adverse effect on our business. Additionally, in connection with the Broadcom sale, we lost other capabilities, including certain threat intelligence data which were historically provided by our former Enterprise Security business, the lack ofemerging markets, which could have a negative impactadversely affect revenue derived from our international operations.
Our business has not been materially impacted to date by Russia’s invasion of Ukraine and retaliatory sanctions against the Russian Federation and Belarus; however, it is not possible to predict the broader consequences of this conflict or other conflicts that may arise in the future, which could include geopolitical instability and uncertainty; adverse impacts on global and regional economic conditions and financial markets, including significant volatility in credit, capital, and currency markets; reduced economic activity; changes in laws and regulations affecting our business, including further sanctions or counter-sanctions which may be enacted; and products.increased cybersecurity threats and concerns. The ultimate extent to which Russia’s invasion of Ukraine or other future conflicts may negatively impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain, difficult to predict and subject to change.
Our future success depends on our ability to attract and retain personnel in a competitive marketplace.
Our future success depends upon our ability to recruit and retain key management, technical (including cyber security experts), sales, marketing, e-commerce, finance, and other personnel. As a result of the acquisition with Avast, we have expanded our leadership team. Our officers and other key personnel are “at will” employees and we generally do not have employment or non-compete agreements with our employees. Competition is significant for people with the specific skills that we require is significant. While we continue to monitor the competitive environment, it is possible that the COVID-19 pandemic may affect the productivity of our employees and our ability to attract and retain key talent. As a result of the pandemic, in March 2020, we transitioned to a remote working environment for the substantial majority of our employees. While our employees have transitioned effectively to working from home, over time such remote operations may decrease the cohesiveness of our employees and our ability to maintain our culture, both of which are integral to our success. Additionally, a remote working environment may impede our ability to undertake new business projects, to foster a creative environment, to hire new employees and to retain existing employees.require.
In order to attract and retain personnel in a competitive marketplace, we must provide competitive pay packages, including cash and equity-based compensation. Additionally, changes in immigration laws could impair our ability to attract and retain highly qualified employees. If we fail to attract, retain and motivate new or existing personnel, our business, results of operations and future growth prospects could suffer. The volatilityVolatility in our stock price may from time to time adversely affect our ability to recruit or retain employees. In addition, we may not have an adequate number of shares reserved under our equity compensation plans, forcing us to reduce awards of equity-based compensation, which could impair our efforts to attract, retain and motivate necessary personnel. If we are unable to hire and retain qualified employees, or conversely, if we fail to manage employee performance or reduce staffing levels when required by market conditions, our business and operating results could be adversely affected.
Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. From time to time, key personnel leave our company and the frequency and number of such departures have widely varied and have, in the past, resulted in significant changes to our executive leadership team. The loss of any key employee could result in significant
disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, our internal control over financial reporting, and our results of operations. In addition, hiring, training, and successfully integrating replacement personnel can be time consuming and expensive, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact future financial results.
Our inability to successfully recover from a disaster or other business continuity event could impair our ability to deliver our products and services and harm our business.
We are heavily reliant on our technology and infrastructure to provide our products and services to our customers. For example, we host many of our products using third-party data center facilities, and while we require them to maintain formal service level agreements around availability, we do not control the operation of these facilities. These facilities are vulnerable to damage, interruption, or performance problems from earthquakes, hurricanes, floods, fires, power loss, telecommunications failures, pandemics and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. The occurrence of a natural disaster, an act of terrorism, a pandemic, and similar events could result in a decision to close the facilities without adequate notice or other unanticipated problems, which in turn, could result in lengthy interruptions in the delivery of our products and services, which could negatively impact our sales and operating results.
Furthermore, our business administration, human resources, compliance efforts, and finance services depend on the proper functioning of our computer, telecommunication, and other related systems and operations. A disruption or failure of these systems or operations because of a disaster, cyber-attack or other business continuity event, such as the COVID-19 pandemic, could cause data to be lost or otherwise delay our ability to complete sales and provide the highest level of service to our customers. In addition, we could have difficulty producing accurate financial statements on a timely basis, and deficiencies may arise in our internal control over financial reporting, which may impact our ability to certify our financial results, all of which could adversely affect the trading value of our stock. Although we endeavor to ensure there is redundancy in these systems and that they are regularly backed-up, there are no assurances that data recovery in the event of a disaster would be effective or occur in an efficient manner. If these systems or their functionality do not operate as we expect them to, we may be required to expend significant resources to make corrections or find alternative sources for performing these functions.
If we fail to offer high-quality customer support, our customer satisfaction may suffer and have a negative impact on our business and reputation.
Many of our customers rely on our customer support services to resolve issues, including technical support, billing and subscription issues, that may arise. If demand increases, or our resources decrease, we may be unable to offer the level of support our customers expect. Any failure by us to maintain the expected level of support could reduce customer satisfaction and negatively impact our customer retention and our business.
Our international operations involve risks that could increase our expenses, adversely affect our operating results and require increased time and attention of our management.
We derive a portion of our revenues from customers located outside of the U.S., and we have significant operations outside of the U.S., including engineering, finance, sales and customer support. Our international operations are subject to risks in addition to those faced by our domestic operations, including:
•Potential loss of proprietary information due to misappropriation or laws that may be less protective of our intellectual property rights than U.S. laws or that may not be adequately enforced;
•Requirements of foreign laws and other governmental controls, including tariffs, trade barriers and labor restrictions, and related laws that reduce the flexibility of our business operations;
•Potential changes in trade relations arising from policy initiatives or other political factors;
•Regulations or restrictions on the use, import, or export of encryption technologies that could delay or prevent the acceptance and use of encryption products and public networks for secure communications;
•Local business and cultural factors that differ from our normal standards and practices, including business practices that we are prohibited from engaging in by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations;
•Central bank and other restrictions on our ability to repatriate cash from our international subsidiaries or to exchange cash in international subsidiaries into cash available for use in the U.S.;
•Fluctuations in currency exchange rates, economic instability, and inflationary conditions could make our solutions more expensive or could increase our costs of doing business in certain countries;
•Limitations on future growth or inability to maintain current levels of revenues from international sales if we do not invest sufficiently in our international operations;
•Difficulties in staffing, managing, and operating our international operations;
•Difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations;
•Costs and delays associated with developing software and providing support in multiple languages; and
•Political unrest, war, or terrorism, or regional natural disasters, particularly in areas in which we have facilities.
RISKS RELATED TO OUR SOLUTIONS
Our solutions, systems, websites and the data on these sources have been and may continue to be subject to intentional disruptioncybersecurity events that could materially harm to our reputation and future sales.
Despite our precautions and significant ongoing investments to protect against security risks, data protection breaches, cyber-attacks, and other intentional disruptions of our solutions, we expect to continue to be an ongoinga target of attacks specifically designed to impede the performance and availability of our offerings and harm our reputation as a leading cyber security company. In addition, we face the risk of cyberattacks by nation-states and state-sponsored actors. These attacks may target us, our partners, suppliers, vendors or customers. Similarly, experienced computer programmers or other sophisticated individuals or entities, including malicious hackers, state-sponsored organizations, and insider threats including actions by employees and third-party service providers, may attemptcould or have attempted to penetrate, and in some cases have penetrated, our network security or the security of our systems and websites and misappropriate proprietary informationvendors or cause interruptions of our products and services.suppliers. Such attempts are increasing in number and in technical sophistication, and if successful could expose us and the affected parties, to risk of loss or misuse of proprietary, personal or confidential information or disruptions of our business operations.
While we engage in a number of measures aimed to protect against security breaches and to minimize the impact ifWhen a data breach were to occur,occurs, our information technology systems and infrastructure maycan be vulnerablesubject to damage, compromise, disruption, and shutdown due to attacks or breaches by hackers or other circumstances, such as error or malfeasance by employees or third partythird-party service providers or technology malfunction. There is no guarantee that these issues will not ultimately result in significant legal, financial, and reputational harm, including government inquiries, enforcement actions, litigation, and negative publicity. There is also no guarantee that a series of issues may not be determined to be material at a later date in the aggregate, even if they may not be material individually at the time of their occurrence. The occurrence of any of these events, as well as a failure to promptly remedy these events shouldthem when they occur, could compromise our systems and the information stored in our systems could be accessed, publicly disclosed, lost, stolen, or damaged.systems. Any such circumstance could adversely affect our ability to attract and maintain customers as well as strategic partners, cause us to suffer negative publicity or damage to our brand, and subject us to legal claims and liabilities or regulatory penalties. In addition, unauthorized parties might alter information in our databases, which would adversely affect both the reliability of that information and our ability to market and perform our services as well as undermine our ability to remain compliant with relevant laws and regulations. Techniques used to obtain unauthorized access or to sabotage systems change frequently, are constantly evolving and generally are difficult to recognize and react to effectively. We may be unableare not always able to anticipate these techniques or to implement adequate or timely preventive or reactive measures. Several recent, highly publicized data security breaches, including a large-scale attack on SolarWinds customersattacks by a foreign nation state actoractors and a significant uptick in ransomware/extortion attacks at other companies, have heightened consumer awareness of this issue and may embolden individuals or groups to target our systems or those of our strategic partners or enterprise customers. In December 2021,As an example, a critical remote code execution (RCE) vulnerability was identified in the Apache Software Foundation’s Log4j software library (Log4j), which if exploited could result in unauthorized access to Company systems and data, and acquisition of the same. We are taking, and have taken, steps to remediate all known Log4j vulnerabilities within our environment, deployed compensating controls, and implemented additional changes to protect against an exploit of those vulnerabilities. A threat actor could exploit a Log4jnew vulnerability or newly discovered vulnerabilities before we complete our remediation work or identify a vulnerability that we did not effectively remediate. If that happens, there could be unauthorized access to, or acquisition of, data we maintain, and damage to Companyour systems. We could also face legal action from individuals, business partners, and regulators in connection with exploitation of those vulnerabilities,data breaches, which would result in increased costs and fees incurred in our defense against those proceedings.proceedings, and/or payment of any regulatory penalties.
We collect, use, disclose, store or otherwise process personal information, which subjects us to privacy and data security laws and contractual commitments.
We collect, use, process, store, transmit or disclose (collectively, process) an increasingly large amount of confidential information, including personal information (which includes credit card information and other critical data from employees and customers), in connection with the operation of our business, particularly in relation to our identity and information protection service offerings.
The confidential and personal information we process is subject to an increasing number of federal, state, local, and foreign laws regarding privacy and data security, as well as contractual commitments. Any failure or perceived failure by us to comply with such obligations may result in governmental enforcement actions, fines, litigation, or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.
Additionally, changes to applicable privacy or data security laws could impact how we process personal information and therefore limit the effectiveness of our solutions or our ability to develop new solutions. For example, the European Union General Data Protection Regulation imposes more stringent data protection requirements and provides for greater penalties for noncompliance of up to the greater of €20 million or four percent of our worldwide annual revenues.
Data protection legislation is also increasing in the U.S. at both the federal and state level. For example, the California Consumer Privacy Act of 2018 (the CCPA) requires, among other things, covered companies to provide new disclosures to California consumers regarding the use of personal information, gives California residents expanded rights to access their personal information that has been collected and allows such consumers new abilities to opt-out of certain sales of personal information. Further, the California Privacy Rights Act (the CPRA) significantly modifies the CCPA and there are new similar and overlapping state privacy laws in Colorado, Connecticut, Virginia, Utah, and Iowa. These new laws may result in additional uncertainty and require us to incur additional costs and expenses in our effort to comply. Additionally, the Federal Trade Commission (the FTC) and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. The burdens imposed by the new state privacy laws and other similar laws that may be enacted at the federal and state level may require us to modify our data processing practices and policies, adapt our goods and services and incur substantial expenditures in order to comply.
Global privacy and data protection legislation and enforcement are rapidly expanding and evolving, and may be inconsistent from jurisdiction to jurisdiction. We may be or become subject to data localization laws mandating that data collected in a foreign
country be processed and stored only or primarily within that country. If any country in which we have customers were to adopt a data localization law, we could be required to expand our data storage facilities there or build new ones in order to comply. The expenditure this would require, as well as costs of compliance generally, could harm our financial condition.
Additionally, third parties with whom we work, such as vendors or developers, may violate applicable laws or our policies and such violations can place the personal information of our customers at risk. In addition, our customers may also accidentally disclose their passwords or store them on a device that is lost or stolen, creating the perception that our systems are not secure against third-party access. This could have an adverse effect on our reputation and business. In addition, such third parties could expose us to compromised data or technology, or be the target of cyberattack and other data breaches which could impact our systems or our customers’ records and personal information. Further, we could be the target of a cyberattack or other action that impacts our systems and results in a data breach of our customers’ records and personal information. This could have an adverse effect on our reputation and business and potentially result in litigation and/or regulatory penalties.
Our inability to successfully recover from a disaster or other business continuity event could impair our ability to deliver our products and services and harm our business.
We are heavily reliant on our technology and infrastructure to provide our products and services to our customers. For example, we host many of our products using third-party data center facilities and we do not control the operation of these facilities. These facilities are vulnerable to damage, interference, interruption, or performance problems from earthquakes, hurricanes, floods, fires, power loss, telecommunications failures, pandemics and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism, and other misconduct. The occurrence of a natural disaster, an act of terrorism state-sponsored attacks, a pandemic, geopolitical tensions or armed conflicts, and similar events could result in a decision to close the facilities without adequate notice or other unanticipated problems, which in turn, could result in lengthy interruptions in the delivery of our products and services, which could negatively impact our sales and operating results.
Furthermore, our business administration, human resources, compliance efforts, and finance services depend on the proper functioning of our computer, telecommunication, and other related systems and operations. A disruption or failure of these systems or operations because of a disaster, cyberattack or other business continuity event, such as a pandemic, could cause data to be lost or otherwise delay our ability to complete sales and provide the highest level of service to our customers. In addition, we could have difficulty producing accurate financial statements on a timely basis, and deficiencies may arise in our internal control over financial reporting, which may impact our ability to certify our financial results, all of which could adversely affect the trading value of our stock. There are no assurances that data recovery in the event of a disaster would be effective or occur in an efficient manner. If these systems or their functionality do not operate as we expect them to, we may be required to expend significant resources to make corrections or find alternative sources for performing these functions.
We are dependent upon Broadcom for certain engineering and threat response services, which are critical to many of our products and business.
Our Norton branded endpoint security solution has historically relied upon certain threat analytics software engines and other software (the Engine-Related Services) that have been developed and provided by engineering teams that have transferred to Broadcom as part of the Broadcom sale. The technology, including source code, at issue is shared, and pursuant to the terms of the Broadcom sale, we retain rights to use, modify, enhance and create derivative works from such technology. Broadcom has committed to provide these Engine-Related Services substantially to the same extent and in substantially the same manner, as has been historically provided under a license agreement with a limited term.
As a result, we are dependent on Broadcom for services and technology that are critical to our business, and if Broadcom fails to deliver these Engine-Related Services it would result in significant business disruption, and our business and operating results and financial condition could be materially and adversely affected. Furthermore, if our current sources become unavailable, and if we are unable to develop or obtain alternatives to integrate or deploy them in time, our ability to compete effectively could be impacted and have a material adverse effect on our business. Additionally, in connection with the Broadcom sale, we lost other capabilities, including certain threat intelligence data which were historically provided by our former Enterprise Security business, the lack of which could have a negative impact on our business and products.
If we fail to offer high-quality customer support, our customer satisfaction may suffer and have a negative impact on our business and reputation.
Many of our customers rely on our customer support services to resolve issues, including technical support, billing and subscription issues, that may arise. If demand increases, or our resources decrease, we may be unable to offer the level of support our customers expect. Any failure by us to maintain the expected level of support could reduce customer satisfaction and negatively impact our customer retention and our business.
Our solutions are complex and operate in a wide variety of environments, systems and configurations, which could result in failures of our solutions to function as designed.
Because we offer very complex solutions, errors, defects, disruptions, or other performance problems with our solutions may and have occurred. For example, we may experience disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, fraud, security attacks, or capacity constraints due to an overwhelming number of users accessing our websites simultaneously, fraud, or security attacks.simultaneously. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Interruptions in our solutions, could impact our revenues or cause customers to cease doing business with us. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our
operations. We could potentially lose customer data or personal information, or experience material adverse interruptions to our operations or delivery of solutions to our clients in a disaster recovery scenario.
Negative publicity regarding our brand, solutions and business could harm our competitive position.
Our brand recognition and reputation as a trusted service provider are critical aspects of our business and key to retaining existing customers and attracting new customers. Our business could be harmed due to errors, defects, disruptions or other performance problems with our solutions causing our customers and potential customers to believe our solutions are unreliable. Furthermore, negative publicity, whether or not justified, including intentional brand misappropriation, relating to events or activities attributed to us, our employees, our strategic partners, our affiliates, or others associated with any of these parties, may tarnish our reputation and reduce the value of our brands. In addition, the rapid rise and use of social media has the potential to harm our brand and reputation. We may be unable to timely respond to and resolve negative and inaccurate social media posts regarding our company, solutions and business in an appropriate manner. Damage to our reputation and loss of brand equity may reduce demand for our solutions and have an adverse effect on our business, operating results, and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brands may be costly and time consuming, and such efforts may not ultimately be successful.
The focus from regulators, customers, certain investors, employees, and other stakeholders concerning environmental, social and governance (ESG) matters and related disclosures, both in the United States and internationally, have resulted in, and are likely to continue to result in, increased general and administrative expenses and increased management time and attention spent complying with or meeting ESG-related requirements and expectations. For example, developing and acting on ESG-related initiatives and collecting, measuring and reporting ESG-related information and metrics can be costly, difficult and time consuming and is subject to evolving reporting standards, including the SEC’s proposed climate-related reporting requirements. We communicate certain ESG-related initiatives, goals, and/or commitments regarding environmental matters, diversity, responsible sourcing and social investments, and other matters, on our website, in our filings with the SEC, and elsewhere. These initiatives, goals, or commitments could be difficult to achieve and costly to implement, the technologies needed to implement them may not be cost effective and may not advance at a sufficient pace, and we could be criticized for the accuracy, adequacy or completeness of the disclosure. Further, statements about our ESG-related initiatives, goals or commitments and progress with respect to such initiatives, goals or commitments may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. In addition, we could be criticized for the timing, scope or nature of these initiatives, goals or commitments, or for any revisions to them. If we fail to achieve progress with respect to our ESG-related initiatives, goals or commitments on a timely basis, or at all, or if our ESG-related data, processes and reporting are incomplete or inaccurate, our reputation, business, financial performance and growth could be adversely affected.
We collect, use, disclose, store or otherwise process personal information,are affected by seasonality, which subjects us to privacymay impact our revenue and data security laws and contractual commitments.results of operations.
We collect, use, process, store, transmit or disclose (collectively, process) an increasingly large amount of confidential information, including personally identifiable information, credit card information and other critical data from employees and customers, in connection with the operationPortions of our business particularlyare impacted by seasonality. Seasonal behavior in relation toorders has historically occurred in the third and fourth quarters of our identity and information protection offerings.
The personal information we process is subject to an increasing number of federal, state, local, and foreign laws regarding privacy and data security,fiscal year, which include the important selling periods during the holidays in our third quarter, as well as contractual commitments. Any failure or perceived failure by usfollow-on holiday purchases and the U.S. tax filing season, which is typically in our fourth quarter. Revenue generally reflects similar seasonal patterns, but to comply with such obligationsa lesser extent than orders. This is due to our subscription business model, as a large portion of our in-period revenue is recognized ratably from our deferred revenue balance. An unexpected decrease in sales over those traditionally high-volume selling periods may result in governmental enforcement actions, fines, litigation, or public statements against us by consumer advocacy groups or othersimpact our revenue and could cause our customers to lose trust in us, which could have an adversea disproportionate effect on our reputation and business.
Additionally, changes to applicable privacy or data security laws could impact how we process personal information and therefore limit the effectivenessresults of our solutions or our ability to develop new solutions. For example, the European Union General Data Protection Regulation imposes more stringent data protection requirements and provides for greater penalties for noncompliance of up to the greater of €20 million or four percent of our worldwide annual revenues.
Data protection legislation is also becoming increasingly common in the U.S. at both the federal and state level. For example, the California Consumer Privacy Act of 2018 (the CCPA) requires, among other things, covered companies to provide new disclosures to California consumers regarding the use of personal information, gives California residents expanded rights to access their personal information that has been collected and allows such consumers new abilities to opt-out of certain sales of personal information. Further, the new California Privacy Rights Act (the CPRA) significantly modifies the CCPA. These modifications may result in additional uncertainty and require us to incur additional costs and expenses in our effort to comply. Additionally, the Federal Trade Commission (the FTC) and many state attorneys general are interpreting federal and state consumer protection laws to impose standardsoperations for the online collection, use, dissemination, and security of data. The burdens imposed by the CCPA, CPRA and other similar laws that may be enacted at the federal and state level may require us to modify our data processing practices and policies, adapt our goods and services and incur substantial expenditures in order to comply.
Global privacy and data protection legislation, enforcement, and policy activity are rapidly expanding and evolving, and may be inconsistent from jurisdiction to jurisdiction. We may be or become subject to data localization laws mandating that data collected in a foreign country be processed and stored only within that country. If any country in which we have customers were to adopt a data localization law, we could be required to expand our data storage facilities there or build new ones in order to comply. The expenditure this would require, as well as costs of compliance generally, could harm our financial condition.
Additionally, third parties with whom we work, such as vendors or developers, may violate applicable laws or our policies and such violations can place personal information of our customers at risk. In addition, our customers may also accidentally disclose their passwords or store them on a device that is lost or stolen, creating the perception that our systems are not secure against third-party access. This could have an adverse effect on our reputation and business. In addition, such third parties could expose us to compromised data or technology, or be the target of cyberattack and other data breaches which could impact our systems or our customers’ records. Further, we could be the target of a cyberattack or other action that impacts our systems and results in a data breach of our customers’ records. This could have an adverse effect on our reputation and business.entire fiscal year.
LEGAL AND COMPLIANCE RISKS
Matters relating to or arising from our completed Audit Committee Investigation, including litigation matters, and potential additional expenses, may adversely affect our business and results of operations.
As previously disclosed in our public filings, the Audit Committee completed its internal investigation in September 2018. In connection with the Audit Committee Investigation, we voluntarily self-reported to the SEC. The SEC commenced a formal investigation with which we cooperated. In April 2022, the SEC Staff informed the Company that it concluded its investigation and does not intend to recommend an enforcement action by the Commission against us.
We have incurred, and may continue to incur, significant expenses related to legal and other professional services in connection with or relating to the SEC investigation, which may continue to adversely affect our business and financial condition. In addition, securities class actions and other lawsuits have been filed against us, certain current and former directors, and former officers. The outcome of the securities class actions and other litigation is difficult to predict, and the cost to defend, settle, or otherwise resolve these matters may be significant. Plaintiffs in these matters may seek recovery of very large or indeterminate amounts. The monetary and other impact of these litigations, proceedings, or actions may remain unknown for substantial periods of time. Further, an unfavorable resolution of litigations, proceedings or actions could have a material adverse effect on our business, financial condition, and results of operations and cash flows. Any future investigations or additional lawsuits may also adversely affect our business, financial condition, results of operations, and cash flows.
Our solutions are highly regulated, which could impede our ability to market and provide our solutions or adversely affect our business, financial position, and results of operations.
Our solutions are subject to a high degree of regulation, including a wide variety of international and U.S. federal, state, and local laws and regulations, such as the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the Federal Trade Commission Act (FTC(the FTC Act), and comparable state laws that are patterned after the FTC Act. LifeLock hasWe have previously entered into consent decrees and similar arrangements with the FTC and the attorney generals of 35 states as well as a settlement with the FTC relating to allegations that certain of LifeLock’s advertising, marketing and security practices constituted deceptive acts or practices in
violation of the FTC Act, which impose additional restrictions on our business, including prohibitions against making any misrepresentation of “the means, methods, procedures, effects, effectiveness, coverage, or scope of” our solutions. NortonLifeLockWe signed an Undertaking, effective June 14, 2021, with the United Kingdom’s Competition and Markets Authority (CMA) requiring our NortonLifeLock Ireland Limited and NortonLifeLock UK entities to make certain changes to itstheir policies and practices related to automatically renewing subscriptions in the United Kingdom as part of the CMA’s investigation into auto-renewal practices in the antivirus sector it launched in December 2018. Any of the laws and regulations that apply to our business are subject to revision or new or changed interpretations, and we cannot predict the impact of such changes on our business.
Additionally, the nature of our identity and information protection products subjects us to the broad regulatory, supervisory, and enforcement powers of the Consumer Financial Protection Bureau which may exercise authority with respect to our services, or the marketing and servicing of those services, through the oversight of our financial institution or credit reporting agency customers and suppliers, or by otherwise exercising its supervisory, regulatory, or enforcement authority over consumer financial products and services.
If we do not protect our proprietary information and prevent third parties from making unauthorized use of our products and technology, our financial results could be harmed.
Much of our software and underlying technology is proprietary. We seek to protect our proprietary rights through a combination of confidentiality agreements and procedures and through copyright, patent, trademark, and trade secret laws. However, these measures afford only limited protection and may be challenged, invalidated, or circumvented by third parties. Third parties may copy all or portions of our products or otherwise obtain, use, distribute, and sell our proprietary information without authorization.
Patents may also not be issued from our pending patent applications and claims allowed on any future issued patents may not be sufficiently broad to protect our technology. Also, these protections may not preclude competitors from independently developing products with functionality or features similar to our products.
Third parties have previously and may in the future also develop similar or superior technology independently by designing around our patents. Our consumer agreements do not require a signature and therefore may be unenforceable under the laws of some jurisdictions. Furthermore, the laws of some foreign countries do not offer the same level of protection of our proprietary rights as the laws of the U.S., and we may be subject to the unauthorized use of our products in those countries. The unauthorized copying or use of our products or proprietary information could result in reduced sales of our products. Any legal action to protect proprietary information that we may bring or be engaged in with a strategic partner or vendor could adversely affect our ability to access software, operating system, and hardware platforms of such partner or vendor, or cause such partner or vendor to choose not to offer our products to their customers. In addition, any legal action to protect proprietary information that we may bring or be engaged in, could be costly, may distract management from day-to-day operations, and may lead to additional claims against us, which could adversely affect our operating results.
From time to time we are a party to lawsuits and investigations, which typically require significant management time and attention and result in significant legal expenses.
We are frequently involved in litigation and other proceedings, including, but not limited to, patent litigation, class actions, and governmental claims or investigations, some of which may be material initially or become material over time. The expense of initiating and defending, and in some cases settling, such matters may be costly and divert management’s attention from the day-to-day operations of our business, which could have a materially adverse effect on our business, results of operations, and cash flows. In addition, such matters may thruthrough the course of litigation or other proceedings incur an unfavorable change unfavorably which could alter the profile of the matter and create potential material risk to the company. Any unfavorable outcome in a matter could result in significant fines, settlements, monetary damages, or injunctive relief that could negatively and materially impact our ability to conduct our business, results of operations, and cash flows. Additionally, in the event we did not previously accrue for such litigation or proceeding in our financial statements, we may be required to record retrospective accruals that adversely affect our results of operations and financial condition.
Third parties claiminghave claimed and, from time to time, additional third parties may claim that we infringe their proprietary rights, which has previously and could in the future cause us to incur significant legal expenses and prevent us from selling our products.
FromThird parties have claimed and, from time to time, additional third parties may claim that we have infringed their intellectual property rights, including claims regarding patents, copyrights, and trademarks.
Because of constant technological change in the segments in which we compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents, it is possible that the number of these claims may grow. In addition, former employers of our former, current, or future employees may assert claims that such employees have improperly disclosed to us confidential or proprietary information of these former employers. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop selling, delay shipments of, or redesign our solutions, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our partners. We cannot assure you that any royalty or licensing arrangements that we may seek in such circumstances will be available to us on commercially reasonable terms or at all. We have made and expect to continue making significant expenditures to investigate, defend, and settle claims related to the use of technology and intellectual property rights as part of our strategy to manage this risk.
In addition, we license and use software from third parties in our business.business and generally must rely on those third parties to protect the licensed rights. These third-party software licenses may not continue to be available to us on acceptable terms or at all and may expose us to additional liability. This liability, or our inability to use any of this third-party software, could result in delivery delays or other disruptions in our business that could materially and adversely affect our operating results.
Some of our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Certain of our products are distributed with software licensed by its authors or other third parties under so-called “open source” licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software if we combine our proprietary software with open source software in a certain manner. Some open source software may include generative artificial intelligence (AI) software or other software that incorporates or relies on generative AI. The use of such software may
expose us to risks as the intellectual property ownership and license rights, including copyright, of generative AI software and tools, has not been fully interpreted by U.S. courts or been fully addressed by federal, state, or international regulations. In addition to risks related to license requirements, usage ofusing open source software, including open source software that incorporates or relies on generative AI, can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open source, butsource. However, we cannot be sure that all open source, including open source that incorporates or relies on generative AI, is submitted for approval prior to use in our products. In addition, many of the risks associated with usage of open source, including open source that incorporates or relies on generative AI, may not or cannot be eliminated and could, if not properly addressed, negatively affect our business.
RISKS RELATED TO OUR LIQUIDITY AND INDEBTEDNESS
There are risks associated with our outstanding and future indebtedness that could adversely affect our financial condition.
As of July 1, 2022,June 30, 2023, we had an aggregate of $3,336$9,691 million of outstanding indebtedness that will mature in calendar years 20222025 through 2030, and $1,000$1,500 million available for borrowing under our revolving credit facility. 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 outstanding debt. Our ability to meet expenses, remain in compliancecomply with the covenants under our debt instruments, pay interest and repay principal for our substantial level of indebtedness depends on, among other things, our operating performance, competitive developments, and financial market conditions, all of which are significantly affected by financial, business, economic and other factors. We are not able to control many of these factors. Accordingly, our cash flow may not be sufficient to allow us to pay principal and interest on our debt, including our 5.0% Senior Notes due 2025, 6.75% Senior Notes due 2027 and 7.125% Senior Notes due 2030 (collectively, the notes,Senior Notes), and meet our other obligations. Our level of indebtedness could have other important consequences, including the following:
•We must use a substantial portion of our cash flow from operations to pay interest and principal on the term loansAmended and revolving credit facility,Restated Credit Agreement, our existing senior notes,Senior Notes, and other indebtedness, which reduces funds available to us for other purposes such as working capital, capital expenditures, other general corporate purposes, and potential acquisitions;
•We may be unable to refinance our indebtedness or to obtain additional financing for working capital, capital expenditures, acquisitions, or general corporate purposes;
•We are exposedhave significant exposure to fluctuations in interest rates because borrowings under our senior secured credit facilities bear interest at variable rates;
•Our leverage may be greater than that of some of our competitors, which may put us at a competitive disadvantage and reduce our flexibility in responding to current and changing industry and financial market conditions;
•We may be more vulnerable to an economic downturn or recession and adverse developments in our business;
•We may be unable to comply with financial and other covenants in our debt agreements, which could result in an event of default that, if not cured or waived, may result in acceleration of certain of our debt and would have an adverse effect on our business and prospects and could force us into bankruptcy or liquidation; and
•Changes by any rating agency to our outlook or credit rating could negatively affect the value of our debt and/or our common stock, adversely affect our access to debt markets, and increase the interest we pay on outstanding or future debt; and
•Conversion of our convertible note could result in significant dilution of our common stock, which could result in significant dilution to our existing stockholders and cause the market price of our common stock to decline.debt.
There can be no assurance that we will be able to manage any of these risks successfully. In addition, we conduct a significant portion of our operations through our subsidiaries. Accordingly, repayment of our indebtedness will be dependent in part on the generation of cash flow by our subsidiaries and their abilityrespective abilities to make such cash available to us by dividend, debt repayment, or otherwise, which may not always be possible. In the event thatIf we do not receive distributions from our subsidiaries, we may be unable to make the required principal and interest payments on our indebtedness.
The elimination of LIBOR after June 2023 may affect our financial results.
All LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. This means that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. In the U.S., the Alternative Reference Rates Committee, a committee of private sector entities convened by the Federal Reserve BoardOur Amended and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (SOFR) plus a recommended spread adjustment as LIBOR's replacement. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained
available, which could have a material adverse effect on our operating results. Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us. It is not yet possible to predict the magnitude of LIBOR's end on our borrowing costs given the remaining uncertainty about which rates will replace LIBOR.
Our term loan and revolving credit facility agreement imposeRestated Credit Agreement imposes operating and financial restrictions on us.
Our term loanAmended and revolving credit facility agreement containRestated Credit Agreement contains covenants that limit our ability and the ability of our restricted subsidiaries to:
•Incur additional debt;
•Create liens on certain assets to secure debt;
•Enter into certain sale and leaseback transactions;
•Pay dividends on or make other distributions in respect of our capital stock or make other restricted payments; and
•Consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.
All of theseThese covenants may adversely affect our ability to finance our operations, meet or otherwise address our capital needs, pursue business opportunities, react to market conditions, or may otherwise restrict activities or business plans. A breach of any of these covenants could result in a default in respect of the related indebtedness.default. If a default occurs, the relevant lenders could elect to declare the indebtedness, together
with accrued interest and other fees, to be immediately due and payable and, to the extent such indebtedness is secured, in the future, proceed against any collateral securing that indebtedness.
The failure of financial institutions or transactional counterparties could adversely affect our current and projected business operations and our financial condition and result of operations.
We regularly maintain cash balances with other financial institutions in excess of the FDIC insurance limit. A failure of a depository institution to return deposits could result in a loss or impact access to our invested cash or cash equivalents and could adversely impact our operating liquidity and financial performance.
Additionally, future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access near-term working capital needs, and create additional market and economic uncertainty. Our general business strategy, including our ability to access existing debt under the terms of our Amended and Restated Credit Agreement may be adversely affected by any such economic downturn, liquidity shortages, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or if adverse developments are experienced by financial institutions, it may cause short-term liquidity risk and also make any necessary debt or equity financing more difficult, more costly, more onerous with respect to financial and operating covenants and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our operations, growth strategy, financial performance and stock price and could require us to alter our operating plans.
Hedging or other mitigation actions to mitigate against interest rate exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distributions.
We have previously and may in the future enter into interest rate swap agreements or pursue other interest rate hedging strategies. In March 2023, we entered into interest rate swap agreements to mitigate risks associated with the variable interest rate of our Term A Facility. These pay-fixed, receive-floating rate interest rate swaps have the economic effect of hedging the variability of forecasted interest payments until their maturity on March 31, 2026. Pursuant to the agreements, we have effectively converted $1 billion of our variable rate borrowings under Term A Facility to fixed rates, with $500 million at a fixed rate of 3.762% and $500 million at a fixed rate of 3.550%. The objective of our interest rate swaps, all of which are designated as cash flow hedges, is to manage the variability of future cash interest expense.
Our future hedging activity will vary in scope based on the level of interest rates, the type and expected duration of portfolio investments held, and other changing market conditions. Our current and future interest rate hedging may fail to protect or could adversely affect us because, among other things:
•Interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
•Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
•The duration of the hedge may not match the duration of the related liability or asset;
•The credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;
•The party owing money in the hedging transaction may default on its obligation to pay; and
•We may purchase a hedge that turns out not to be necessary (i.e., a hedge that is out of the money).
Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distributions. Unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.
GENERAL RISKS
Government efforts to combat inflation, along with other interest rate pressures arising from an inflationary economic environment, have led to and may continue to lead to higher financing costs.
We operate globally and as a result our business and revenues are impacted by global macroeconomic conditions. Inflation has risen on a global basis, including in the United States, and government entities have taken various actions to combat inflation, such as raising interest rate benchmarks. While inflation rates have currently slowed, global inflation remains high and government entities may continue their efforts, or implement additional efforts, to combat inflation, which may include continuing to raise interest rate benchmarks or maintaining interest rate benchmarks at elevated levels. Such government efforts, along with other interest rate pressures arising from an inflationary economic environment, have led to higher financing costs and have had and may continue to have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in our quarterly financial results have affected the trading price of our outstanding securitiesstock in the past and could affect the trading price of our outstanding securitiesstock in the future.
Our quarterly financial results have fluctuated in the past and are likely to vary in the future due to a number of factors, many of which are outside of our control. If our quarterly financial results or our predictions of future financial results fail to meet our
expectations or the expectations of securities analysts and investors, the trading price of our outstanding securities could be negatively affected. Volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions. Factors associated with our industry, the operation of our business, and the markets for our solutions may cause our quarterly financial results to fluctuate, including but not limited to:
•Fluctuations in demand for our solutions;
•Disruptions in our business operations or target markets caused by, among other things, terrorism or other intentional acts, outbreaks of disease, such as the COVID-19 pandemic, or earthquakes, floods, or other natural disasters;
•Entry of new competition into our markets;
•Technological changes in our markets;
•Our ability to achieve targeted operating income and margins and revenues;
•Competitive pricing pressure or free offerings that compete with one or more of our solutions;
•Our ability to timely complete the release of new or enhanced versions of our solutions;
•The amount and timing of commencement and termination of major marketing campaigns;
•The number, severity, and timing of threat outbreaks and cyber security incidents;
•Loss of customers or strategic partners;partners or the inability to acquire new customers or cross-sell our solutions;
•Changes in the mix or type of solutions and subscriptions sold and changes in consumer retention rates;
•The rate of adoption of new technologies and new releases of operating systems, and new business processes;
•Consumer confidence and spending changes;
•The outcome or impact of litigation, claims, disputes, regulatory inquiries, or investigations;
•The impact of acquisitions and divestitures and(and our ability to achieve expected synergies or attendant cost savings;savings), divestitures, restructurings, share repurchase, financings, debt repayments and investment activities;
•FluctuationsChanges in U.S. and worldwide economic conditions, such as economic recessions, the impact of inflation, fluctuations in foreign currency exchange rates and changes in interest rates;rates, conflicts including Russia’s invasion of Ukraine, and other global macroeconomic factors on our operations and financial performance;
•The publication of unfavorable or inaccurate research reports about our business by cybersecurity industry analysts;
•The success of our corporate responsibilityESG initiatives;
•Changes in tax laws, rules, and regulations;
•Changes in tax rates, benefits, and expenses; and
•Changes in consumer protection laws and regulations.
Any of the foregoing factors could cause the trading price of our outstanding securities to fluctuate significantly.
Changes to our effective tax rate, including through the adoption of new tax legislation or exposure to additional income tax liabilities, could increase our income tax expense and reduce (increase) our net income (loss), cash flows and working capital. In addition, audits by tax authorities could result in additional tax payments for prior periods.
We are a multinational company dual headquartered in the U.S. and the Czech Republic, with our principal executive offices in Tempe, Arizona. As such, we are subject to tax in multiple U.S. and international tax jurisdictions. Our effective tax rate could be adversely affected by several factors, many of which are outside of our control, including:
•Changes to the U.S. federal income tax laws, including the potential for federal tax law changes put forward by Congress and the Bidencurrent administration including potentially increased corporate tax rates, new minimum taxes and other changes to the way that our US tax liability has been calculated following the 2017 Tax Cuts and Jobs Act. Certain of these proposals could have significant retroactive adjustments adding cash tax payments/liabilities if adopted;
•Changes to other tax laws, regulations, and interpretations in multiple jurisdictions in which we operate, including actions resulting from the Organisation for Economic Co-operation and Development's (OECD) base erosion and profit shifting project including recent proposals for a global minimum tax rate, proposed actions by international bodies such as digital services taxation, as well as the requirements of certain tax rulings. In October 2021, the OECD/G20 inclusive framework on Base Erosion and Profit Shifting (the Inclusive Framework) published a statement updating and finalizing the key components of a two-pillar plan on global tax reform which has now been agreed upon by the majority of OECD members. Pillar One allows countries to reallocate a portion of residual profits earned by multinational enterprises (MNE), with an annual global turnover exceeding €20 billion and a profit margin over 10%, to other market jurisdictions. Pillar Two requires MNEs with an annual global turnover exceeding €750 million to pay a global minimum tax of 15%. Additional guidance is expectedOn December 12, 2022, the European Union reached an agreement to implement the Pillar Two Directive of the OECD’s reform of international taxation at the European Union level. The agreement affirms that all Member States must transpose the Directive by December 31, 2023. The rules will therefore first be published in 2022.applicable for fiscal years starting on or after December 31, 2023. We will continue to monitor the implementation of the Inclusive Framework agreement by the countries in which
we operate. We are unablewill continue to predict ifmonitor and determine how these and other legislative changes will be enacted into law and ithow they will potentially impact our corporate tax liabilities, our income tax provision, and cash tax liability. It is possible that they could have a material effect on our corporate tax liability and our global effective tax rate;
•Changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
•Changes in the valuation of deferred tax assets and liabilities and the discovery of new information in the course of our tax return preparation process;
•The tax effects of, and tax planning and changes in tax rates related to significant infrequently occurring events (including acquisitions, divestitures and restructurings) that may cause fluctuations between reporting periods;
•Tax assessments, or any related tax interest or penalties, that could significantly affect our income tax expense for the period in which the settlements take place; and
•Taxes arising in connection to changes in our workforce, corporate entity structure or operations as they relate to tax incentives and tax rates.
From time to time, we receive notices that a tax authority in a particular jurisdiction believes that we owe a greater amount of tax than we have reported to such authority.authority and we are consequently subject to tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly judgmental. Additionally, our ability to recognize the financial statement benefit of tax refund claims is subject to change based on a number of factors, including but not limited to, changes in facts and circumstances, changes in tax laws, correspondence with both IRS and State tax authorities, and the results of tax audits and related proceedings, which may take several years or more to resolve. If tax authorities disagree with certain tax reporting positions taken by us, as a result, they assess additional taxes against us. We are regularly engaged in discussions and sometimes disputes with these tax authorities. We ultimately sometimes have to engage in litigation to achieve the results reflected in our tax estimates, and such litigation can be time consuming and expensive. We regularly assess the likely outcomes of any audits in order to determine the appropriateness of our tax provision. If the ultimate determination of our taxes owed in any of these jurisdictions is for an amount in excess of the tax provision we have recorded or reserved for, our operating results, cash flows, and financial condition could be materially and adversely affected.
Any changes or interpretations to existing accounting pronouncements or taxation rules or practices may cause fluctuations in our reported results of operations or affect how we conduct our business.
A change in accounting pronouncements or taxation rules or practices could have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements, taxation rules and varying interpretations of accounting pronouncements or taxation rules have occurred in the past and may occur in the future. We could be required to modify a current tax or accounting position as a result of any such change, and this could adversely affect our reported financial results and could change the way we conduct our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of equity securities
Under our stock repurchase program, shares may be repurchased on the open market and through accelerated stock repurchase transactions. As of July 1, 2022,June 30, 2023, we have $1,474$829 million remaining authorized to be completed in future periods with no expiration date. Stock repurchases during the three months ended July 1, 2022June 30, 2023, were as follows:
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| (In millions, except per share data) | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| April 2, 2022 to April 29, 2022 | — | | | $ | — | | | — | | | $ | 1,774 | |
| April 30, 2022 to May 27, 2022 | 6 | | | $ | 24.17 | | | 6 | | | $ | 1,633 | |
| May 28, 2022 to July 1, 2022 | 6 | | | $ | 24.52 | | | 6 | | | $ | 1,474 | |
| Total number of shares repurchased | 12 | | | | | 12 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except per share data) | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| April 1, 2023 to April 28, 2023 | — | | | $ | — | | | — | | | $ | 870 | |
| April 29, 2023 to May 26, 2023 | 3 | | | $ | 16.65 | | | 3 | | | $ | 833 | |
| May 27, 2023 to Jun 30, 2023 | — | | (2) | $ | 17.33 | | | — | | | $ | 829 | |
| Total number of shares repurchased | 3 | | | | | 3 | | | |
(1) The number of shares purchasedrepurchased is reported on trade date.
(2) The number of shares repurchased is less than 1 million.
Item 5. Other Information
Insider adoption or termination of trading arrangements
During the fiscal quarter ended June 30, 2023, none of our directors or officers informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as defined in Regulation S-K, Item 408.
Item 6. Exhibits
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Exhibit Number | | | | Incorporated by Reference | | Filed/Furnished with this 10-Q |
| Exhibit Description | | Form | | File Number | | Exhibit | | File Date | |
10.01 | | | | | | | | | | | | X |
| 31.01 | | | | | | | | | | | | X |
| 31.02 | | | | | | | | | | | | X |
| 32.01† | | | | | | | | | | | | X |
| 32.02† | | | | | | | | | | | | X |
| 101 | | The following financial information from NortonLifeLockGen Digital Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 1, 2022June 30, 2023 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 |
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| † | 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.
| | | | | | | | |
| | NORTONLIFELOCKGEN DIGITAL INC. |
| (Registrant) |
| | |
| By: | /s/ Vincent Pilette |
| | Vincent Pilette Chief Executive Officer |
| | |
| By: | /s/ Natalie Derse |
| | Natalie Derse Chief Financial Officer |
August 5, 20224, 2023