Factors influencing rising debt
Symantec’s (SYMC) debt levels in the last two years have increased at a rapid pace, driven by the acquisition of Blue Coat Systems for ~$4.7 billion and LifeLock for $2.3 billion. In the last five years, the company’s total debt of the company grew at a CAGR (compound annual growth rate) of 24.0%.
Apart from these large acquisitions, the company’s capital return policy led to an increase in leverage. In the last five years, Symantec has returned ~$7.7 billion to its investors through share buybacks and dividends.
Symantec security products are generally sold in a bundle with laptops and PCs. Softness in the PC market, coupled with competition from other cybersecurity service providers, has forced the company to boost its product portfolio and market presence through inorganic growth.
From fiscal 2017 to fiscal 2018, the company invested more than $7.0 billion in acquisitions compared with $60.0 million in the previous three years.
Impact of higher leverage
From the graph above, we can see Symantec’s total debt levels in the last five years. In fiscal 2017, its debt levels were quite high. The company exited fiscal Q4 2018 with debt of ~$5.0 billion compared with debt of $8.2 billion in fiscal Q4 2017.
In the next four years, ~$4.2 billion in debt is due to mature, which could put pressure on the company’s cash flow and impact its expansion strategy in terms of new product launches and acquisitions.
In the last five years, Symantec’s declining free cash flow trend, which was affected by its higher capital return policy, is expected to be a concern.
In fiscal Q4 2018, the company’s debt-to-total-capital ratio stood at ~99.4, which is higher than Palo Alto Networks’ (PANW) ~84.9 in fiscal Q2 2018, which ended in January.