Gen Digital Inc.

Good afternoon, everyone. Thank you for standing by. My name is Chino and I'll be your conference operator today. I would like to welcome everyone to the Norton LifeLock First Call 2022 First Quarter Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At this time, for opening remarks, I would like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Ms., you may begin.

Thank you, Chino, and good afternoon, everyone. Welcome to the Dorn LifeLock Fiscal 2022 First Quarter Earnings Call. Joining me today to review our Q1 results are Vincent Pellet, CEO, and Natalie Dursey, CFO. As a reminder, there will be a replay of this call posted on the IR website, along with our earnings slides, press release, and supplemental materials defining our non-GAAP metrics. I'd like to remind everyone that during this call, all references to the final metrics are non-GAAP and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-gap-to-gap measures is included in our press release, which is available on our IR website at investor.normlifelocks.com. Today's call contains statements regarding our business, financial performance, and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which may be considered forward-looking statements, and such statements involve risk and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on current beliefs, assumptions, and expectations, and speak only as of the current date. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC and a particular annual report on Form 10-K for the fiscal year ended April 2, 2021. And now I will turn the call over to our CEO, Vincent.

Thank you, Mary. Welcome and good afternoon, everyone. So before we dive into our first quarter results, let me start by addressing the possible combination we have asked. We confirm that we are in advanced discussions with the Board of Avast regarding a possible merger. As we've said many times, M&A is a key part of our strategy, and we're constantly looking at potential acquisitions and investment opportunities, some small, some larger in size. We believe in being disciplined in our approach and playing for the long term. So if or when we have material developments, we will share those with you. I'm sure you understand that today we will not be able to answer any questions related to specific cases. So now with that out of the way, just barely over two months ago at our investor day, we shared with you our long-term strategic path to meaningful and sustainable growth. And the ambitious big goals we set then should tell you everything you need to know about our opportunity that we see in front of us. Big, audacious goals are not achieved in the short term, of course, but quarter by quarter, strong execution creates the momentum that will allow us to meet our long-term goals. And Q1 is just that, a strong execution and solid results that put us right on track to achieve our ambition. We are off to a strong start to fiscal year 2022 with solid financial results for Q1. The direct-to-consumer demand for cyber safety remains a global opportunity, and our Q1 results are evidence of that evolving and underpenetrated opportunity. Overall Q1 performance was in line with short-term and long-term commitments. Bookings and revenue growth were 12% and 13% respectively, and EPS grew 35%. We sustain our growth momentum in Q1, managing our business through the unpredictable macro environment and the transition to post-pandemic environment in many parts of the world. At the heart of it, it is critical for us to focus on product and service innovation. This is the only way we can stay at the forefront of the ever-changing scope and sophistication of cyber crimes and offer consumers the best in cyber safety. In the first quarter, we unveiled four new products, doubling the number of new product introductions compared to a year ago. As we have said at our investor day, it is about being nimble, showcasing our ability to move faster, and being better by learning along the way. Let me tell you about a couple of these product releases in Q1. As planned and previewed, we launched the very first integrated product with Avira called Game Optimizer. This new feature on Norden 360 platform is designed to maximize gaming performance while strengthening security, freeing PCs from programs that are typically running in the background and hogging CPU system resources. This is another tool in our expanding toolbox and we're excited and eager to give gamers tools that they not only need but want. Another new product is Norden Crypto. While this seed investment is in its infancy, it is another example of how we are committed to innovation and how we are looking to enable and empower the digital lives of consumers. Digital currency is becoming an increasingly important part of consumers' digital lives, and this feature allows you to use your idle PC time to earn digital currency. An unknown crypto wallet allows you to track, transfer, and store earnings in the cloud. We accelerated our pace of innovation to be the first cyber safety companies to provide such a feature to help ensure our customers have a safe and easy way to mine crypto without having to make trade-offs that could compromise their cyber security. As we transform our company to offer a richer portfolio, we've also made great strides in expanding our overall consumer reach. In Q1, our direct-to-consumer revenue, which represents the majority of our business, was up 7%. Our global expansion efforts are working as Q1 growth was partly driven by record growth in international. While our North America business remains larger than the rest of the world, the international grocery, once again, outpays the Americas. Similar to last quarter, our direct business grew double digits across multiple countries, including the UK, Germany, France, Australia, and New Zealand. We continue to make great progress in leveraging Avera's freemium model to broaden our reach while accelerating their free-to-paid conversion using our marketing capabilities. Another area of strength is our partner business, which posted double-digit revenue growth for the third straight quarter, up 29% in Q1, including Avira. Key channels continue to drive the growth, from employee benefits to online retail and service providers. As part of our all-in effort to build the most comprehensive go-to-market model, we recently expanded our partnerships with Lenovo for our OEM business. Selected 5G Lenovo laptop PCs will be pre-installed with Northern Security and VPN app available now in selected markets. While our OEM business is small, it demonstrates that we will continue to explore all avenues to reach customers. We've been highly engaged in various opportunities and markets globally in our partner business. Our goal is to continue to build and expand these long-term partnerships and increase cyber safety awareness everywhere. In Q1, our direct customer count grew over 150,000 sequentially, and including Avira, over 2.5 million customers year-over-year, bringing our total direct customer count to 23.1 million. This was our seventh straight quarter of net direct customer ads sequentially, in a quarter that has been historically down sequentially driven by normal seasonality. Our customer retention rate remains strong at 85% as we drive new initiatives to further improve retention overall and within specific products and customer cohorts. As we shared at our investor day, we have started multiple operational initiatives targeting areas of improvement, such as our first-year cohort or geographies with different customer profiles. Customer satisfaction and retention will continue to be a long-term focus for this leadership team. Finally, before I pass it to Natalie, I want to reiterate our core values and our inspiration to fulfill our vision to protect and empower people to live their digital lives safely. We think customer first. We innovate and grow. We scrap it. We own it. And we are open and authentic. These are the core values that push us to be better every single day to make the world cyber safe. Quarter in, quarter out, we have been and continue to exercise financial discipline and reinforce a cadence of innovation. We have demonstrated our ability to grow this business, relentlessly building a strong financial track record with consistent and accelerated growth. We are far from being down, of course, and we're just getting started as we look to transform our company to redefine consumer cyber safety. And with that, let me turn it over to Nathaniel.

Thank you, Vincent, and hello, everyone. For today's discussion, I will focus on non-GAAP financials, starting with our Q1 results, and then provide our outlook for Q2 and full year. Fiscal year 2022 is off to a strong start. Our Q1 revenue was $691 million, up 13% year-over-year on an as-reported basis, delivering above the high end of our guidance range. We grew bookings by 12% in the quarter, Our growth was driven by broad-based strength across all geos and products and included two-point positive impact from that effect. Our total direct customer count increased to over 23.1 million, adding 2.6 million customers year-over-year and adding 150,000 net new customers quarter-over-quarter. This was our seventh consecutive quarter of sequential net customer ads, a testament to our growing value proposition. Our customer retention rate, a unit retention metric, remains stable at 85%. Our monthly average revenue per user, or ARPU, is up on a sequential basis to $8.84. Our growing customer base combined with our strong retention rate and expanding ARPU accelerated the revenue growth of our direct business to 11% year-over-year. We continue to add more in-demand products and features into the portfolio to assist our cross-sell and up-sell efforts, keeping loyal customers engaged through their life cycle. As we continue to grow our customer base, it is important to note that our first-year ARPU and retention rate for newly acquired customers is generally lower than our total average. but our growing product portfolio and customer-centric mindset make us well-positioned to foster growth with these customers while expanding our reach to new audiences. Our partner business is a key tenant of our go-to-market strategy and once again posted strong results in Q1, up 29% year-over-year, including Avira, and with broad-based growth across our distribution channels. Our employee benefits channel continues to post double-digit growth with an expanded pipeline. More small and mid-market employers are discovering that our identity theft protection solutions help mitigate the rapidly evolving cyber safety threats, including recent concerns related to unemployment and tax fraud. We're proud of the progress we've made so far and are excited about the upcoming expansion efforts in this channel. We also drove double-digit retail growth in key European countries as we continue to adapt to the market conditions in each country and focus on building the strategic partnerships needed to achieve our long-term goals. Turning to profitability, we remain focused on executing to achieve our long-term strategy and consistently drive sustainable growth with operational discipline. As I shared at our investor day, we continue to drive the core business at or above a 50% margin rate, with Q1 operating at 51%, up 410 basis points year over year. In the quarter, we invested in performance marketing and product innovation. With our marketing investments, we operate with a disciplined approach in new customer acquisition. measuring and ensuring effectiveness along the way, while adapting to consumer behavior shifts in the market and newer media offerings. We keep our eyes on the marketplace and continue to evolve our marketing spend mix to expand our reach in a relevant and efficient manner. With R&D, we continue to accelerate the pace of product introductions, investing to expand our product portfolio, and provide an increasingly differentiated value proposition for consumers, all the while focused on operational excellence and funding additional investment capacity through G&A efficiencies. Q1 net income was $248 million, up 32% year-over-year. Diluted EPS was $0.42 for the quarter, up 35% year-over-year and at the high end of our guidance range. we continue to prioritize sustainable growth and maintain strong operational disciplines to deliver EPS expansion in line with our long-term strategy. Turning to our cash flow and balance sheet, Q1 operating cash flow was $258 million and free cash flow was $257 million. We ended Q1 with over $1.2 billion of total cash and $1 billion of undrawn revolver capacity. Please note, this does not reflect the cash proceeds from the sale of our Mountain View Ellis buildings, which closed in mid-July for total cash proceeds of approximately $358 million. We continue to have a strong liquidity position, healthy balance sheet, and are levered at approximately two times net debt. Now, let me spend a few minutes specifically on capital allocation. In Q1, we returned approximately $74 million to shareholders in the form of our regular quarterly dividend of 12.5 cents per common share. At the end of Q1, there was approximately $1.8 billion remaining in the current share buyback program, which we intend to deploy opportunistically. As described in the press release... For Q2, the Board of Directors approved a regular quarterly cash dividend of 12.5 cents per common share to be paid on September 15, 2021, for all shareholders of record as of the close of business on August 23, 2021. Now turning to our Q2 and full-year outlooks. We expect Q2 non-GAAP revenue in the range of $690 to $700 million, which translates to 10% to 12% growth year over year. We expect non-GAAP EPS to be in the range of $0.41 to $0.43 per share, assuming stable currency rates. We also reiterate our full-year non-GAAP guidance presented in May at Investor Day, which is revenue growth of 8% to 10% plus year-over-year and EPS in the range of $1.65 to $1.75. Q1 was a great start to the year, and we look forward to building on this growth momentum with our scalable foundation. We're excited about the tremendous opportunities ahead. Thank you for your time today, and I will now turn the call back to the operator to take your questions, but please do keep in mind we are not able to answer any questions related to any specific M&As at this time. Operator?

All right, so as a reminder, to ask a question, you will need to press star 1 on your telephone. To resolve your question, press the pound key. Again, that is star 1 on your telephone. Please stand by while we compile the Q&A roster. Again, if you would like to ask a question, please press star 1. We do have a question from Saket Kalia from Barclays. You are now live.

Okay, great. Hey, guys, thanks a lot for taking my questions here. Maybe to start out with you, Natalie, just on the core business, you know, I was wondering if you could talk a little bit about how you think about the seasonality of net ads in a typical year and perhaps any color that you could give on retention rates in the quarter. Does that make sense?

Yeah, and thanks for your question, Sergey. On customer count, look, as you heard me say, we added $2.6 million year-over-year, $150K quarter-over-quarter. Yes, you're right, Q1 seasonally is lower. Note last year we were right in the heart of COVID, but from a seasonality perspective, Q1 honestly landed exactly how we expected it to. In terms of retention, retention is stable. 85% is our overall unit retention. And, you know, look, we are where we expected to be. Our focus now is on, as we move forward, just driving new acquisition, retaining existing customers. Both are key priorities for us. We're not only focused on staying relevant where the consumers are and making their buying decisions, but we are just continuously driving and fueling innovation in our product roadmap, coupled with world-class customer service to really keep the current customers happy and satisfied, sustain and grow our retention rate, and, again, prioritize new acquisition at the top of the funnel.

Got it. Very helpful. Maybe for my follow-up for you, Vincent, understanding we don't want to ask anything about sort of the headlines out there, maybe I can ask a broader question about capital allocation. Maybe outside of M&A broadly, how do you think about the priorities for capital allocation sort of going forward?

Yeah, I can talk about capital allocation, but first let me talk about the overall strategy moving forward. It's really about investing into innovation, bringing more product to redefine cyber safety, investing, not only talk about marketing, but broadly define investing in the more solid product. go-to-market model, we know that this market is still vastly under-penetrated when you take a broad definition of cyber safety and reaching out to our customers is very important. We said it at the analysis day, we are operating management teams that create levers within the P&L, so improving capacity to drive more innovations, more productivity there, more marketing spend. But we are also using all levers of our business, including the balance sheet, and there you talk about the capital and its capital allocation. It's not rocket science. There are really three areas we use capital for. One is for inorganic investments, and we talk about M&A and all capitalized investments. The other one is buyback, and the other one is dividends. And we use all three in a balanced way. Now, when we talk about balanced way, it doesn't mean that every quarter it will be balanced. Also, last year, over 12 months, it was exactly a third, a third, a third. But we really take a very long-term view of our business when it comes to investment and use of cash.

Very helpful. Thanks, Yasgul. I'll get back in queue.

Yeah, thanks again. Next one on the queue is Jonathan Reithofer from Baird. You are now live.

Angela.

Yeah. Hello. Good afternoon. So, Vince, this is, again, along the lines of trying to understand your thinking around M&A. And specifically at the LSA session, you highlighted $0.30 to $0.35 from M&A as part of the bridge to $3 in earnings. So I'm just curious if If you can add some perspective to that in terms of how scale from an acquisition might change the timing and or a contribution to the doubling of that earnings profile, and then kind of as a follow-on, when you think of scale, how does dilution factor into that? Is dilution something you're willing to accept, and if so, for how long?

So to be very clear, right, so we are under strict rules. We cannot talk about specification. We want to make sure we follow all the rules, including the U.K. rules, considering one of the cases, as you know. So I'll remind you what we said in May in terms of the broad business. We talked about a long-term aspirational view, and we said that we have multiple levers at a high level split between business growth efficiencies and then use of capital and use of capital we talk about just the capital allocation model which has to prong the buyback in the M&A and we said that the way we manage the business in the long term all of those levers should be contributors to our long-term aspiration When we think about more tactical capital or capital structure, we look again, there are two at all levels, all possible, with a long-term ambition goal in mind to make sure we achieve those. And I'll leave it at that, and hopefully you understand that we are under strict rules we intend to respect fully.

Yeah, I appreciate that color-written thing. So the other question I have is it looks like you're dipping your toes back into the PCOEM channel. And so I'm just wondering if you can walk through what you see around the opportunity there. Is this a channel that you're likely to pursue more aggressively going forward? And maybe just remind us on how you see the economics of that go to market. You know, years ago, Symantec walked away from that channel because of those economics.

100%. So Symantec kind of almost owns the majority of those channels in the past decade ago or five, six, seven years ago. Those relationships have long tail and we still have a little bit of those into our business today. As you know, the economy on a long-term basis takes a seven-year or a ten-year view. requires more investments up front and then profitability over time, as you told, customer value has a long tail, six, seven years. So that's how it works. One time, Antec decided to really focus on maximizing the profit of the consumer division to fund the enterprise turnaround. They made certain decisions. When we became known as LifeLock and 100% focused on consumers, really maximizing the protection for digital lives of every consumer connected to the Internet, we said, and I'll confirm that today, we look at all ways to reach the customers, all go-to-market channels. They have to make sense financially in a short, mid, or long-term view, and we'll go and develop the best, most diversified distribution channel for reaching out to those consumers, creating the awareness, and fulfilling the demand. As part of that, I also said we don't have anything that we want to exclude from, and obviously relationship with PC manufacturers, although we are focused on the user experience and the Internet and the cloud digital lives, is one of the ways that could be favorable. The relationship we announced with Lenovo or the few remaining relationships we have in our current distribution channels are important, and we continue to look at creating capacity in our P&L to go and develop all channels if you want to go to consumers.

That's helpful. Thanks, Vincent. I'll get back in the queue. Sounds good. Thank you, Jonathan.

Next question comes from the line of Matt Hedberg from RBC. You are now live.

Hey, guys. Thanks for taking my question. Vincent, I wanted to follow up on Socket's question on retention. Obviously, it's clear that it remains strong. Overall, 85%. I guess I'm wondering if you could provide a little bit more color on, obviously, if you noted the strong sub-add quarter last year due to COVID. How some of those initial COVID subs are doing from retention? And also, your – Yeah.

Yeah, totally good. So – You point on the two, and I'm sure Saket meant them behind these questions, which is this is the first full quarter where you're leaping, the first big growth we had as we entered the COVID lockdown period last year, as you remember, starting in March, but really impacting this quarter. So it's the first time we have three months, a full quarter of 12 months looking back. And a lot of investors and a lot of people were wondering, where are we going to be able to maintain a customer base account growth. And we definitely have seen the impact of a lower quarter Q1. As you know, when it's summer, people get out and they're less into their digital apps. But I think the progress we've made in expanding the needs for a cyber safety platform, which is different than just a PC antivirus, if you want, has shown. And we were able to maintain the not only a year-over-year growth, but a sequential growth, which is pretty extraordinary considering Q1, right? Q4 is a big quarter, is a tax quarter, and then normally Q1 sequentially is down and we're able to grow it. So we're very happy by the result. As Natalie mentioned, it's in line to what we had embedded into our guidance, so we are on plan and put a big deposit into our full-year plan. The second question I get from investors is, those people or those customers that signed in for the first time during the COVID period, are they going to renew at the same level? And what we have seen in now four months, looking back March to end of June, we've seen very stable renewal rates. Now, they are first-year renewal rates, so they are lower than the average 85%, but the first-year renewal rates a year ago, two years ago, are in line to what we saw this quarter. We believe it's... It's an opportunity to improve retention rate by specific or driving specific operation initiatives around the first year cohort and customer satisfaction and experience. But we have not seen a change in behavior with what some of you may have called the COVID cohort, if you want. The third question I get is around Avira. Avira was slightly below in their retention rate, below our average northern customers, but not that far behind. And despite the addition of a little bit less than 2 million Avira customers, we've seen an overall retention rate for our business that maintained around 85%. Now, I have more details. I will not make them public for obvious reasons, but I have more details, and I can tell you that we've improved on every line, and Avira, too, continues to have a solid, although small incrementally, a solid performance on both acquisition and retention. In addition, they have a third... dimension we are learning or we're building is really the free, two-page conversion. And we've redeployed some of our marketing capacity and capabilities to drive and increase that conversion rate as well. So we're very pleased by the performance of all of our line staff of businesses.

That is super helpful. Thank you for all that color. And then, you know, something else that kind of stood out to me, ARPU grew sequentially. And, you know, it hadn't been growing for a while. I think we always thought with Norton 360 there would be an upward bias to ARPU. I know it was a subtle increase sequentially, but it was up. Anything to call out there in terms of trends or anything that you noticed?

Yeah, as we mentioned last quarter, the Avira ARPU was roughly half of our northern ARPU, more focused, of course, on the security. And so it lowered our aggregated ARPU that was at $9.10 before the acquisition to $8.80 when you take the aggregate. By the pure fact of adding new customers that only had exporter to security plus a few other products but didn't have exporter to a full cyber safety system, And from here, we continue to see good traction on ARPU. Now, as you know, as we continue to acquire new customers and be a net grower overall, the first-year ARPU is lower than the multi-year. And so the headwind from that first-year cohort growing is an offset by the slight but consistent and incremental improvement from the Norton 360 and the upsell into the portfolio.

Got it. Super helpful. Thanks.

Yep. All right. Again, if you would like to ask a question, please press star 1 on your telephone. Next question on the line is Hamza Fodorwala from Morgan Stanley. You are now live.

Hey, guys. Thank you for taking my question. Just on the – so I understand from the subscriber standpoint – a lot of it had to do with sort of normal seasonality. But I think you mentioned earlier sort of post-pandemic demand trends. I'm wondering how much of maybe the dip in subscriber ads was due to that post-pandemic demand trend that we saw much of last year versus, you know, typical seasonality from Q4 to Q1?

So I just want to be clear when you call dip and every time and see that I want to be sure we qualified correctly. Last year, we grew sequentially between 100,000 net new customer to 400,000 net new customer depending on the quarter. We also know that Q1 and Q2 are the seasonally low quarter on a sequential basis, and then Q3 is more security-driven, and Q4 is our tax identity-driven quarter. And so growing 150,000 quarter, while it's less than Q4, of course, on last quarter, it is a very strong performance in a first seasonally low quarter sequential net customer ad. So it's right on our plan. It's right on our short-term and long-term commitments. Do we want to have a higher awareness and pandemic faster? Of course, but we feel pretty good about that plan. What is the impact of the COVID or post-COVID market opening versus the normal effect of more people being in summertime on vacation, the mountain on the beach, and less on their digital life? That we cannot say, and I think it will always be a business that, in the winter is a bit more dominant than it is in the summer.

Makes total sense. And just maybe a follow-up. The partner revenue continues to grow quite strongly. Obviously, you know, much lower percentage of the overall revenue, but can you maybe give some color as to what's driving that in your recent partnerships that, you know, we should be aware of here?

Yeah, and for those of you from Northern LifeLock that are listening, I want to thank you for driving a spirit of growth. I can tell you since we became Northern LifeLock, we told everyone, look, the opportunity, although we committed to a mid-single digit, it's much bigger than that. Look at the underpenetrated market. It is a business that had not been invested. enough in the past as they shifted from partnership, the OEM mainly, into direct-to-consumer and built a very strong direct-to-consumer engine. We said it will be much more diversified and go in every area. There is no one salesperson within our go-to market that doesn't come directly doing our weekly or our monthly reviews and say, I have a new idea, should we invest in that? And Natalie and I are going through the reviews, look at the investment and decide to invest. We have increased our sales capacity in a few of the channels. I mentioned a quarter or two quarters ago our employee benefits. channel that has been growing double-digit and we continue to build that up. Mention, of course, the OEM is still small, but we can do more. We have our XSP business that continue to grow. And then Natalie mentioned that between online and physical retail, balancing it and really strategically moving through different opportunities by local markets has always been an effort. Recently, a few months ago, we also started a country-by-country strategy that looks at all of our different channels, if you want, and trying to balance our investment in a coordinated way at the local level, and that also is bearing its fruits. You should see us continue to invest in our GTM organization.

Thank you so much.

We do have a follow-up question from Saket Kalia from Barclays. You are now live.

Great. Thanks for letting me back in queue here. You know, Vincent, you mentioned the Avira acquisition earlier. I was wondering if you could just comment a little bit about what you're seeing in sort of their end markets in Europe specifically. You know, what are you seeing in that market? Maybe just expand. What are you seeing in terms of Europe around market share in core antivirus as well as perhaps the opportunity to cross-sell your identity monitoring products in that geo?

I think the latter part of your question is the right one. I still get the question around competition and is it like McAfee or Microsoft on antivirus and what is it? We see the market cyber safety as much more broad. Antivirus almost being kind of a free or commoditized product and building up the cyber safety platform around identity, around privacy, around new digital services, if you want, is really where we see the demand. And in Europe, it's definitely driven by new concerns around identity and privacy. We introduced dark web monitoring in many of those countries. We are trying to build a richer portfolio around northern identity for all of those customers. And you touched it, the opportunity to cross a currently strong focus on identity into an Avira freemium install base. is a huge potential. It won't happen over one quarter. We need multi-quarters to build that offering and drive that awareness and then that conversion. But it's a huge opportunity for us, for sure.

Got it. Very helpful. Thanks.

Good. All right. At this time, there are no more questions. I will turn the call over back to Vincent Pellet, CEO for Closing Remarks. Excellent. Thank you, Chino.

Well, let me be very short. Thanks for joining. Thank you for your support. Obviously, we want you to drive our business towards our long-term ambition, and we look forward to connecting with you very soon. Thank you.

This concludes the conference call.

Thank you.