Gen Digital Inc.

Good afternoon, everyone. Thank you for standing by. My name is Matt, and I'll be your conference operator today. I would like to welcome everyone to Jen's second quarter fiscal year 2023 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, Matt, and good afternoon, everyone. Welcome to Jen's first earnings call. Joining me today to review our second quarter fiscal year 2023 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 slides and press release. I'd like to remind everyone that during this call, all references to the financial metrics are non-GAAP and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release, which is available on the IR website at investor.gendigital.com. Today's call contains statements regarding our business, financial performance, and operations, including the impact of our business industry that may be considered forward-looking statements, and such statements involve risks 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 in particular, our most recent reports on Form 10-K and 10-Q. And now, I will turn the call over to our CEO, Vincent.

Thank you, Mary Ann. Welcome, everyone, to our first earnings call at GenDigital. In many ways, we are a new company, better positioned as a leader in cyber safety and with an expanded purpose of powering digital freedom for everyone. Our mission is to create technology solutions for people to take full advantage of the digital world safely, privately, and confidently. Let me tell you a little bit about why we created Gen. Generations today are normally associated with age, such as Gen X, Gen Y, or Gen Z. But all generations, no matter your age, are connected by one thing, We are all digital, Generation Digital. We shop, bank, learn, socialize online, and that is just today. We have reimagined what the future will bring and what we can bring to Generation D. Digital technology and innovation bring tremendous benefits to consumers in ways we could never have imagined, but they also make our world more complex, more demanding, more exposed. They have created new threats and challenges. Hacking has become a profession. The dark web is a black market used by bad actors, and the challenges are not limited to hacking, scamming, or phishing. Our personal data is exposed everywhere, and algorithms are influencing our reasoning. Safety, of course, remains an absolute prerequisite for protecting our digital lives and fully benefiting from the digital world we live in. Protecting online security is how we got started 30 years ago, and it's still at the heart of what we do today. But that's not enough anymore. At Gen, we are committed to bring our credibility, our passion, our innovation to step up and boldly tackle new challenges, powering digital freedom for everyone. Gen is now the leader that consumers trust to deliver comprehensive digital protection and empowerment in the digital world. We are now united by our family of trusted brands, including Norton, Avast, LifeLock, Avira, AVG, Reputation Defender, and CCleaner. These amazing brands have and will continue to spend generations with products and solutions that suit different lifestyles and life stages. We will also focus on trust-based solutions that will do more than just help people around the world live fuller, safer digital lives today. we will help define what it means to live freely in the digital world of tomorrow. As you know, Jan is dual headquartered in both the US and Czechia, giving us the benefit of a truly global talented team located across America, Europe, and Asia. We have a purpose-driven culture with an innovative mindset. We have products and solutions in over 150 countries with an omnichannel distribution strategy and we are trusted by over 500 million users around the world. It is critically important to us to provide a seamless, integrated cyber safety portfolio with best-in-class functionalities and products that are easy to use and consumer-friendly. Before I share more about the quarter, let me talk a little bit about our integration. We closed the Avast acquisition on September 12th, and we are off to a great start. We have announced our new organizational design and leadership teams to help drive the next chapter of this company. On November 1st, we merged our backend systems and have detailed technology and integration roadmaps. As a result, we have increased our annual savings to over $300 million, and we believe we will be fully completed within the next 18 months. With a combined go-to-market, leveraging a powerful set of trusted brands, we are focused on the opportunity to deliver more value to our current customers across our brands. We know that higher engagement leads to growth in our pool and growth in retention for our nearly 65 million cyber safety customers, which includes both paid direct and partners. As of today, we have identified initiatives that are revenue synergy opportunities of about $200 million in the next two years, giving us additional confidence in our ability to sustain a mid-single-digit growth rate in the mid-term. While an integration is never easy for the team, we are collectively very motivated by the opportunity in front of us. Now let me move to our Q2 results. I will provide a high-level summary, and then Natalie will spend more time working you through our detailed results and the reporting structure post-acquisition. Supported by our strong execution in a challenging environment, we delivered our 13 consecutive quarter of growth with Q2 bookings up 11% and revenue up 12% in constant currency, which includes 7 percentage points of contribution from Avast. Excluding Avast, our cyber safety bookings revenue grew 5% in constant currency in line with our mid-single-digit growth expectation. Earnings grew 5% or 12% excluding the impact of currency headwinds. Our market leaderships, our strong customer loyalty, and the continued increase in value we deliver to our product innovation and membership adoption enable us in the current economic environment to really tackle the business from a position of strength. At the core, we are a technology and product company And one thing that will not change is our continued pursuit for a faster pace of innovation and build out of our product portfolio. Combining our offering with Avast gives us the most comprehensive product portfolio featuring a full coverage of cyber safety needs. We are the first to offer a fully integrated platform covering device security and performance, data and cloud security, identity protection, personal privacy, and reputation management. Before the acquisition, over 60% of our customers had taken a membership or platform approach using Norton 360. Now, with Avast, we approximately have 35% of our customers having adopted a platform, giving us the opportunity to offer another 15 million customers the benefits of a feature-rich platform. While we are making fast progress on the technology front and the product integration front, we remain focused on the pace of our product releases, whether they are new products, new functionalities, or platform upgrades. We continue to make strong inroads with our privacy solutions. In Q2, AntiTrack expanded its capabilities to additional browsers and countries, and we launched our Privacy Monitoring Assistance, or PMA, solution into retail channels for the first time. In the identity pillar, we continued our international expansion and launch our ID Advisor Plus offering to more European countries, including Germany and France. We have also launched several new enhancements to the US LifeLock experience, including guided child credit freeze. We also launched Email Guardian with Avast, a new feature capable of filtering malicious emails with no endpoints present, independent of device used. The new online safety score provides regular feedback on the user's digital habits and personalized tips to help them take charge of their online safety. Finally, we are also very pleased by the performance of the Avast Security Engine, which scored top marks in leading independent tests. Overall, the Avast team brings a lot of technology know-how and an innovation mindset around human-centric cyber safety, which makes our combination even richer for consumers. Expanding our ability to reach customers is equally important. Gen is now a house of brands with diversified set of sales channels and a business model that spans from premium to premium. Direct-to-consumer business remains the main channel for us today. Despite macroeconomic pressure that showed in global e-commerce traffic through the quarter, we're able to grow bookings 3% in our direct-to-consumer business. We strategically deployed our marketing spend, focusing on higher R pool versus customer counts. We believe that this is the right way to deploy our marketing spend in this current environment, and we will continue to adapt to deliver the most efficient and highest returns on our investment. On the partner side, we continue to expand geographically, delivering another double-jig growth quarter. Our value proposition of complete cyber safety, including security, identity, and privacy protection, is taking root. As an example, we're excited to have launched our identity offering for a large British telco provider, expanding our effort of identity protection for the UK market and replicating the success we have had in Canada. As Gen, we have expanded our customer universe, but that is a small step towards our mission to protect and empower every one of the 5 billion global Internet users. Today, we have over 500 million total users, including paid and free customers. One layer down, we have a new classification of paid cyber safety tolling about 65 million customers that is made up roughly of 39 million paid direct customers and over 25 million paid customers from our partner business. And while our direct customers count declined by roughly 60,000 quarter over quarter on the Northern LifeLock side and 190,000 on the Advanced side, our short-term focus and opportunity coming out of the acquisition is to work on increasing the value for millions of our customers and consequently, their satisfaction and retention rate. While bid-direct customer count is an important metric, it is also important to highlight that we have multiple levers to drive booking growth in more diversified ways, such as growing in ARPU with the opportunity of cross-selling new products, growing in memberships, offering a platform approach to cyber safety, and growing in retention rates, especially on the Ava side, supported by our best-in-class support and services organization. Post-acquisition, we have about two-thirds of our customers that benefit mainly from a broadly defined security offering. As a result of the acquisition, our aggregated monthly ARPU is now $7 per customer. And as we have done before, we believe we have the opportunity to demonstrate the need for a comprehensive cyber safety approach including cross-selling identity and privacy solutions from a richer portfolio and increase ARPU over time. As I mentioned, our platform's strength continues to be a cornerstone of our strategy. We have over 14 million members with a membership plan from Northern 360, Avast One, or Avira Prime. These represent approximately 35% of our direct customers and believe we have the opportunity to bring that ratio to over 50% over time as we did it at Northern LifeLock over the last two years. We have observed higher utilization, higher satisfaction, and better retention for our customers that have subscribed to a membership and now benefits from our broad portfolio. Customer satisfaction is a very important metric at Gen. It is supported by a consumer-centric approach to our innovation and the largest service organization in consumer cyber safety. As a result, our Northern LifeLock direct customer renewed their membership at a retention rate of 85% plus. When including our advanced customer base and mobile customers, our aggregate retention rate is now 75%. This is an opportunity to cross-pollinate our operational know-how and offer a rich portfolio supporting by a global service organization to all of our 65 million customers, whether direct or through partners. We see this as an opportunity to increase our 75% retention rate over the next two years. In addition to our integration work, we have clean line of sight and priorities for our growth and operational initiatives. Taking into consideration what I just mentioned, we have identified $200 million of potential revenue synergies that should lead to growing ARPU and growing retention rates over the next two years. We have channel diversification initiatives focused on partnership and new segments such as the Avast platform for small businesses. And we will prioritize the effectiveness of our marketing spend on bookings growth over direct customer count. These revenue opportunities combined with over $300 million of cost synergies should deliver tremendous value and create room to invest for the long-term opportunity. So as we look to the future, The current and potentially a recessionary economy does put downward pressure on some part of our business, but we also see this as an opportunity and a catalyst for us. I am confident with our high recurring revenue model coupled with our operational discipline that our business will remain durable and flexible to navigate the short-term challenging environment. At the end, we know that the need for comprehensive cyber safety and digital freedom is a secular growth trend and we are the leader. And now, let me turn the call over to Natalie to cover our results and new reporting details. Natalie?