NortonLifeLock Inc.

Good afternoon, everyone. Thank you for standing by. My name is Anne and I will be your conference operator today. I would like to welcome everyone to the Norton LifeLock fiscal 2021 third 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 now like to pass the call over to Ms. Mary Lai, head investor relations. Nice to meet you again.

Thank you, Anne, and good afternoon, everyone. Welcome to the Norton LifeLock fiscal 2021 third quarter earnings call. Joining me today to review our 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-GAAP to GAAP measures is included in our press release, which is available on our IR website at investor.nornlifelock.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 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 annual report on Form 10-K for the fiscal year ended April 3rd, 2020. and recently filed quarterly reports on Form 10-Q. And now, I will turn the call over to our CEO, Vincent.

Thank you, Mary, and good afternoon, everyone. I hope you are all safe and well. As we embark on 2021, I think it's important to recognize the sense of uncertainty and the ongoing challenges that we all face as individuals or as a society. Despite the social, economic, and health issues we are facing, I'm hopeful that collectively we will emerge stronger and more united. At Northern LifeLock, the safety and well-being of our employees is our utmost priority. And I want to thank each and every one of them for facing all those challenges while continuing to show a deep commitment to drive our vision of protecting and empowering people to live their digital life safely. A lot has happened since our last earnings. On top of delivering another solid quarter, accelerating our growth, and adding some exceptional talents to our team and our board, we also are proud to have been recognized by the Human Rights Campaign Foundation for earning a top score on the 2021 Equality Index. We are proud of the diverse backgrounds represented by our entire team at Northern LifeLock, and we remain committed to building an inclusive company. We know that delivering on our vision cannot happen without a committed, talented, and diverse team. In December, we announced LifeLock's first acquisition. Now that the deal has closed, we are excited to welcome Avira's employees, customers, and partners to the Nolan family. We are really excited by the opportunity to provide Avira's 30 million users and over 1.5 million paid customers. the benefit of the Nolan plus Avira offering. Together, we are now privileged to help protect over 80 million consumers globally as we embrace the important responsibility we have in securing their digital lives. We are also quickly working to leverage Avira's strong presence in Europe, which now also includes BullGuard, a UK-based cybersecurity company that Avira added to their business last year. On top of extending our reach deeper into EMEA, we look forward to adding Aviras and BullGuard's capabilities to our portfolio. Before I dive into Q3 results, I want to revisit two key post-transition commitments we previously set as a standalone Northern LifeLock company. From returning to a growing customer base, a first since 2014, to delivering over $1.5 annualized EPS, I am proud to say that we have established the company on the trajectory of sustainable and profitable growth. We are a stronger cyber safety company today, 100% focused on protecting and empowering consumers to live their digital lives safely. While we are proud of these achievements, we know we have a tremendous responsibility to deliver a portfolio that stays ahead of cyber criminals. We don't take this lightly. As we innovate and work to keep our customers safe, we know that we will be transforming our company for a richer portfolio and expanded consumer reach. And we're just getting started. In Q3, we delivered solid growth and accelerated our momentum. Revenue was up 6% and non-GAAP EPS grew 52%. Reported billings growth was 10%, our first quarter of double-digit growth. We are closing the fiscal year out strong, and more importantly, we're well on our way to creating a meaningful and sustainable growth business. Leading the growth momentum, our partner business posted double-digit revenue growth up 15%. Retail was strong in the quarter, performing well through e-tail and during the holidays. Internationally, Japan was particularly strong as it relates to identity theft protection solutions, such as Dark Web Monitoring and ID Advisor, sold through partners and retailers. Finding the right opportunities and markets to build and expand these long-term partnerships is one of our key strategic focus areas to broaden our reach and bring cyber safety to more consumers in under-penetrated markets. Stay tuned for more developments in this area as we continue to transform the company. Our direct-to-consumer revenue, which represents the majority of our business, was up 5%. We saw broad-based growth across the portfolio, as well as strong performance through the holiday season. While our North America business is considerably larger than the rest of the world, the international growth rate continues to show strength and outpace the Americas. In the quarter, our direct business grew double digits across multiple countries, including Germany, France, Australia, and New Zealand, where we have recently added dark web monitoring into our Norden 360 offering. This is part of our strategic push to expand Norden identity products internationally and bring more comprehensive cyber safety offering to international consumers. We definitely have more room to grow here, especially with the synergies and extended global reach we will be leveraging with Avira and the freemium model. In Q3, our direct customer count grew over 300,000 sequentially and close to 900,000 year-over-year, bringing our total count to 21 million. This was our fifth straight quarter of net direct customer ads sequentially. Our customer retention rate remained stable at 85%. Our industry-leading monthly ARPU, average revenue per user, also remained strong at $9. Both metrics are strong indicators that our current customers see the value of our products. Notwithstanding the effect of tenure and geographical mix, we come here to see opportunities to improve our pool as we enrich the cyber safety value offered to our customers and to improve retention rates, especially in the early years of the customer journey. One of the key contributors to our customer count growth and retention success continues to be the Norton 360 integrated platform, the first truly integrated cyber safety offering in the market. At the end of Q3, approximately 60% of our installed base are using Norton 360. This platform is designed to provide a comprehensive protection while driving higher customer engagement. This level of adoption shows that our approach to provide an easy to use platform and comprehensive protection through a membership model resonates well with our customers. And we're working hard to continue bringing new functionalities, simplifying the membership plans, and constantly improving the user experience. The combination of Nolan 360 platform, our international expansion effort, and our strategic shift to new forms of digital marketing is working and bringing cyber safety to new customers. Looking back at the last 12 months, we've welcomed approximately 4 million new customers to Northern LifeLock, the majority of which was on Northern 360. We are seeing early improvements in renewal trends with these newer customer cohorts. We're engaging with these customers differently, communicating with new alerts, measuring what works, what doesn't, and we're able to scale product launches more effectively through our in-house e-commerce platform. At the heart of all of this, it's our technology and accelerated pace of innovation that enable us to be nimble in bringing new and incremental value to customers. Sometimes we may run the risk of failing fast, but the reward is that we learn even faster to translate that into success as we move to own the consumer cyber safety category. With the ever-expanding scope of cyber crimes and the acceleration of the numbers of attacks that we've all witnessed in the news, we know it's critical to focus on product and service innovation to help keep consumers' digital lives safe and to raise the overall awareness of consumer cyber safety across all audiences. We plan to continue to release new products and features at an accelerated pace that we have not achieved in years. Let me tell you about a couple of them launched in Q3. As part of our global expansion efforts, we successfully launched Nolan ID Advisor in Japan, powered by LifeLog. Here, we specifically targeted retail and service providers to reach new audiences and increase awareness on the value of dark web monitoring. One of the differentiators in this product is the access to a dedicated ID restoration specialist, a Japanese-speaking service agent, to help resolve fraudulent claims from start to finish. Another example is our enhanced Nolan 360 mobile experience, which provides customers access to their device security, online privacy, and identity features through one single easy-to-use app, making it easier for customers to access and manage their cyber safety tools from one dashboard. This is another example of our commitment to bring a richer and simpler experience to consumer cyber safety. Looking back, we have demonstrated our continued commitment to grow the top line, drive discipline operating leverage, and pursue value creation for all stakeholders. It's important to me and our entire leadership team to build credibility and a sustainable and growing financial track record. It's also worth noting that behind our strong third quarter performance, you will find a very passionate team working hard to fulfill our vision to protect and empower people to live their digital lives safely. We think customer first. We innovate and grow. We scrappy. We own it. We open. We authentic. These are the core values we live by. And making the world cyber safe is what inspires us. Finally, before I pass it to Natalie, I'm excited to share a little more detail on our recent additions to the board. Cherie Smith is Vice Chair and Partner at Paul Hastings, a prominent global law firm. She brings extensive international experience in data privacy, cybersecurity, and bridge response issues. Similarly, Emily Health, DocuSign's Chief Trust and Security Officer, brings significant experience in information security, data privacy, in addition to being a key contributor in creating consumer trust to digitally transform an industry. They are both passionate and accomplished leaders who are already valuable members of the board team. And now let me turn the call over to Natalie for more details on the financial results.

Thank you, Vincent, and hello, everyone. For today's discussion, I will focus on non-GAAP financials, starting with our Q3 results and then provide our outlook for Q4. We delivered strong performance in Q3, with growth year-over-year and quarter-over-quarter across our key metrics. Our Q3 revenue was $639 million, up 6% year-over-year, and above the high end of our guidance. We accelerated reported billings growth to 10%, including a two-point positive impact from FX in our ending contract liability balance. Our growth momentum was driven by broad-based strength across all GEOs and products, as well as a successful holiday season. Our total direct customer count increased to 21 million, adding 334,000 customers quarter-over-quarter and 876,000 customers year-over-year. This was our fifth consecutive quarter of net customer ads sequential. Our customer retention rate, a unit retention metric, remained stable at 85%. Our monthly average revenue per user, or ARPU, was over $9 this quarter, up 1% year over year and stable quarter over quarter. 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. As we explore new business models and add more customers globally, ARPU can vary as our mix changes. We will look for opportunities to improve ARPU and first-year retention as we continue to grow and diversify our business. We are still in the early innings, but our go-to-market efforts are beginning to take hold. We are leveraging our distribution channels to reach more customers globally. We accelerated growth in our direct business in Q3, driven by our growing renewable base. As we continue to add new customers, we are seeing positive data points and retention directly correlated with our Norton 360 membership suite. As we have accelerated the pace of our innovation and launched new in-demand products and features, we are beginning to see improvements in our cross-sell and up-sell efforts. And we have the opportunity to accelerate further as we expand our reach to new audiences and continue to foster growth in our loyal customer base. In our partner business, Q3 revenue grew 15% year over year. We continue to make strides internationally, signing new partnerships that we expect will scale over the long term. As we have noted in previous conversations, these partner sales cycles are longer, taking one to two years or more to realize. We continue to invest in these partnerships for the long term as they are strategically important for us to expand our reach. Next, Q3 operating margin was 51%. We remained focused on driving operational discipline and prioritizing investments in product innovation and diversified marketing. With R&D, we continue to accelerate the pace of product introductions, growing and expanding our product portfolio, and providing an increasingly differentiated value proposition for consumers. With marketing, we continue to invest to drive new customer acquisition, as well as diversify our spend into more digital and international channels to help widen our audience, measuring and ensuring effectiveness along the way. We are disciplined in our approach and will continue to invest in sustainable growth. Q3 net income was $229 million, up 44% year over year. Diluted EPS was $0.38 for the quarter, up 52% year-over-year and at the high end of our guidance range. We are now operating above the $1.50 annualized EPS level and have established a strong foundation to build upon. As we look to the future, we will continue to prioritize EPS expansion while taking advantage of the sustainable growth opportunities. Turning to our cash flow and balance sheet, Q3 operating cash flow was $293 million, and free cash flow was $291 million. For a few quarters now, we have been generating more than $900 million in annual free cash flow, excluding stranded costs. We ended Q3 with over $1 billion of total cash and $1 billion of undrawn revolver capacity. We continue to have a strong liquidity position and are levered at approximately two times net debt. Now a quick update on our real estate assets held for sale. We see a lot of activity and interest in each of our properties and recently agreed to terms for the sale of one of our buildings in Mountain Dew. The buyers are expected to complete their due diligence in our fourth quarter. While we've seen a lot of interest and continue to be in active discussions on all properties, we remain focused on achieving fair market value for the remaining assets for sale in Mountain View, Dublin, and Tucson. Let me spend a few minutes specifically on capital allocation. In Q3, we returned approximately $207 million to shareholders in the form of our regular quarterly dividend and share repurchase. In the quarter, we paid a dividend of 12.5 cents per common share. Despite the limited open trading window, we were active in the last month of the quarter and deployed $133 million and purchased 7 million shares. As of the end of Q3, there was approximately $420 million remaining in our $1.6 billion share buyback authorization, which we expect to continue to deploy opportunistically. As described in the press release, the board of directors approved a regular quarterly cash dividend of 12 and a half cents per common share to be paid on March 17th, 2021 for all shareholders of record as of the close of business on February 22nd, 2021. Before I move on to our Q4 outlook, let me provide an update on Avira. As you heard from Vincent, we closed the acquisition of Avira in January, which falls in our fiscal fourth quarter. While it is early, the integration process is well underway and on track to plan. As a reminder, we expect to add approximately three points of growth to our total revenue and be financially accretive in the first year, targeting to achieve 50% operating margin post synergies within six months. Now turning to our Q4 outlook. We expect Q4 revenue in the range of $655 to $665 million, which translates to high single-digit growth year over year. We expect non-GAAP EPS to be in the range of $0.37 to $0.39 per share, assuming stable currency rates and share count dilution from Q3 buybacks. Our Q4 outlook includes the partial impact of Avira. As we enter the last quarter of our fiscal year 2021, we are proud to have achieved all of the long-term commitments we set when we stood up Norton LifeLock, including revenue growth of mid-single digits, operating margin at 50%, generating annualized free cash flow of more than $900 million, and an annualized EPS of $1.50. Achieving all of those is a true testament to our renewed focus on execution and building a consistent and sustainable track record. We look forward to closing out the fiscal year strong with accelerating momentum and a scalable foundation, and 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. Operator?

Yes, ma'am. Everyone, to ask a question, you will need to press star 1 on your telephone keypad. We will allow one question for each participant in the queue. And we will pause for a moment to compile the Q&A roster. Our first question comes from the line of Greg Moskowitz from Mizuho. Your line is open.

All right. Thank you very much. Good afternoon, guys. Congratulations on a good Q3. Thank you. So, Vincent, you've invested a lot more in marketing over the last 12 months, and it seems pretty clear, inclusive of these results, that you've already seen a really good yield on those investments. So looking forward, how much more room for improvement do you see with regard to driving traffic to the site and increasing monetization?

Yeah, and it's important to note that your marketing investment is never done in a vacuum, right? We've also launched Norton 360 a year and a half ago. We introduced a bunch of new products and new functionalities into our overall portfolio, and we started to accelerate the spend or at least the penetration of certain international markets. I think as we continue to play on all three levers, including the marketing spend, if you want, we'll be able to continue to show good growth. And with the acquisition of Avera, actually maybe an accelerated growth as we move forward.

All right, perfect. And then you mentioned in your prepared remarks that you're seeing early improvements with newer customer cohorts. And that's interesting because typically that first-year renewal rate is, of course, the most challenging thing. So my question is, you know, your retention has been extremely stable at 85%. And I know it's early, but given some of the improvements that you're seeing, is there potential to get that retention higher?

I think it's still early. As you mentioned, the first year and the second year retention is where we have the most improvement to achieve. If I look at the out years for those who are in the full portfolio, we achieved the 90-plus percent retention on a unit basis. And so we see the full potential between first year and that 90 percent as the improvement needed. It has many different operations, increasing the engagement, showing the value, adding new functionalities. The results I mentioned is mainly on Norton 360, when we have the ability to show cross-category values, if you want, to the users. We've seen better retention rate in the first year than standard on product, and still early to say, right? We're still in the early phase of renewing the early adopters of Norton 360, but we're very encouraged by what the numbers show.

All right, terrific. Thanks. Maybe just one quick one for Natalie. So the billions growth of 10% reported, 8% constant currency. I just wanted to confirm that none of that includes Avira, and then also how much of Avira is sitting in deferred revenue as of Jan 31? Thank you.

Yeah, thanks for the question. Just really quickly, Avira is not in our Q3 results at all. And so whether you think about growth or you think about the liability balance, any of that, it's not going to be in our financials until Q4.

Okay, even though it was closed at the end of January, it's not sitting on the balance sheet at all, is that right? That's correct. Okay, fantastic. Thanks for the clarification. Nice job. Thank you.

Your next question comes from the line of socket, Kalia, from Barclays.

Hey, guys, thanks for taking my questions here, and congrats on the quarter. Thanks, Adam. Sure. Vincent, maybe first for you, just maybe zooming out a little bit. Can we just talk a little bit about Avira's freemium business model and sort of how you see that complementing what Norton currently offers?

Yeah, let me zoom out even one more. We definitely see more and more consumer moving their activities online. The pandemic has only accelerated that movement, and I think a lot is here to stay. Along with that, as you know, cybercriminals are adapting, and we've seen an increase in activity there. And the awareness from a consumer standpoint to have a cyber safety protection is more relevant than ever we feel good about where we are as a company both investing as we discussed organically and inorganically we have a platform the cyber safety integrated platform we've launched northern 360 covering three pillars security privacy and identity protection and restoration and then along with that we said we're going to continue and accelerate the growth by doing three things one is accelerating our penetration of international markets The second one was to, while we doubled down on a direct-to-consumer go-to-market model, explore new go-to-market models, partner with companies like Telus to penetrate Canada, or explore new business models. Obviously, a membership plan was the first in the market for cyber safety. We'll continue to build on that. And the third one is adding new functionalities. We came with some title, et cetera. When I take those three dimensions, Avira plays in all three. Expanding internationally, obviously, they're very strong in Europe. We were number three market share in Germany. With Avira, we moved to number one, and we accelerate our growth across Western Europe. And Avira, to penetrate internationally many markets, will be definitely an asset. The second one, which you mentioned, which is the free model, going to market in different ways is very important. We have the direct-to-consumer on a premium model. We are doing B2B2C activities and trying to bring combined solutions to consumers. The free model for us is just one more tool in our toolbox. As functionalities could become more commoditized, we can have an offer first access for all consumers to cyber safety using some of those in the freemium model, and then using the muscle of cross-selling and upselling and converting to the full portfolio over time. So it's a way of acquiring those eyeballs, if you want an experience around cyber safety, to then later on demonstrate that value without spending more in marketing. And the third element is they had a few nuggets in their technology. They were very nimble and creative engineering teams. And there's some functionalities, like we mentioned, the gaming booster functionality from Bulgada we can integrate into our gaming editions of Neuron 360. So we'll continue to look at their capabilities from a portfolio perspective to enrich our overall experience. So that's how Avira plays into our growth moving forward. Got it.

That's really helpful. Maybe for my follow-up for you, Natalie, great to see the uptick in net ads this quarter. I guess the open-ended question is, was there anything on conversion rates or renewing cohorts? I mean, it sounds like the renewal rate was maybe a little bit better, but was there anything that surprised you, especially looking at the net ads last quarter versus this quarter? What sort of changed as you look back at sort of the tea leaves?

Yeah, thanks for the question. So, look, we've seen consistent customer ads, you know, five quarters in a row. If I step back and take a look at just this fiscal year, you know, 600,000 net new ads in the first half, now 300,000 in Q3, with growth across the board, you know, across geos, across product lines, and positive contribution from Holiday. Now, to answer your question around renewal and conversion, yes, we are seeing early improvements in our renewal rates related to our new customer cohorts. And now, look, it's early, but I would say the Norton 360 platform is definitely helping us. It's gaining good traction with now nearly 60% of our base. And so all in, all of that's helping us sustain that strong 85% overall retention.

Got it. Very helpful. Thanks, guys.

Thank you. Thank you. Our next question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.

Hey, Brad. Great. Thank you so much. Hey, Vincent, congratulations on a great quarter. Thank you. and to the team as well. I wanted to just touch on international a bit more. It's nice to hear about the success that you're having in Japan. And I was hoping you can just better help us to better understand the international opportunity broadly away from the freemium asset that you get with Avira. Obviously, that gives you a lot more reach. In which theaters does the value prop translate best? Where might there be just too much competition? And how should we think about the cost of reaching these markets?

Yeah, you know, when you think about international, 70% of our business is still in the U.S., 30% international. So when you look at the geographical mix of the overall market, it's clear to see that we are underpenetrated internationally. So from a core security first entry point, if you want, Avira will definitely be a strong help. But where we add a real differentiator is when we bring people our expertise in privacy and identity management and restoration from LifeLock and make it in the form of an international proposal, which was always the intent when we bought LifeLock, but was late to come as we were trying to find a first angle. With dark web monitoring, which is really protecting your multiple digital identities that you have out there, we see a lot of very good positive feedback from consumers. And so now adding two that dark web monitoring activities The restoration and helping the consumers to restore claims when there is some is definitely also a value add and a differentiator. I think that opportunity to push northern identity international is broad across many countries, and we'll start with the big one. Japan was the first one where we got real roots. We expanded into Australia, New Zealand, Germany, U.K., touching France, and we'll continue to penetrate actively all of the interesting markets.

Thank you. That makes a lot of sense. And maybe just to follow up for Natalie, specific to the Avira deal, can you share with us when exactly in January did it close, just so we can understand how much of a contribution it might have in Q4 and going forward? And as well, what's assumed in guidance in terms of contribution? And if you can speak to the deferred write-down, what's the mix of duration in their portfolio? Thanks.

Yeah, the Avira deal closed on January 8th. And so, yeah, that's when it closed. In terms of the guide, we definitely have partial impact Avira in. You know, we have shared with you the contribution on revenue, you know, just from a growth perspective. And then from an EBITDA perspective, you know, we have folded them in. And we'll look to really drive the business hard to get the synergistic savings we've communicated to you over the next six months.

Okay. Thank you.

Your next question comes from the line of Fatima Bulani from UBS. Your line is open. Hey, Fatima. Hey, sorry about that. Maybe I'll start with you, Vincent.

And just with respect to Avira and some of the things you mentioned in your prepared remarks around maybe introducing some Norton LifeLock functionality into that base, I know you've been very categorical about keeping the premium brand premium and the Avira freemium brand freemium. And so I'm curious how you bridge that gap with some of the goodness of the LifeLock capability without diluting the pricing power and the branding around Norton LifeLock. And then I have a follow-up for Natalie, please.

Yes, and, you know, the great news with our business, digital business, we can run a lot of experiments. So we are not concluding yet from a brand perspective. But definitely there is a way to get new consumers or address consumers on the freemium model, which has certain functionalities, mainly commoditized, provided value but commoditized. And then it's about adding the pass for upselling and cross-selling the different functionalities that today are either differentiators or offered at a premium to the market. And as we discussed, our long-term success is based on that pace of innovation, introducing new functionality all the time. As cyber criminality is evolving, we continue to increase the overall level of protection for consumers. From dark-white monitoring to restoration services, focus on privacy identity, all the next level. We obviously have a very rich funnel of new ideas that we're working on. And so the freemium is one way, if you want, to get the first access to then see more closely the value of the overall portfolio. For the short term, as you mentioned, we're going to keep Avira separate as one brand and Norden on the other side. But obviously, we're testing different ways in terms of branding.

Fair enough. Natalie, I need to shift gears to you around the strength in the partner segment of the business. You gave some very helpful color around, you know, these partnerships take longer to get off the ground, and it's an area of investment for you. But I'm wondering how we should think about some of the key drivers of strength this quarter within the partner business, and what are some of the largest components in the partner business that we should be thinking about going forward? And that's it for me. Thank you.

Yeah, thanks. So from a partnership perspective, it's pretty diverse. We've got a lot of different channels within the partnership business. Overall, we grew 15% year over year, and we saw relatively broad-based strength across all of those different channels. The one that we are really – very excited about and really plays to our strengths is employee benefits. Employee benefits is a great distribution channel that widens our audience but brings users very close to our book of business as we have their direct relationship with those users. or those customers and so we're really really excited about that but overall for the quarter just overall uh just generally speaking broad stroke uh growth across the partner side very helpful thank you so much our next question comes from the line of matt hedberg from rbc capital your line is open

Yeah, thanks. This is Matt. Natalie, if I could just follow up on Fatima's question, I would think Q4 is going to kind of be the strongest quarter for that employee benefits segment. Could you just talk a little bit more about kind of trends that you're seeing this year from that area?

Yeah, I would say I hear you on the timing in terms of, of course, we've got to figure out from an employee benefit calendar. Most people really get started understanding what partners they're going to do business with, et cetera, as those annual enrollments come later in the year. So we are definitely working hard. The employee benefits channel for us has been pretty consistent. You know, we have been really working across the employee benefits channel to gain more partners and to really get our Norton 360 value proposition out there. and really get the education and the audiences widened through the employee benefits channel. And then as we look forward, again, just to reiterate, we love this channel. And, you know, we want to make sure that we are working with the partners in the right way. There's a lot of different size and types of partners that we can go after from a growth perspective. And we're just really excited to take advantage of the opportunity. But you're right. The time is now. I mean, and you really have to pay attention to when those employee benefits, annual enrollments are. So we're trying to get after it, for sure.

And Matt, if I can add to that, taking back outside of the channel, Q3 traditionally has been more of a northern quarter, and then Q4 has been more of a lifelong quarter aligned to the tax season in the U.S., where most of our business is protecting identity. So from that perspective, on the identity side here coming into this quarter, we expect a very strong quarter built into Nathalie's guidance. Now, we also are closing Avira and doubling down on Northern Identity internationally. So that's not linked to the tax season, but it is definitely new areas, whether it's markets or product positioning, if you want, for us to continue to

uh to accelerate our growth that's uh that's really helpful and then vincent obviously maybe not the first security company when you're thinking about your core customer base as far as impact from sunburst but when a major breach like that is you know front page news all over the place what do you think that does for the demand environment just in terms of kind of mind share and awareness you know being front and center for consumers around security and breaches

I think you're totally right. The first level is continue to increase awareness. I can tell you the highest retention rate is when we have customers who have been breached and we help them restore. what they've had in their customer for a long, long time. And then the rest is about really building up the awareness that it's not just a breach of your old data or your devices, but it's a breach of your personal data and access to your, as an identity, if you want, or digital identities now. And I think seeing that the pandemic, when more activity move online, as we mentioned, with that cyber criminals are adapting and have a wider scope to play in. And it's up on us as a company, Northern LifeLock, to continue to build a portfolio to show the relevance and staying a step or two or three ahead of those risks that consumers face. Thank you for the comment.

Our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.

Thank you guys for taking the questions. I think most of my questions have been answered. Just a couple of clarification questions, if you will. In terms of ARPU, is there any significant differentiation between the international average ARPUs and the U.S. that you should be keeping in mind on a go-forward basis?

Yeah, I think the value perceived by markets obviously changes. The value perceived by also the pillars that you subscribe to into our membership level also changes, right? So if you are a Nolan 360 Level 3 customer that has Most of the security password managers, VPN access, it's one level off. If you add identity protection and if you add identity protection and restoration, the ARPU will grow. And therefore, from that perspective, last log being mainly in the U.S., we are getting a higher ARPU in the U.S. And then as you move into Western Europe, we start to add some of those identity protection and restoration, so we're able to grow ARPU, although it is less than our aggregate. And then if you move into more international, closer to emerging markets, we'll have lower ARPU. The way we think about it is really about a set of all combined levers by cohort and by market. So in aggregate, we may have pressure on an ARPU or retention rate, But as long as we continue to grow more customers, and by cohort or by market, continue to improve the value we deliver to customers, we're moving into the right direction.

Got it. Got it. That makes sense. And then on Avira, for Q4 explicitly, is it three percentage points of growth in Q4, or did you not give an explicit number for the Q4 contribution as of yet?

Yeah, so overall the business will contribute on an annual basis at about three points per revenue growth, call it 75.

So actually think about two, four in particular in terms of your contribution.

Yeah, and Natalie mentioned we close Avira in the early months of January. It's not every quarter exactly the same. There's also a bit of seasonality. But, you know, if you model it, you're somewhat in the same level.

Okay, got it. That helps. Great quarter, guys. Thank you very much. Thank you.

Our next question comes from the line of Walter Pritchard from Citi. Your line is open.

Hi, two questions. Hi, how are you doing, Vincent? Two questions for you on the kind of product side. One, relative to the mobile product, can you update us there on what you're seeing, you know, on phones and tablets and conversions and how you're thinking about that strategy as you move into next year? And then a lot of focus here on the channels and benefit channels and so forth around identity. I'm curious – If you've, as you've sort of put the marketing dollars into direct channels, how you've thought about some of the device-attached channels, PCs and other things that might attach traditional sort of security sales and, you know, circling back on those markets as you've understood customer acquisition here better? Yeah.

Let me take the product first. I've got a question. What is the question again on product? Okay. So mobile, very important user experience, right? And we acquired through multiple channels. I know in the past, as security started on a device, then on a desktop, then moved to a laptop, then moved to a mobile, I get very often the question of, well, do you need security on your cell phone, for example? And the answer is we've moved to a user-centric view of cyber safety, which includes security, but also identity and privacy. And we see a lot of our customers using their cyber safety dashboard and tools both on desktop and on tablet or cell phones. And therefore, mobility from a user experience perspective is hugely important to us. Simplifying that experience as we continue to enrich the value is also a core element of our investment. So you'll see more around simplifying, making cyber safety easy to use, to consume, and giving consumer full peace of mind. In terms of the channels, you know, we have a direct-to-customer, and I'll pass it to Nathalie, and we have a second angle, which is partnership. It's very important for us to continue taking that user perspective to work on B2B2C offering, combining our value add with other offering to provide full total protection to consumers depending on their situations. And I think that's the one we approach. It's not only device hardware-centric world, but it's really a user service-centric world that we're taking as an approach. Natalie, I don't know if you want to add anything.

Yeah, I was just going to add, look, from a customer acquisition perspective, we don't necessarily plan through the eyes of just LifeLog versus Norton. I would say, you know, it's about reach. It's about expanding audiences. It's about doing it in an effective way and an efficient way. So from a channel reach perspective, we focused in the last year really trying to diversify. Of course, historically, we've been more in the long form, TV and radio. We've been diversifying into online digital channels so that we can get really relevant and interesting content out there. We can diversify the users that are that are coming to our platform. We've got really, really strong brand awareness. We've got brand strength that we will continue to leverage and strengthen in the market as we diversify and really try and attract new customer acquisition, as well as get the word out there on all of our product innovation, our product introductions, as we build and strengthen the Norton 360 suite. Great.

Thank you.

Next question is coming from the line of Keith Lee with Oppenheimer. Your line is open.

Hi. Thank you for taking my question, and congrats on another strong set of results. Question for either Vincent or Natalie. Just on the capital allocation front, in terms of the free cash flow, the runway is now about $250 million, $300 million each quarter. What's wondering if you could just remind us on the capital allocation plans, Vincent, any areas that you look to further invest? I know you just went to the other acquisition. Just want to get your heads around how to spend this cash flow generation.

Yeah, thanks for the question. I'll take it. Our capital allocation strategy remains relatively unchanged. And what I mean by that is we have said we've been, for the last couple of quarters, been on track to generate $900 million of annualized cash flow. from a capital allocation perspective, we've talked about three main tenants, the first one being the dividend, which we paid the regular dividend in the quarter. And then, you know, as we progress, we said we would strike the right balance to approach as it pertains to opportunistic share buyback and acquisition. And so the actions in Q3 I think speak for themselves in terms of if you look back and you think back to approximately November and, you know, all things considered, now you guys know why we didn't necessarily, you know, we had the acquisition activity going on. As soon as our trading window was open, we opportunistically bought the share buyback to the extent of $133 million. And so as you take that into account, high safety ratio in terms of leveraging and maximizing the value of our capital allocation tenants, and you look forward, I would Our strategy remains unchanged. We will continue with the quarterly dividend and then strike that right balance on opportunistic share buyback. But we've not been shy to say that we are interested in M&A activity, especially as we look forward and look for those sustainable growth opportunities.

Thanks for that, Natalie. Maybe just one quick one. Like, in terms of, like, areas that you intend to look at, I know there's international opportunity that you're taking care of, the gaming opportunity as well. Like, Vincent, like, just talk to that, you know, our heads are now, like, which area of focus next?

Yeah, well... It all started with our vision, right? We want to both protect and empower everyone that's connected to the internet to live their digital life safely. That's our vision, and that gives us a wide range of opportunities to fulfill that we have not fulfilled yet and so when when you look at our overall strategy i would say number one is continue to scale up the cyber safety platform three pillars today security privacy and identity and building that up As we continue to do that, adding digital services that address the vision is very important, and we continue to do it, increasing into the gaming verticals with new functionalities, now integrating some of the bull guard functionalities that are really interesting. And so we have a long list, if you want, of opportunities that we are working with our engineers and our product people to And then the third element, of course, is to continue to expand outside of the U.S. to be a truly global and reach out to everyone, the 5 billion connected to the Internet that have a digitalized online.

Thanks for that, Mr. Natalie.

Yep. The next question will be coming from the line of Greg Moskowitz with Mizuho. Your line is open.

Okay, great. Thank you for the follow-up. And first of all, apologies for earlier, if you were doing a related question, you know, so many simultaneous earnings falls, so many January ending quarters, so I got thrown for a moment there. But I did have a follow-up for Natalie. So I know that you're a data-driven executive, just given your background. And now that you've been in this seat for several months, I guess I'm wondering, are there opportunities to leverage data in a way that you think is translating or potentially could translate into more business for Northern Lifehack?

Oh, absolutely, I would say. And I don't know how I would answer that question, no. We just have opportunities everywhere. I think from a value and a culture of put the customer first, we have so many opportunities to use analytics to get closer and closer to the customer and understand their behaviors, understanding their needs and wants and how we can serve that the best. If I get into specifics, of course, we will continue to build out our marketing analytics. But it's not just in a silo. When I think about marketing analytics, I think customer analytics, and it's about making sure that we are at the very top of the funnel expanding our audiences in a diverse way, in an efficient way, and making sure that we've got the content out there that really showcases our value proposition. Everything from the expanding Norton 360 integrated platform and the suite of products that Vincent has talked about, and whether you talk about where you're at in the funnel in terms of whether you're brand new and we need to explain the value that we can bring to consumers globally, or if you are an existing customer perhaps on the security side and we can find ways to share the value we can bring to your life from an identity perspective. There's just so many opportunities to just get to as close to the customer as possible, understand where they are in their journey and in their life, and really use data analytics to predict how we can take that next step in the customer journey. There's so many opportunities to build that out.

All right, that's great, Ali. Thanks very much.

Operator, we have time for one more question.

And that question will be coming from the line of Shaul Eyal with OpenClaimer. Your line is open.

Thank you so much for squeezing me in. And in addition to Yi's prior question, Vincent, I have more of a technology-related question. I think also it is related to your Japan launch. When I look at your Norton ID Advisor and your solutions associated with the gaming industry, there's definitely plenty of dark web capabilities. Are these capabilities homegrown? Do you actually use your own sensors in the dark web, or is it facilitated through some third party? Thank you for that.

Yeah, so we have, as LifeLock had, a mix of integrated third-party technologies and own algorithms that build on top. It's a mix of the two, and we'll continue to build upon that to offer it not only in Japan but across all countries. Someone was asking, hey, if you launch it in Japan, why don't you launch it in all countries internationally? Exactly for that reason, because you want to adapt your data architecture, your sensors, and your approach to the country and the data that's relevant in each country. And so we're taking a country-by-country approach to build up the solutions.

Thank you. Thank you.

At this time, there are no more questions. I will turn the call back to Vincent Pellet, CEO, for closing remarks.

Thank you, Anne. The overlap between the physical world and the digital world continues to grow. More and more activities are moving online, from shopping to socializing, almost every aspect of our life has a digital component. Unfortunately, many of those activities are left unprotected or weakly protected at best, leaving many doors open for cyber criminals. Our vision is to protect and empower people to live their digital lives safely. And while we have already accomplished a lot since we launched Northern LifeLock over a year ago, we're just getting started. We plan to leverage our leading technologies and integrated product portfolio, our relentless focus on customer experience, our trusted global brand, our unmatched scale and direct distribution, as well as a growth-focused financial model. I have to summarize it in four words. I would say our future is bright. Thank you for joining and for your support, and we look forward to connecting with you very soon.

This concludes today's conference. Thank you, everyone, for your participation. You may now disconnect.