NortonLifeLock Inc.

Good afternoon, everyone. Thank you for standing by. My name is Jerome, and I will be your conference operator today. I would like to welcome everyone to the Northland Live Black Fiscal 2022 Second 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 of Investor Relations. Ms., you may begin.

Thank you, Jerome, and good afternoon, everyone. Welcome to the Norton LifeLock Fiscal 2022 Second Quarter Earnings Call. Joining me today to review our Q2 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 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 the IR website at investor.nortonlifelock.com. In addition, we previously announced the merger of Norton LifeLock and VAST. The information shared today will be limited to what has already been disclosed in the document published on our website in connection with the deal. 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 certainties that may cause actual results to differ materially from our current expectations. Those statements are based on our 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 2nd, 2021. And now, I will turn the call over to our CEO. Vincent?

Thank you, Mary. Welcome and good afternoon, everyone. We've come a long way since we became a consumer-focused standalone company exactly two years ago today. As I reflect on Northern LifeLock's transformation, I'm extremely proud of our team. We committed to operating within financial discipline and bringing meaningful and sustainable growth to this business, and we have delivered. We have relentlessly been building a strong track record and remain focused on meeting our long-term objectives. As you've heard me share before, we are focused on driving growth by improving customer experience, scaling our integrated cyber safety platform and accelerating the pace of our product innovation from core security to trust-based digital solutions. By putting our customers first and relentlessly executing to our plan, we believe our long-term goals are within reach. Our strategy is working. And as we delivered another quarter of solid and consistent growth, Q2 revenue was up 11%, with high single-digit growth in bookings. We are delivering strong profitability and continued EPS expansion of almost 20% year-over-year. Our high single-digit bookings growth was in line to our long-term objectives and is reflective of our normal seasonality with the first half of our fiscal year historically being seasonally lower. The start of Q2 was impacted by expected weaker summer demand and COVID reopening as more people mobilized or prioritized to travel and other activities. As we balanced all of our operational metrics and investment, we finished the quarter with strong momentum, delivering our eighth straight quarter of net direct customer ads sequentially. Our direct customer count grew over 178,000 sequentially, and we added over 2.6 million customers year-over-year, bringing our total customer count to 23.3 million. In Q2, our direct-to-consumer revenue, which represented the majority of our business, was up 9%, with ARPU growing slightly quarter of a quarter and unit retention stable. We have continued to build a richer and more robust product portfolio as we reach more consumers on a global basis while driving higher engagement with our existing customers. Our net promoter score continues to improve from low 40s last year to 49 this quarter, reflecting our focus on customer experience and providing peace of mind to our customers as they live their digital lives. Our international expansion efforts continued in Q2 and grew double digits similar to last quarter. We continue to invest in our freemium model as it increases our consumer reach and awareness and we are encouraged that our nascent expansion into identity internationally is now available in more than 20 countries across Europe and Asia. It is a critical component of our ability to provide more value to our customers outside of the U.S., replicating the success we have had with ID Advisor in Japan, where we combined dark web monitoring with elements of restoration. Our partner business posted double-digit revenue growth for the quarter, for the actually fourth straight quarter up 25 percent in q2 all channels contributed meaningfully to these results amongst those the employee benefits channel delivered another very strong quarter we've expanded beyond the united states offering our employee benefit solutions to canadian employers and unlocking a broader customer base our investment in this area are paying off as we have strengthened our sales team and market coverage in the last few quarters. We intend to expand our overall partner business and we will continue to invest in our multi-channel approach, evaluating all potential opportunities and markets globally. Overall, we are on track to our plan and committed to investing in what we see as a long-term secular growth opportunity to develop the best cyber-safety portfolio for consumers. As a result, we continued to accelerate the pace of our product innovation pipeline as we work to bring cyber safety to every digital user and release products that help protect consumers' devices, privacy, and identity. We opened the quarter with the release of Northern Utilities Ultimate, a new performance maintenance offering that helps create a faster and smoother and more secure experience for consumers, whether they're gaming or browsing or streaming content or more on their Windows PC. We expanded Nolan Family with new features including favorite locations to help parents establish approved geographic locations and receive notifications when their child's device arrives or departs those set locations. We also introduced Alert Me, which helps parents stay informed about their children's location by setting specific dates and times to receive automatic check-in alerts from the location of their child's device. Both of these new features were quite timely, as many kids headed back to school in person. On the identity front, we added payday loan lock to selected U.S. life lock plans to help block the opening of fraudulent payday loans and other short-term loans. And we've added new features like social media monitoring in more markets to provide consumers with broader protection as their digital footprint expands. As awareness grows globally for identity protection, we continue to evolve our roadmap to protect our customers and provide the most relevant products and features to new audiences. As we continue to strengthen our privacy pillar and help provide additional ways for consumers to control their online privacy, we released Northern Anti-Track in the US, a new app and browser extension that helps prevent websites from tracking and profiling users in ways normal private browsers or VPNs cannot do. That way, people can protect and control their digital footprints from companies and websites that track online activities and collect or sell their personal data. We've seen positive momentum from this new product release as consumers are seeing ways to protect their privacy. And I'm pleased to share that Nolan and Tytrak, as we expanded now to APG and EMEA earlier this week. Privacy overall is one of the three pillars of our cyber safety portfolio. And we should continue to see investment in this area to help consumers manage their privacy and reputation online. In Q2, we also released our first environmental, social, and governance report. This report highlights Northern LifeLock's ongoing pledge to bring together our team, expertise, and technology to help build a safe, inclusive, and sustainable future. We are making good progress on this front, and I'm proud of all of our employees, the commitment we have made together to develop a responsible company. I encourage you to check all of our achievements in that area on our IR website. Additionally, we were recognized by the Business Intelligence Group 2021 Sales and Marketing Technology Awards, or what they called the SEMIs. We drank Northern LifeLock as one of the top medium-sized companies of 2021 for innovation in sales and marketing technology. We were recognized for our efforts upgrading customer service operations with the development of a new internal sales platform that was built by our own in-house engineers and launched in the spring of 2021. This technology enables us to better deliver key customer services within a single, easy-to-use interface. The platform also replaced a legacy vendor-supplied solution, driving cost efficiencies for the company. This is a great example of the teams living our value. They advocated for the customer, they were empowered to take initiative, they identified the opportunity, and they delighted customers while improving our business operations. and more importantly, they delivered. Before I turn the call over to Natalie to discuss the financial results, I would like to provide an update on our proposed merger with Avast. We have made great progress and we continue to be enthusiastic about the combination of the two companies and the opportunity to accelerate innovation in cyber safety. We crossed an important milestone today with Northern LifeLock shareholders voting to overwhelmingly support our ongoing transformation through the proposed merger with Avast, with the next key step being the Avast shareholder vote scheduled for November 18. We are also actively and collaboratively working through the antitrust and other regulatory processes in all relevant jurisdictions, and we believe we are on track to close mid of next calendar year 2022, as previously stated. Our strategy has been to protect and empower consumers as more and more of their lives move online, and this transaction will allow the combined companies to invest in and accelerate innovation for new cyber safety products. And now let me turn the call over to Natalie for more details on the financials.

Thank you, Vincent, and hello, everyone. To all our customers, shareholders, and listeners around the world who are celebrating Diwali today, may the Festival of Lights bring joy and happiness to you and your families. For today's discussion, I will focus on non-GAAP financials, starting with our Q2 results and then provide our outlook for Q3 in full year. We delivered another solid quarter, rounding out a strong first half of our fiscal year. Our Q2 revenue was $695 million, up 11%. Our growth remains broad-based across GOs and products. Booking's growth of 7% was supported by our renewal efforts, expanded product offerings, and continued international expansion. Our total direct customer count increased to 23.3 million, adding 2.6 million customers year over year, and adding 178,000 net new customers quarter over quarter. This was our eighth consecutive quarter of sequential net direct customer ads. In a quarter where there is seasonally lower demand, our strong net ads in Q2 is evidence that there is growing demand for our products, and we feel proud to have added over 300,000 net new customers in the first half of our fiscal year. Our operational metrics remain strong with 85% unit retention, and our monthly average revenue per user, or ARPU, increased on a sequential basis to $8.85. As a result, our direct business maintained consistent growth momentum, up 9% in revenue. We continue to drive higher engagement with our existing loyal customers through the accelerated pace of new product releases while scaling up our cross-sell efforts. We are also reaching more audiences with the expansion of our identity protection offerings into more international markets, providing broader cyber safety protection to newer cohorts of customers. As Vincent mentioned earlier, our partner business again posted strong results in Q2, up 25% year-over-year, with continued strength in employee benefits, as well as growth from other distribution channels. Although it accounts for approximately 10% of our total, our partner business remains a key tenant of our long-term growth strategy and will continue to be an important investment area for us, and we are encouraged by the year-to-date growth on locks thus far. Turning to profitability, Q2 operating margin was 52%, up 200 basis points year over year. We operate with a growth-focused approach in our investment decisions. With sales and marketing, we are constantly evaluating the effectiveness of our spend to optimize how we reach consumers and market our products to maximize the return on these investments for both the short-term and long-term in an increasingly competitive advertising environment. With R&D, we have focused our efforts on increasing the pace of new product launches while maintaining a robust, evolving product pipeline for our customers. And we self-fund these investments through productivity gains and lower infrastructure costs, operating at 87% gross margin and with G&A less than 5% of revenue as we drive long-term sustainable growth. Q2 net income was $255 million, up 19% year-over-year. Diluted EPS was 43 cents for the quarter, also up 19% year-over-year and at the high end of our guidance range. We remain focused on EPS expansion in achieving our long-term EPS objective of $3 that we shared back in May this year. Turning to our cash flow and balance sheet, Q2 operating cash flow was $60 million, and free cash flow was $59 million, which included seasonal tax payments. Year-to-date operating cash flow is $318 million, in line with our net income improvement and growth. We ended Q2 with over $1.5 billion of total cash, which includes the cash proceeds from the July sale of our Mountain View Ellis buildings. We remain levered at approximately two times net debt and maintain both a strong liquidity position and a healthy balance sheet. In Q2, we also returned approximately $73 million to shareholders in the form of our regular quarterly dividend of 12.5 cents per common share. For Q3, the Board of Directors has approved a regular quarterly cash dividend of 12.5 cents per common share to be paid on December 15, 2021, for all shareholders of record as of the close of business on November 22, 2021, as described in the press release. And a reminder that while we still have approximately $1.8 billion remaining in the current share buyback program, we cannot deploy it in the short term due to the pending Avash transaction. Now turning to our Q3 and full-year outlook. We expect Q3 non-GAAP revenue in the range of $695 to $705 million, assuming stable currency rates quarter over quarter, which translates to nine to 11% growth year over year. We expect Q3 non-GAAP EPS to be in the range of 42 to 44 cents per share. For the full year, we expect non-GAAP revenue growth of 9% to 10% year-over-year in constant currency and non-GAAP EPS in the range of $1.70 to $1.75, narrowing the range to the high end on both revenue and EPS versus what we shared with you back in May at our analyst day. We look forward to building on our growth momentum and consistent profitability in the second half of this year, and we are well-positioned to deliver on our objectives. Even with the macro impacts around inflation, foreign exchange rate fluctuations, and the evolving pandemic conditions, we have successfully navigated through and continued to hit expectations. As we look forward, we will continue to challenge ourselves to anticipate, prioritize, and meet customer needs in a growth-focused manner. Thank you for your time today, and I will now turn the call back to the operator to take your questions. Please do keep in mind, we are not able to answer any questions related to any specific M&A at this time.

Operator? Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Again, that's star one on your telephone keypad. Your first question comes from the line of Saket Kalia from Barclays. Your line is now open.

Hey, good afternoon. Hey, Vincent. Hey, good afternoon. Hey, Vincent. Hey, Natalie. Thanks for taking my questions here. Yeah. Natalie, maybe just to start with you. I was wondering if you could just double-click a little bit into the billings metric. You know, I think we heard 7% growth in bookings, which was really good to hear. I think the billings growth is a little bit lower than that. I come to about 5%. You know, can you just walk through maybe some of the puts and takes there? I know that maybe there was a, you know, slightly tougher compare. You know, there's always currency. Maybe you could just touch on that growth, you know, kind of compared to bookings, kind of compared to billings growth in prior quarters.

Sure. Thanks, Huckett. Look, I'm not surprised at the question around 7% bookings. I'm going to focus on bookings in the response to your question. But I'm also not surprised at our Q2 results, as it's in line with our models, our internal models. As you know, you know, we don't guide bookings, but we did share that Q2 is historically a seasonally lighter quarter. We also recognized early on that, you know, even if you look at the external search traffic metrics, either, you know, on Google metrics, analytics, et cetera, and you hone in on our branded and non-branded terms, we knew that search volume was lower than prior quarters in what we saw last year. And then we also saw very early on that the advertising spend being put into the market across our competitive landscape was up. The other thing I'd encourage you guys to look at is, as you know, with our recurring business model and, as you know, with customer acquisition, when they get to the first year retention and renewal, there's a healthy step-up in terms of the bookings amount that we get as those customers choose to renew with us. So you really have to date back to last year. In Q1, we added 379,000 net new customers. Again, factor in the seasonality component from Q1 to Q2. Last year at this time, we added about 117,000 net customers. When you factor into the model the step-up in the renewal bookings that we get from that renewable customer base, it would point you to a 7% result for us.

If I can add just a few stepbacks, I get quarter in, quarter out. Obviously, we represent bookings, so investors can understand the underlying metrics. But revenue and bookings trend about the same way, not every quarter, but on a multi-quarter trend. And we guided revenue for next quarter, 9% to 11%. Again, we don't guide bookings, but we see this trending somewhat in that range.

Got it. Got it. That's very helpful. Vincent, maybe for my follow-up for you, you know, a lot of good things happening internationally. Can you just remind us how big is international currently as a percentage of the business and sort of what's – You know, I guess how big can you see international, you know, long-term as a percentage of total? And is that more of a, you know, antivirus type of market? Is that more of an identity monitoring market? Is it a little bit of both? Curious how you sort of see international markets. sort of longer term?

It's a good question. I'll give you the short Belgium answer. Internationally, it's not big enough. Today, it represents about 30% of our business. As you know, we acquired Avira to accelerate our growth internationally. As you said, a lot of good efforts initially are offering in those outside of the U.S. countries did not include identity elements. We now start to build up the portfolio to move above and beyond that security, moving into protecting the digital lives, exploring elements of restoration, and so what I call solutions, which includes services. I think on a long-term perspective, outside of the U.S., we have huge structural growth opportunities. Obviously, the proposed merger with Avast will boost all of that. It will be more balanced. When I look at different industry, technology, or even the demographic, as you know, we should be more forwarding the U.S. 60 international versus the reverse on a unit basis, and we're going to continue to expand.

Very helpful. Thanks, guys. Thank you.

Thank you. And again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Hansa Pudervala from Morgan Stanley. Your line is now open.

Hey, good evening, guys. Thanks for taking my question. So I'll keep it to one question. Natalie, since you alluded to inflation, I'm curious what Norton LifeLock is thinking about in terms of pricing on renewal, particularly into the next fiscal year. Thank you.

If you don't mind, I'll take it and I'll step back a little bit in a broader context. First, as you know, we've acquired Avira. Our number one objective is to scale our cyber safety platform, and you're going to see us going to invest into the freemium model. Expanding the freemium model to above security, expanding to other countries, And that's our first point of entry. We would love that the 5 billion internet users are all fully consciously protected from cybercriminality. When it comes to then our ongoing prices, obviously pricing, structure, and how do you upsell and move to a premium model have different structure. First, your price, as you know, has a promotion to get in the first time you get in. And then you have the renewal price at the normal MSRP that we have set. And then we're tracking the dynamic of cost, inflation, competition in every country. It is a dynamic environment. It is a competitive environment. And so our pricing philosophy follows the value we provide to the members. As we continue to add new product and new value to that membership, then customers opt to higher level of membership. And that is the whole business model the way I've described it. Thank you.

Thank you. And again, if you'd like to ask a question, please press star 1 on your telephone. At this time, there are no more questions. I will turn the call back to Vincent Pilet, CEO, for closing remarks.

Why don't we wait one minute to see if there's nobody. Last time, there was no more question. We had two minutes later, plenty of questions trying to get in. So let's check one more time, operator, if you don't mind.

Sure. And again, if you would like to ask a question, please press star 1 on your telephone keypad.

Okay. Well, we'll obviously always have management very open and available for any questions our investors or analysts would have. We'll have plenty of one-on-one sessions between now and the next few days. I do want to thank our shareholders that have overwhelmingly approved the issuance of shares for the acquisition or the merger with Avast. We see that as a vote of confidence, a confidence into our strategy, a confidence into the specific transaction, a confidence into the board and management. So thank you, everyone, and we'll be connecting very soon. Thank you. This concludes the conference call.

You may now disconnect. Thank you.