NortonLifeLock Inc.

Good afternoon, ladies and gentlemen. This is your operator. Your conference will begin in two minutes. Please continue to stand by. Once again, this is your operator. Your conference will begin in two minutes. Please continue to stand by. THE END THE END THE END Good afternoon, everyone. Thank you for standing by. My name is Paul, and I'll be your conference operator today. I would like to welcome everyone to the Norton LifeLock fiscal 2022 third quarter earnings call. Today's call is being recorded and all lines have been placed on me 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, Paul, and good afternoon, everyone. Welcome to the Norton LifeLock Fiscal 2022 Third Quarter Earnings Call. Joining me today to review our Q3 results are Vincent Poulet, CEO, and Natalie Dursey, CFO. As a reminder, there will be a replay of this call posted on the Investor Relations website, along with our earnings slides, press release, 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.norinlifelock.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 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 2, 2021. And now I will turn the call over to our CEO. Vincent?

Thank you, Mary, and welcome, everyone. This was another strong quarter, double-digit growth on both the top and bottom line, and we continued to drive improvements across several key business areas that we believe are critical to our long-term success. Q3 revenue and bookings grew 12% and 11% respectively. The growth profile we delivered was broad-based, reflective of diversification across our product portfolio, our channels, and our geographies. And with 16% growth in EPS, our profitability remains strong and continues to grow faster than revenue. Later in this call, Natalie will provide you with more details on our Q3 results, but let's take a step back for one minute. It is clear to all of us that we are living more and more of our daily lives online. Shopping, working, learning, creating, sharing, you name it. We are doing it all online. All of it is designed to make our lives easier and better, but it does come with a very real risk of more cyber criminality. Every day, this team wakes up driven by a singular purpose, making the world cyber safe for everyone and ultimately powering their digital freedom. Today, we are protecting and empowering approximately 80 million users in more than 150 countries, but we are just getting started. Our strategy is built around our customers and their digital lives. We're focused on accelerating innovation, expanding access and reach, and relentlessly serving our customers' needs. Our innovation engine continues to thrive. In Q3, we introduced Avira Breach Monitor, where we actively scan the internet and alert users if their email is a part of a data breach. In identity and in privacy, we continue to expand our reach internationally, combining dark web monitoring, anti-track, and ID navigator, and bringing it to over 20 countries. Not only do we bring new products to market, we also improve upon category-leading products that we have offered for years. For example, using machine learnings, We rolled out new alerts detecting unusual transactions for our LifeLock subscribers, better protecting people from various frauds or unusual activities. Day after day, this team brings energy and new ideas about how we can better build out the Nolan360 Cyber Safety integrated platform. Within various plans of Nolan360, our members automatically receive the benefits of our latest innovation. simplified and frictionless onboarding experiences, new device detection and addition through QR codes, easy backup activation, software updater, improved integrated VPN, game booster, cryptocurrency mining and wallet options, and enhanced identity protection features like identity lock and social media monitoring. These are just a few of the new features made available into our Nolan360 platform over just the last few months. And it's not just innovation. It is a continued commitment to protecting our users, as highlighted with multiple A-B test awards and the most recent, the SE Labs Best Consumer Anti-Malware Awards for 2021. We know we are on the right track as over 14 million customers are now on Nolan360. with more than 1 million members added since our investor day last May. We are thrilled that over 60% of our direct customers are now protected by the Nolan360 platform, and it keeps growing. Whether it's launching entirely new products, bringing these products to more people, or improving our industry-leading platform, we know that innovation is a core driver of our success. When customers make the decision to trust us to help protect their digital lives, they stay with us. We have improved our net promoter score by five points to high 40s in the last 12 months. That strengthening engagement is also reflected in our retention rate, which is something we are particularly proud of. In Q3, it was slightly above 85%. If you exclude the first-year customers, retention is at 87% in aggregate and as high as 90% for some cohort of customers with the identity offering. It speaks to the power of our Nolink 360 platform with identity protection, as traditionally in this industry, renewal rates for the first-year customers or security-only customers are lower. But even in this category, we believe we have room for improvement. We've already improved Avira retention to 83% at three points since we acquired them. Through our evolving and innovative product portfolio and expanding distribution channels, we have now added customers to the platform consistently over nine consecutive quarters. Total direct customers are now over 23.4 million, up 12% or 2.4 million customers added year-over-year, and 126,000 sequentially. The growth was broad-based, although slightly higher mixing security, as expected for a December holiday-driven quarter. In our direct-to-consumer channel, we observed some market pressure on ad prices that slightly pushed up our customer acquisition costs. We partially offset those increases with improvement in shopping cart conversions. One of the key investment areas in our go-to-market strategy is the expansion in indirect channels. The net direct customer count increase that I just shared does not include customers coming through our partner channels, including employee benefits or through the App Store, for example. In those two channels alone, we added almost half a million customers year-over-year and over 100,000 customers sequentially. And interestingly, almost two-thirds now of our new customers from app stores have installed the Nolan 360 app. You will see us continue to expand and invest in our multi-channel approach to reach more customers. While it is great that we've brought innovations to the market, added customers to our platform, and retained them, it is also clear that we're delivering value. In Q3, our average revenue per user, or ARPU, was $8.87. But excluding Avira, we achieved a record organic ARPU well above $9, driven by higher Nolan 360 adoption and successful cross-sell and upsell activities. Avira's install base is more focused on traditional security features, which drives an ARPU at just below $5. We view this as one of the many opportunities we have to continue to grow and provide more rounded protection to all customers, Avira and internationally. Natalie will provide more details on our pool in her section. To wrap up, I'm also excited to announce that we are driving to an accelerated close date for the merger with Avast. As you will recall, we originally expected to close in mid-calendar year 2020, but we need to be satisfied always before we can close. We currently expect to close on February 24, 2022. We have made great strides towards combining the two companies, including receiving approvals from both Northern LifeLock and Avas shareholders, satisfying recommendations from the Czech Republic, Australia, and New Zealand, and securing permanent financing commitments.

Under remaining regulatory conditions, we have submitted antitrust filings for the UK, Germany, and Spain, and are fully engaged with each of them.

We fundamentally believe that this merger will allow us to increase our pace of innovation and better serve consumers around the world. We've made great progress and, frankly, can't wait to merge with Avast.

And now I will pass the call over to Natalie to cover details of the financial results and the activities supporting our merger with Avast.

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 fiscal year 2022.

We delivered another excellent quarter. Our Q3 revenue was $704 million and at the high end of our guidance range. Revenue was a constant currency, including a two-point currency headwind as the euro and yen weakened against the U.S. dollar. Bookings growth accelerated sequentially and year-over-year, up 10% in USD and 11% in constant currency. we continue to effectively utilize the levers we have at our disposal. Our total direct customer count increased to 23.4 million, adding 2.4 million customers year over year and adding 126,000 net new customers quarter over quarter. A consecutive quarter of sequential net direct customer ads with close to half a million net new customers added already this year. We remain focused on acquiring more customers at the top of the funnel in an increasingly competitive landscape with the U.S.

and international regions. Services in key international markets have improved our overall global reach. While our customer mix more international opportunities as we scale across key operating metrics, overall unit retention was slightly above 85 percent in q3 and our monthly average revenue per user or arcu expanded sequentially to 8.87 collectively this contributed to nine percent revenue growth in our direct business

versus 5% growth in Q3 last year and no growth the year before. We believe this consistent growth momentum is built on the foundation of expanding product portfolio and the increasing value we provide to our customers. Retention is a major area of focus for us, including our newer customers, which now reflect the larger mix of our customer base. Our cross-sell, up-sell efforts are also beginning to bear fruit.

supported by new the customer journey and bringing more value to our customers, increase retention, and drive growth in our ARPU over time.

Our partner business continued to grow double digits in Q3 with revenue up 17%, scaling in multiple channels,

including employee benefits and App Store.

Our employee benefits channel continues to grow double digits as we broaden our identity offerings to more employees in North America. Our App Store channel is up double digits for the fifth consecutive quarter, driven by the success of percent of our total business. We continue to dedicate more resources in this area as we focus on broadening our go-to-market reach. and drive this as a key tenet of our long-term growth strategy. Turning to profitability, we continue to deliver high operating leverage. Q3 gross margin sustained at 87%, and operating margin was 52.8%, up 180 basis points year over year. We remain diligent in our cost structure in pursuit of efficiency opportunities and to create capacity for reinvestment to drive growth. We are operating our G&A functions at a cost of approximately 4% of revenue, down from 10% of revenue just to make investments in sales and marketing while navigating through the competitive advertising environment and higher ad costs.

With R&D, We focus our energy on increasing the pace of new product launches while also effectively driving efficiencies.

Looking ahead with Avast, we will continue to operate with a disciplined approach.

$160 million, up 14% year over year. Diluted EPS was $0.44.

for the quarter, up 16% year-over-year, and at the high end of our guidance range. We remain committed to driving EPS expansion and achieving our long-term EPS objective of $3. Turning to our cash flow and balance sheet, and free cash flow was $328 million. Year-over-date operating cash flow is $648 million. growing over 80% year-over-year. We continue to maintain both a strong liquidity position and a healthy balance sheet. Our net debt leverage lowered to approximately 1.5 times in the quarter, but please note this does not include any of our expected acquisition financing, as that does not become funded until the deal closes. In Q3, we returned approximately $73 million to shareholders in the form of a regular quarterly dividend of 12.5 cents per common share. For Q4, the Board of Directors has approved a regular quarterly cash dividend of 12.5 cents per share on February 22, 2022, as described in the press release. We still have approximately $1.8 billion remaining, which is not being deployed at this time,

As a reminder, an incremental share buyback of up to $3 billion is possible to the extent that Avast shareholders elect for the majority stock option.

Before I get into our guidance, let me give you a brief update on the Avast merger financing.

As you may recall, back in August, we made commitments for the acquisition financing. At the start of this calendar year, we launched syndication of our term 1b commitment we received strong interest and great reception in the debt markets in fact the demand was financing we had plans for this merger very to date for the deal close outlook we have narrowed our food fiscal 2022 non-GAAP guidance to the high end of the range.

2022 annual non-GAAP revenue in the range of 2.795 billion to 2.805 billion, assuming stable currency rates quarter over quarter, which translates to approximately 10% growth year over year in constant currency. For fiscal 2022 annual non-GAAP EPS, we expect to be in the range of $1.73 to $1.75, narrowing again to that high end. Please note this guidance does not include any impact from the anticipated Avast merger close. We look forward to closing out another successful fiscal year. We remain well positioned as the leader in cyber safety. We have growing momentum, a very healthy business model, and strong operating capabilities.

I want to reiterate what we said last quarter. Prioritize and meet customer needs in a growth-focused manner. 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 Any specific M&A at this time?

Operator? Thank you, ma'am. We will now begin the question and answer session. If you would like to ask a question, follow by the number one on your telephone keypad.

If your question has been answered, you may remove yourself from the queue by pressing the pan key. Please stand by while we compile the Q&A roster.

Your first question is from the line of Saqib Khalia with Barclays. Your line is open. Okay, great.

Maybe I'll start with you. I understand the disclaimer just on talking about specific M&A, but I think the most surprising news with the release here, in my view, is the earlier expected close for Avast on February 24th. And so maybe to the extent you can, can you just share with us just some of the regulatory hurdles left, right, just to understand the timeline from here to the 24th? And then also, in as much detail as I guess you're allowed to, what gives you the confidence in that earlier close date compared to the June time?

I would say what I'm going to say is we posted a double-digit quarter

quarter, the most exciting news is for me, too, that we are now scheduling the close of the merger with Avast for February 24th. We, as you imagine, are super eager to get started. We've made great progress, and we know that this merger will offer an increased capacity for innovation, for global reach, to make cyber safety richer for consumers. So we've been patiently working all the processes. As I mentioned in my prepared remarks, we made great progress on many fronts. We still have regulatory conditions to meet in the UK, Germany, and Spain. We've done all of the findings, and we are openly and actively, if you want, I'm collaborating with those stories, answering all of the questions they have. Based on the progress, and I won't go into every detail, we're now confident that we will be in a position on February 24th to either meet all conditions or waive all conditions and be able to close. So that's, as you mentioned, great news.

Yeah, absolutely. We'll look forward to that. Natalie, maybe for you just to zero in on the core business. To Vincent's point, I mean, great to see the double-digit bookings growth. You know, you talked about a couple of the levers in your prepared remarks, you know, the better retention, you know, the ARPU, I mean, continued customer acquisition. Can you just go one level deeper into sort of, you know, how you've been able to accelerate that growth to double digits here?

Yeah, hi, Sokka. Thanks for the question. In our prepared remarks, you heard us, right? The growth was pretty broad-based, both the U.S. and international and across security and identity. How we continue to post the double-digit growth, I think, is exactly what we've said. It's really having our new products come to market faster, which is allowing us to offer increasing value to our new as well as our existing expansion as well as international. national expansion.

We've got, you know, with Avira, you know, really versions as well as, you know, through the partner and indirect channels coming together. And we're focused on all of those key tenants to drive that double-digit growth.

Another one in, it's a product question. You know, I thought the social media monitoring solution was interesting. I was wondering if you could just talk a little bit about the competitive landscape there and the additional value that you can capture with a tool like that. Because I guess in the world of, you know, unfortunately cyberbullying, to be honest with you, so we have a very,

very broad purpose, right? Really protecting and empowering everyone to have that digital lives being safe and getting the maximum value for it. As we know, as we move more online, we of course expose to our family two more risks coming from that cyber criminality that continues to evolve all the time.

I mentioned at the multi-device to then and then adding identity features is what our mission is to build just the best cyber safety platform full stop and then on top offering

additional services that would have a lot of value because they are part of that cyber safety platform. I mentioned a category we really look at very closely within that privacy and protection is your reputation online, reputation privacy, reputation management, and then protecting against all sort of activities that would expose you, cyberbullying being one of them. And so social monitoring is just another feature that you would not want to have, and creating an alert system and a blocking system that helps spotting that.

Kind of a seed development.

different categories. When it comes to competition, I have to tell you, we see a lot of innovation, startups, either geographically located or product category-focused that bring interesting new ideas. And this is why we like the position we have, and we will even reinforce with Avast, we're going to free up capacity for innovation and continue to accelerate the rate into the overall portfolio. So you should see it as a long-term development and understanding that move the value and build up that full definition of what cyber safety means to that user.

Makes a lot of sense. I'll get back in queue. Thanks, guys.

Thanks.

Your next question is from the line. Your line is open.

I think that, guys, thanks for taking my questions, and congrats on the double-digit growth. You know, Vincent, you talked about capturing more international business, and obviously Avast will accelerate working internationally and maybe in international markets. Now, very good question. So every geography is different. important.

But as you know, Northern came with a more U.S.-centric base, right? 70% of our business coming from there. And when we started as a company two years ago, Northern Africa, we say, hey, we have a big opportunity internationally. All countries, there's many features that are more free features and introducing In our portfolio, the ability to manage a premium model was important. We acquired Avira, and we did a lot of test entry under the same roof. A full lifecycle from premium to premium to full cyber safety platform is actually working, and we were able to grow almost all line of tests locally. So that has been, of course, a proof point that gave us the confidence to say, hey, the combination with Avast would be definitely a fantastic, very powerful move

customers, including the commitment to the frame. That's number one. Number two is we have seen it with Avira, but also with Norton.

As we continue to move more value up the, if I can call it, value chain, and when you look at the pyramid at the basic security of that, we can see both, of course, the value creation of the output

...going up along with the customer satisfaction... ...launch more combined product, anti-track, starting at the basic... ...countries to introduce the notion of that... ...see us more committed and going to drive that digital identity internationally.

In Europe, as you know, digital identity has a different meaning than... present in each region and understanding both the local market in a global framework is very important and we'll be fully committed to that. The third one I would say internationally that we have seen is once a customer gets more of that value that I mentioned under either an alternate single product, anti-truck, retention improves significantly.

internationally, and we can see in the various countries.

Every country has different renewal rates, but they move up when they move up the value chain and become more a member of a cyber safety platform. So that gives you an idea if you want of the different levers to share best practices with our friend at Avast.

No, that's super comprehensive. the international opportunities. Indirect success as well. Now, I think it's just over 10% of your business. Maybe tell us, what are some things there? Obviously, it's been more of a direct focus historically, but it's really exciting to see a lot of I totally agree with you. Let's be very clear.

We know that to reach others, we can't just do it through a DPC business model. We have to commute to partner. Whether it's going indirect through a simple channel or combining with other solutions to offer a better mix or a fully integrated value, combining, for example, with an So expect us going to develop our channels that way. I think we mentioned publicly that employee benefit was one of them. That's more U.S.-centric.

We've increased our investment a year ago in that, and we now see the fruition to that.

There, too, it's not only a channel because then we get feedback around adjustment to the product portfolio and we can add more value for the employee benefit. That our brand is recognized, that we have engagement with the customers, which is not the case with every legacy indirect channels, making sure we have the ability to continue to move up the value chain of customers. Those are some of the criteria we really consider before really putting the trigger on increasing an investment in one area. But there's a lot of opportunities there, one to be thoughtful. We're particularly excited, sorry to come back all the time with that, but when Avast will come in, they have a VSB Soho channel, so focusing on the gig economy, worker, a person around that cyber safety, we expect to increase that channel as well. And we have none in our Northern LifeLock. So definitely expecting direct channel to be our go-to-market strategy.

Super exciting. Thanks, Spencer. Thanks, everybody.

Questions, please press star 1 now. Again, it's star 1 on your telephone keypad. Your next question is from the line of Fiona Hines with Morgan Stanley. Your line is open.

On the line from Hamza.

So first question, which is a little bit below typical season. Can you expand on that a little bit?

Has there been any change in renewal rates?

Yeah, thanks for the question. So look, growing our customer base has consistently been and will continue to be a key ingredient to our strategy. And we've just posted our ninth consecutive quarter of quarter-over-quarter net ads. but you know we've chosen to report our customer ads to you defined as direct customers we'll continue to invest and drive in this area it's very very fruitful to acquire customers for direct acquisition but it's not the only avenue to customer acquisition i think you've heard us today a couple times talk about the indirect channels these are diverse channels that we can go to market and really expand our reach And we're putting resources behind that. We absolutely want customers through our funnel. And that's why it's so important for us to focus on how we expand our reach globally in all different channels. The direct channel is becoming increasingly more competitive, both from a competitive spend perspective, but also just ad costs. And so we're trying to strike the right balance and really leverage all of the diversity of the channels that we have out there to acquire users and or indirect customers that will over time feed into our installed base.

There's one ad I want to say. I know it's doubling down on what I already said, and Natalie mentioned it briefly, but we have a lot of also indirect customers. A year ago, we launched Norden 360 on mobile, Android and iOS. In employee benefit and mobile app, we increased 100,000 net new customers or over 100,000 net new customers in those two channel quarter over quarter. We saw for the first time, 65%, about two-thirds of the mobile app purchases were known in 360, which is a very big change. That is impacting how we report a direct customer account. We've made some analysis. Avast, for example, is including the mobile app into their customers. So as we merge with Avast, we're going to take a fresh look on how we report this customer account so investors can have a full view on how we looked at our business across all dimensions.

Okay, got it. That's very helpful. One follow-up, if I could. So how should we think about ARPU going forward now that the price increases given the current inflation that we're seeing? Thank you.

The price increases inflation, etc. I know it's being talked about across the globe, very, very top of mind and relevant. For our business, though, we're software-based, so we really don't have a ton of logistical and raw material inflation in our business. What we focus on when we think about price, when we think about inflation, it's more so how are we driving customer value, how are we bringing innovation faster to market, how are we making sure that we are the number one customer choice in the decision they choose how to protect themselves and their family. And that's how we focus and that's how we think about our price. We want to make sure that the price value equation makes sense and not necessarily focusing on price increases just because it's top of mind across the world today.

And when it comes to growth with balance retention, ARPU, new customer acquisitions, if your question is can you go higher than the $9 average, the answer is yes. We still have the majority of our customers that don't have identity protection but are just on the core security. Nobody is anymore just on the EV. They have more than just security like password manager, et cetera. But they haven't really made the leap yet on understanding the benefit of having digital identities being being protected, and I think that's really our effort, creating the innovative portfolio to really drive that increased adoption of identity protection.

Okay, thank you both very much.

Congrats on the results. Thank you. At this time, there are no more questions. I will turn the call back to Vincent Pellet, CEO for... Thank you, Paul.

Yes, thank you, Paul, and thanks, everyone, for joining us for this call. We appreciate your continued support, of course, and we look forward to connecting with you very soon. So stay safe and be well. Thank you.

This concludes the conference call. Thank you. You may now disconnect.