Gen Digital Inc (GEN) — Q4 2018 Earnings Call Transcript

Thank you. I'm Cynthia Hiponia, Vice President of Investor Relations at Symantec, and I'm pleased to welcome you to our fourth quarter and full year fiscal year 2018 earnings results. We've posted the earnings materials and prepared remarks to our Investor Relations Events webpage. Speakers on today's call are Greg Clark, Symantec's CEO; and Nick Noviello, EVP and CFO. This call will be available for replay via webcast on our website. I'd like to remind everyone that all references to financial metrics are non-GAAP, unless otherwise stated. Please refer to the CFO commentary posted on the Investor Relations website for further definition of our non-GAAP metrics. Today's call contains forward-looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions, and expectations, speak only as of the current date and, as such, involve risk and uncertainties that may cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information. Lastly, as mentioned in the company's press release, the Audit Committee of the Board of Directors has commenced an internal investigation concerning concerns raised by a former employee. The Audit Committee has retained independent counsel and other advisors to assist in its investigation. The investigation is in its early stages and the company cannot predict the duration or outcome. Now, I'd like to turn the call over to our CEO, Greg Clark.

Thank you for joining us, and good afternoon. We were pleased with our performance in the fourth quarter and FY 2018, delivering operating results across the business above the guidance levels we provided in our last earnings call. We're also pleased that we exceeded our full-year EPS guidance based on our second half performance and good results from our cost control initiatives. In Q4, our total revenue was driven by performance in both Enterprise Security and Consumer Digital Safety. Our operating margin exceeded our guidance as a result of revenue growth and continued cost and operating efficiencies. We generated strong cash flow from operations, which should benefit going forward from our continued business momentum, deferred revenue, and the drop-off of costs associated with our restructuring initiatives. In Enterprise Security, our Integrated Cyber Defense platform gained traction with customers attracted to our value proposition of an integrated platform with best-of-breed solutions. We saw continued adoption in Q4, with our deals greater than $1 million again exceeding 100. Our best-of-breed solutions were also recognized by industry analysts. In FY 2018, we were named a leader in the Gartner Magic Quadrant for Managed Security Services, Endpoint Protection Platforms, Cloud Access Security Brokers, CASB, and Secure Web Gateways. We were also named a leader in the IDC MarketScape for Mobile Threat Management in FY 2018. We believe our third and fourth quarter results indicate the successful integration of our sales force and the success of our Integrated Cyber Defense platform strategy. Now turning to the market and how we are doing with customers. The trend that I described in our last earnings call of increased cross-selling in our Enterprise Security segment continued to gain strength this quarter. Enterprise customers are buying more of our products and solutions, simplifying their environments, and cutting costs by consolidating around our platform. The rising awareness of long-term challenges and higher costs associated with sustaining many fragmented solutions across the enterprise is extensive and fragile. In the fourth quarter, we had a new customer adopt our platform in a seven-figure deal. One of the 10 largest banks in the U.S. turned to our Integrated Cyber Defense platform, purchasing multiple solutions. This is just one of many examples of customer transactions driven in part by the need to cut complexity and costs from the security stack while improving performance. Another critical need for enterprise customers is ensuring compliance and security in the cloud. In the fourth quarter, we closed an eight-figure deal with a large global professional services company that adopted our solutions. We displaced the offerings of two vendors. We believe consumers are seeing the value in our bundled offerings, which offer protection across devices, information, and identity, and we expect our growth in FY 2019 will be driven by further integration of our offerings and increased marketing to drive consumer awareness of our Consumer Digital Safety platform.

Thank you, Greg, and good afternoon, everyone. All references to financial metrics are non-GAAP, unless otherwise stated. Please note, we've posted information on our financial metrics as well as other tables and reconciliations of GAAP to non-GAAP metrics in our supplemental materials and CFO commentary to our Investor Relations website. I will start with a high-level view of our Q4 and full year fiscal 2018 results. Recall that the first three quarters of fiscal year 2018 and fiscal year 2017 include results from our WSS/PKI solutions that we divested in Q3. For comparative purposes, our organic growth rates discussed are adjusted for acquisitions and divestitures. Looking at organic revenue growth in constant currency, adjusted for acquisitions and divestitures, total company year-over-year revenue growth was 4%. At the same time, year-over-year deferred revenue was up 21% for the total company. In our Enterprise Security segment, over 80% of our business was ratable. Our Q4 implied billings was $937 million. We expect that the implementation of the new revenue recognition standard will impact our metrics, and we will give you the details on our Q1 earnings call. Our direct customer count was 20.9 million, down slightly from Q3. We expect these direct customer statistics to represent approximately 90% of our revenue stream at any point in time. Total company operating margin for the fourth quarter was 36.5%. Fully diluted earnings per share was $0.46. Looking back on fiscal year 2018, we entered fiscal year 2019 with industry-leading platforms in both Enterprise and Consumer, a continued focus on operating efficiency, and a stronger balance sheet. We are forecasting fiscal year 2019 revenue in the range of $4.760 billion to $4.900 billion. Based on the revenue recognition standard in effect in fiscal year 2018, we expect higher revenue in Enterprise Security in the second half of the year compared to the first half as deferred revenue is recognized. We anticipate that our shift to a more ratable-based enterprise business will continue.

As I look back on the fiscal year 2018, I'm pleased with how we executed for the year. Our strategy is resonating with customers. Enterprise customers are adopting our platform. Our FY 2019 guidance reflects our expectation that our Enterprise Security segment revenue will become more ratable. In FY 2018, our Consumer Digital Safety segment experienced rising ARPU with an annual retention rate of approximately 83% and a digital safety adoption rate of approximately 11%. These statistics validate that our strategy is working. Thank you for joining us this afternoon.