Gen Digital Inc (GEN) — Q2 2022 Earnings Call Transcript

Thank you, Darrell and good afternoon, everyone. Welcome to NortonLifeLock's fiscal 2022 Second Quarter earnings call. Joining me today to review our Q2 results are Vincent Pilette, CEO and Nally Jersey 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 NortonLifeLock and Avast. 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 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 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 NortonLifeLock'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 base of our product innovation from core security to trust-based digital solutions. By putting our customers first and relentlessly executing 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, up almost 20% year-over-year. Our high single-digit bookings growth was in line with 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 and prioritized travel and other activities. As we balanced all of our operational metrics and investments, we finished the quarter with strong momentum, delivering our eighth straight quarter of net direct customer adds 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-over-quarter, and new lead 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 the 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 continued to invest in our 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've had with our idea 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 fourth straight quarter, up 25% in Q2. All channels contributed meaningfully to these results. Among those, the Employee Benefits channel delivered another very strong quarter, expanding beyond the U.S. by offering our employee benefit solutions to Canadian employers and unlocking a broader customer base. Our investment in this area is 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 will continue to invest in our multichannel 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 Norton Utilities Ultimate, a new performance maintenance offering that helps create a faster, smoother, and more secure experience for consumers, whether they're gaming, browsing, streaming content, or more on their Windows PC. We expanded Norton Family with new features, including favorite locations to help parents establish approved geographic locations and receive notifications when their child's device arrives at or departs from 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. LifeLock clients 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 Norton AntiTrack in the U.S., 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. I'm pleased to share that Norton AntiTrack has been 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 investments 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 NortonLifeLock's ongoing pledge to bring together our team, expertise, and technology to help build a safe, inclusive, and sustainable future. We're making good progress on this front and I'm proud of all of our employees and 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's 2021 Sales and Marketing Technology Awards, or what they call the Sammys, which rank NortonLifeLock as one of the top medium-sized companies of 2021 for innovation in sales and marketing technology. We were recognized for our efforts in 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. These technologies enable 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 team's commitment to delivering value. They advocated for the customer, were empowered to take initiative to identify opportunities, and delighted customers while improving our business operations. And more importantly, they delivered. Before I turn the call over to Nally 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 NortonLifeLock shareholders voting to overwhelmingly support our ongoing transformation to the proposed merger with Avast, with the next key step being the Avast shareholder vote scheduled for November 18. Additionally, we are actively and collaboratively working on the antitrust and other regulatory processes in all relevant jurisdictions. We believe we are on track to close in the middle of next calendar year 2022, as previously stated. Our strategy has been to protect and empower consumers as more and more of their daily 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 Nally 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 and the 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. Bookings growth of 7% was supported by our renewal efforts, expanded product offerings, and continued international expansion. Our total direct customer account 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 adds. In a quarter where there is seasonally lower demand, our strong net adds in Q2 evidence growing demand for our products. We feel proud to have added over 300,000 net new customers in the first half of our fiscal year. Our operational metrics remained strong with 85% retention. 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're 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 pillar 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 of 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. We are selling our investments through productivity gains and lower infrastructure costs. Operating at 87% gross margin, and with G&A less than 5% of revenue, we drive long-term sustainable growth. Q2 net income was $255 million, up 19% year-over-year. Diluted EPS was $0.43 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 for 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 was $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 LS 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 $0.12.5 per common share. For Q3, the Board of Directors has approved a regular quarterly cash dividend of $0.12.5 per common share to be paid on December 15th, 2021, for all shareholders of record as of the close of business on November 22nd, 2021, as described in the press release. 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 Avast transaction. Now, turning to our Q3 and full-year outlook.

We expect Q3 non-GAAP revenue in the range of $695 million to $705 million, assuming stable currency rates quarter-over-quarter, which translates to 9% to 11% growth year-over-year. We expect Q3 non-GAAP EPS to be in the range of $0.42 to $0.44 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. 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 continue 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.

Good afternoon.

Hey Vincent. Hey, good afternoon, Vincent, hey, Natalie, thanks for taking my questions here.

Yeah.

Natalie, to start with you, could you provide more detail on the billing metric? I believe we heard about 7% growth in bookings, which is encouraging. However, the billings growth seems to be slightly lower at around 5%. Can you explain the factors influencing this? I understand there may have been a tougher comparison period, and currency fluctuations could also play a role, so it would be helpful to hear how this growth relates to bookings and the billings growth in previous quarters.

Sure. Thanks, Saket. Look, I'm not surprised at the question around 7% bookings. I am going to focus on bookings in the response to your question. But I'm also not surprised that our Q2 results as it's in line with our models, our internal models. As 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 even if you look at the external search traffic metrics, either on Google metrics, analytics, etc., 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. 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 the 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 step backs. Like at 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.

That's very helpful, Vincent. For my follow-up, could you remind us of the current percentage of the business that comes from international markets? How large do you anticipate international could grow as a percentage of the total in the long term? Is this primarily an antivirus market, more focused on identity monitoring, or a combination of both? I'm interested in your long-term outlook for international.

It's a good question, Saket. I'll give you the short Belgium answer. International is not big enough. It indeed 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 our 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 life, exploring elements of restoration, and so, what I call solutions, which includes our services. I think on the long-term perspective, outside of the U.S. there are huge structural growth opportunities. Obviously, the proposed merger with Avast will boost all of that, making it more balanced. When I look at different industry, technology, or even the demographic, as you know, we should be more 40 in 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.

Hey, good evening, guys. Thanks for taking my questions.

Sure.

I'll keep it to one question. Natalie, since you alluded to inflation, I'm curious what NortonLifeLock 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. You are going to see us investing in 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 five billion Internet users are all fully consciously protected from cyber criminality. When it comes to our ongoing prices, obviously, pricing structure, and how do you move to a premium model, have different structure. First, your price, as you know, as 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 with tracking, the dynamic of cost, inflation, and 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, allowing customers up to higher levels of membership. That is the whole business model the way I'm describing it.

Thank you.

Why don't we wait one minute to see if there are no more questions. Last time there were no more questions, and 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.

Okay. We are obviously always as management very open and available for any questions our investors otherwise 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, confidence in our strategy, confidence in the specific transaction, confidence in the board and management. Thank you, everyone. And we'll be connecting very soon.