Q3 2020 Mcafee Corp Earnings Call
Ladies and gentlemen, and please continue to hold you of conference call will begin momentarily.
[music].
Ladies and.
Gentlemen, and thank you for standing by and welcome to the Mcafee third quarter earnings. The results conference call. At this time, all participants are and the listen only mode. After the speaker presentation that will be of question and answer session to ask a question during the session and you would need to press the star one on your telephone please.
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And I would not like the and the conference over to you for a speaker today to Mister Chris Maloney Investor Relations. Thank you. Please go ahead.
Good afternoon, and thank you for joining US today Mcafee is hosting this call to discuss the third quarter earnings of adults for the period ending September 2025th.
Depending on today's call or Peter leave the President and C E O and cat the made of party Chief Financial Officer, and the Sheesh Agarawala Senior Vice President of strategy and corporate development.
Earlier this afternoon Mcafee issued a press release announcing its financial results.
Well this call of reflect the items discussed within those documents for complete information about our financial performance. We also encourage you to read our third quarter of 2020 quarterly report on for them 10-Q.
Before we begin I want to remind you that matter of disgust on today's call and they include forward looking statements related to our operating performance financial goals and business outlook, which are based on me and management current beliefs and assumptions. Please note that the forward looking statements reflect our opinions as of the date of this call and then they take no obligation to revise this information as the results of.
New developments that may occur.
Lord looking statements are subject to various risks uncertainties and the other factors that could cause the actual results to differ materially from there was expected and describe today.
For a more detailed description of a risk factors. Please review our final initial public offering prospectus date of October 21st 2020, and filed with the security of and Exchange Commission, where you will see of discussion of factors that could cause of the the company the actual results and different materially from these statements and replay of this conference call will be available on our website under the inverse.
The relations section I would also like to remind you that during the call and they will discuss on non-GAAP measures and talking about and that to be the performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures and our earnings the least I will now turn on the call over the Peter leaf and that's B as President and C E O.
Thank you Chris and good afternoon, we were excited to report earnings for the first time since back of he's returned to the public markets I would like to extend a special thank you to mcafee employees or customers around the world are partners and.
And to our shareholders for your confidence and our team and our company. We look forward to building increase shareholder value and the years ahead.
Before diving into our strong third quarter results I'd like to start by framing Mcafee is key strategic focus areas. This will better contextualize the quarter and how our results underscore execution against our strategic objectives and.
Mcafee as of trusted global brand and provider of cyber security solutions, and large growing and important markets.
We have of market, leading consumer subscription business with sustained multi year of double digit revenue growth, we offer a holistic consumer cyber security platform with of differentiated Omnichannel go to market strategy and our air price business. We're driving continued EBITDA growth with a focus on our core customers and or the.
Of vice the cloud portfolio, and Mcafee has of highly attractive financial profile with consistent growth and profitability of scale as well as very strong cash flow generation.
With that is the main backdrop, let's turn to our queue three financial highlights.
It was a strong quarter continuing the overall momentum we have seen and the business. We generated robust topline performance with total net revenue of 728 million representing growth of 10 per cent year over year. We also delivered improved profitability with total adjusted EBITDA of 265.
Million, representing a 36% margin and growth of 26 per cent vs last year.
We have once again turned it and very strong double digit revenue and direct to consumer subscriber growth and our consumer business or 23 per cent revenue growth rate was driven by our Omnichannel go to market and diversified partnerships I am very pleased to say the smartest 12 consecutive quarters of sequential.
And and year over year subscribe of growth.
Our enterprise business with our long tenured customer base delivered continue to EBITDA growth and it was the strong contributor to our overall profitability improvement and the quarter Vencat will go into more detail regarding our queue three results during his remarks.
Looking at each of our two main segments and more depth, we'll start with consumer.
Mcafee has a sustained double digit growing consumer franchise that protects more than 600 million consumer devices and over 17 million cord direct to consumer subscribers as of the third quarter up 16% year on year.
This includes and industry, leading 669000 net new core direct to consumer subscribers added to the platform in the past quarter alone.
Mcafee is consumer business is a robust growth engine for the company with revenue growing double digits for several years now along with improving profitability.
We have a holistic solution built by committing to our customers needs to deliver the right protections at the right time through and engaging experience the.
The solutions are supported by the scale of our Omnichannel distribution, best and class holistic protection and of trusted consumer brand, we leverage advanced a I M L and behavioral analytics with industry, leading threat intelligence expertise to deliver always on protection for our subscribers.
As we live more of our lives on line, we recognize the need to provide security that is now more than ever easy to use.
To this and we recently launched and enhanced user experience. This new user experience makes it easy for consumers to insure all devices, including those for additional family members are covered and that all protections are easy to understand and use our commitment is to relentlessly protect our subscribers.
Recent channel partnership highlights and consumer include and expanded relationship with one of the top three mobile service providers in North America, offering our holistic protection to their tens of millions of customers and.
And agreement with the leading telecommunications provider to broadly make available are secure home platform to which millions of broadband customers and.
And Mcafee has also expanded our relationship with Amazon with and exclusive off from now available for business Prime members, Mcafee and Amazon business Prime partner to solve cyber security and I T resource challenges for small businesses.
Is consumer experiences become increasingly digitized, we expect the demand for continual connectivity and on line services to provide of lasting tailwind and our consumer business. We have grown of subscriber base that is strong and loyal and we expect our consistently improving omnichannel acquisition and retention model to drive further.
The success as we expand our consumer relationships that expansion potential remains of very much in front of us.
Switching to our enterprise business, we have three key strategic imperatives first we will continue to focus on our core long tenured enterprise customer base and leverage our expertise and serving complex hybrid multi cloud environments.
Next we will continue to drive innovation and device the cloud security to help protect users applications and data across the enterprise finally, we'll be focused on improving EBITDA through our targeted marketing and product orientation.
We have of well established presence and important areas of the enterprise security market and are pleased that the investments we have made and our device. The cloud of portfolio have received strong recognition and particular Mcafee was recently named a leader and the Twenty-twenty gardener magic quadrant for cloud access security broker or cozby the for.
The consecutive year of placement and the leader quadrant.
With more than 30 years of leadership and innovation and cyber security our customers have relied on mcafee to protect them from of growing array of cyber threats, whether we of securing the digital experience of of consumer who's on line footprint is increasing daily or defending many of the world's largest organizations from sophisticated attacks and nation.
<unk> threats Mcafee is committed to protecting our customers against the risks with leading edge cyber security products, what we do for our customers is more important today than ever before.
Is the world of rapidly evolves to of mobile digital and work from home reality, Cybercriminals see opportunity and the structural shift which has only served to intensify the overall threat landscape for some perspective, Mcafee now records and average of 8006 hundred incidents per minute and found that external attacks on.
And cloud services grew nearly 500% from January to April.
The need for a platform that provides effective and frictionless security and our personal lives and at work is escalating what follows is of massive and growing 42 billion dollar combined addressable market over the next five years of this 19 billion as the consumer related Tam while twenty-three billion comprises the enterprise.
Rise Tam expected through Twenty-twenty for we have a long runway of opportunities in front of us.
Our approach to providing effective and frictionless security for consumers and enterprises is resonating across the user base operating and increasingly complex high and and mission critical digital environments to solve the security challenges Mcafee offers the technology to uniquely of comedy is rapidly escalating market Rick.
And wireman.
Thank you once again to our Mcafee team members for your hard work and dedication, which is allowed us to serve our customers execute on our strategy and deliver solid third quarter financial results. We look forward to of strong close to the year and to speaking with many of you over the coming months and.
I will now turn the call over to Vencat to discuss our queue three financial results and further detail.
Thanks, Peter and good afternoon, everyone.
I too am very pleased and on her to be speaking to you today.
And our first earnings release as of public company.
I'm excited to be here at Mcafee.
And the first two months and joining I've been impressed with a passion and excitement of the employees are.
Out of products and our customers.
As they talk about the income statement.
My comments will refer to non-GAAP results unless otherwise noted.
And that cancellation to the related GAAP numbers is attached to the earnings press release, we issued this afternoon.
I'll know for like a brief overview of for business and.
And outline are for national principles the.
And then I'll go through our fiscal third quarter of results in detail on.
Finished by providing of guidance for the fourth quarter.
Mcafee, the trusted global cyber security Brang, serving kind of large base of millions of of consumers and leading global enterprises and governments.
We have a leading consumer franchise with consistent double digit revenue growth.
Increasing market share and highly profitable with 46% adjusted EBITDA margins and the most recent quarter.
And edition or enterprise franchise has a loyal customer base stable revenues and.
And the improving adjusted EBITDA.
Mcafee approaches it's the financial model with the same discipline and focus on providing value for our customers.
We're incredibly committed to driving shareholder value with the following principles.
First.
We're committed to organic around the new growth.
At scale for.
Focused on a consumer business.
Second we drive disciplined resource allocation by deliberate investments and our highest priority areas.
That will yield stronger and returns.
Third we display of strong operational and financial management with.
With costs and margin discipline.
Executing across these principles years of business with the healthy level for EBITA and cash flow.
Based on a disciplined strategy for capital allocation to drive sure hold of returned.
We plan to distribute the dividend of $150 million.
On and annualized basis to.
And to be paid starting the first quarter of 2021.
We use some of the IPO proceeds to pay down our second lien debt.
Oh 525 million and our long term target leverage is expect it to be below three times on the net debt or adjusted EBITDA basis.
Turning to the third quarter of results total net revenue for the quarter was 728 the million up 10 per cent or the last year.
Shortly adjusted EBITDA of for the quarter was 265 million, reflecting 26%.
Your overview of growth.
Our adjusted EBITDA margins expanded for 170 basis 0.2, 36 per cent from the prior here.
Here to date, we of January at her Unlevered free cash flow of 639 million.
Up significantly with an increase of 41 per cent or says the same period last year.
This reflects the operating leverage and the model has EBITDA and free cash flow grow greater than the revenue.
Our team delivered solid the results.
Topline trend is attributable to growth across our major consumer channels, including her new and renewal of emotions and mobile.
As Peter mentioned this marks 12 consecutive quarters of sequential and.
And euro or ear direct to consumer subscriber growth.
This validates the strictly take advantage of our of holistic personal protection offerings, and Omnichannel and go to the market as well as strong execution on acquisition conversion and retention.
We also saw very strong adjusted EBITDA improvement from both segments.
Driven by executing on our device to cloud product portfolio and our focus on core customers.
Now turning to operating expenses we'd.
We remain focused on improving profit of routine and our business, while balancing on investments and growth.
With this dynamic and mind.
Our goal is to grow revenue at the faster rate than our total operating expenses, which will result, and improved operating margins.
Evidence of that focus came and Q3, where are total adjusted operating income improved but 30 per cent compared to the priority of a quarter.
We've also seen the higher than expected partner product demand across are wary of channels.
While this drove increased marketing spend during the quarter and it also book dwell for our future revenue growth.
Ah consumer segment continued its momentum across all dimensions during the third quarter.
For the period consumer Avenue was 395 million, reflecting twenty-three per cent growth worst as the prior year of quarter.
Clearly we're happy with.
And with continued momentum of for a consumer of business and.
And the underlying day man that is driving this growth.
The robust growth rate is attributable to solid business fundamentals across our direct and partner let the activities.
Overall revenue growth was led by continued strong performance and our retention.
The 16%, it'll where you increase and core direct to consumer subscribers and.
Long with mobile and service provider channel and business.
And we ended Q3 with 17.3 million core direct to consumer subscribers.
And increase of over 2.4 million subscribers compared to the end of third quarter of 2019.
And and increase of 669000 subscribers compared to the second quarter of 2020.
It's important to understand that as this large cohort of new subscribers derived from value from our offerings.
And renews their subscriptions next year the.
Just for like a higher lifetime value to Mcafee and.
As well as of tailwind the growth and the consumer segment for the coming years.
A R P C or monthly average of avenue per of customer finish.
Finished the quarter at $5.98 compared to $6 and for sense and the Saint Peter last year.
This change reflects the accelerated growth and mix of new subscribers.
Which are initially dilutive to air P C.
Once again these new subscribers feed of large installed base and all powerful growing renewal Lynch and.
All the and the consumer business trailing 12 month dollar attention or P. P. M was the 100 per cent for the third quarter worst is 96% and the compatible petered last year.
This reflects and excellent execution on retaining and upselling value to our customers.
It just it EBITDA for consumer was 181 million, reflecting 26 per cent euro or ear adjusted EBITDA growth.
Cycling now to the third quarter highlights of for enterprise business Enterprise revenue for the quarter was 333 million.
We continue to see our customers to adopt our newer and point plus E D R and unified clouded solutions.
The percentage of revenue and the third quarter from core enterprise customers. They.
And they find us for so long as the of January at least 100000 and annual contract value for Mcafee.
Remained or 80 per cent of total enterprise revenue.
We continue to drive meaningful enterprise EBITDA expansion your or ear during the Peter.
Three adjusted EBITDA was 84 million, whereas the 66 million.
From the third quarter of last year, reflecting twenty-seven per cent euro of your growth.
Enterprise segment adjusted EBITDA margin also saw significant the euro of your improvement coming in at 25 per cent compared to the 19 per cent and the compatible Peter.
Now turning back the total company the results and the balance sheet.
We ended the third quarter, with 348 million and cash and cash equivalents and short term investments.
We raised approximately 586 million and.
And the initial public offering and October or about 553 million net of commissions.
Cash flow from operations increased and the first nine months of 2022 $464 million compared to $285 million and the prior ear.
The improvement is attributable to increase profitability and fell and man and it's working capital.
Turning to guidance and we will provide next for the guidance ranges for total net revenue and adjusted EBITDA.
And the fourth quarter, we expect consolidated net revenue to be between 732 million.
And $742 million.
Embedded within this guidance is our expectation that consumer with the girl net revenue between 15 and 17 per cent ear over a year we.
We expect total adjusted EBITDA of 254 million to $264 million.
To further help with your understanding the model.
We anticipate cash the net interest expense for the fourth quarter could be between $62 million and $66 million.
The normalized non-GAAP tax rate is expected to be 22 per cent post IPO.
Finally, you should assume it fully diluted share count of approximately 468 million chairs.
Although we will not be guiding to unlevered free cash flow I should note that due to our I P. O. We incur several of one time payments related the the transaction that are disclosed and Ah 10-Q, which of file today as well.
This will impact of Unlevered free cash flow and the fourth quarter.
These items wouldn't be a factor starting next year.
Overall, we're very pleased with our momentum and Q3.
We continue to execute on all facets of our strategy.
And a consumer segment, we've historically grown double-digit and our product user experience and Omnichannel and strategy have position does well for the future.
And our enterprise segment, we Delaware strong adjusted EBITDA growth by optimizing our device to cloud offerings and focusing on core customers.
Mcafee sophisticated product platform and loyal longterm relationships constitute sustainable competitive advantages.
We are committed to the success of our customers and positioning Mcafee for long term growth and profitable day, we look forward to the reporting of continued progress to you and these forums overtime.
With that I'll turn the call back to the operator to begin Q&A.
Thank you Sir.
And as a reminder to ask the question you would need superstar one on your telephone to withdraw your question. Please press the pound key.
And in order to get to everyone and the cube. Please limit yourselves to one question and one follow up please stand by while we compiled the Q&A roster.
I shall of our first question comes from the line of Hams the for the Wildlife from Morgan Stanley. Please go ahead.
Hi, guys. Thank you so much for taking my questions and just a couple of quick ones for for my and so you know and it seems like you guys had a really strong year and and the consumer business I'm wondering as you think about 2021 right.
How do you see the really strong growth and and the consumer segments. The beginning into the next to your is it sort of.
And your partnership so you're forming here.
The additional skews that that that will likely benefit of 2021 that didn't I've heard of this year I'm wondering how do you guys think about the durability of grew up there and then I have a follow up.
Hey, How's the thanks for the question. This is Peter and Ashish may and some color as well.
So related to the consistency of the strategy. It really starts with the fact that the market is continuing to expand and.
And because of that we've been able to expand the partnerships that we've had for many many years across the omnichannel that includes OEM and that includes Mcafee direct that includes e-tail and retail around the world and that includes a very grocery channel, which.
Which is which is our mobile channel as well so when we look at it with that lens, we see the opportunity to continue to grow new subscribers and obviously, we've been on a consistent path of having done so as we just mentioned and 12 consecutive quarters 669000, and new subs added in queue.
Three alone now when we think about the continuation of that we also think about strategically insuring that we make it a great experience and then we work on conversion to renewal and economically that serves us very well because those customers become part of our renewal aperture.
Aperture and they become part of the renewal base, which is getting bigger and bigger and we think about dollar based retention and ensuring that they have a great experience. So and we do that we continued through the same cycle, we grow new subscribers. We ensure that the the relationship is fantastic we expand the sales because we're really sure.
The more of a holistic solution than ever before and the Tam continues to grow. So we see this as a consistent theme we've been growing on a nice double digit clip for years, we've been growing obviously, new subscribers for quite a while as well and we are absolutely see the opportunity to continue to do that she she any color that you wanted to add is great.
Sure and you know on the.
My mind and you'll model for this is that it starts with the pipeline the of your creating a few customers and you subscribe for us today.
And that really for them to the to do what basis, Peter talked of art for next year of the Euro Austin.
And so on and.
And these shows value of upset and do this subscriber base.
New of really solid and more capable of products and tell them for capable of find the larger and more device protection and to.
To the holistic protection and blacks.
I'll talk ecosystems across operating system.
And.
Okay.
Okay.
And this concept of holistic family protection and do a much broader audience. Some of the mobile partnerships that we have we're on our partners are upsetting our predictions are capable of two day subscribers.
Okay got it I think we broke up a little bit there on my and but I think I've got the the picture Uhm just one quick follow up question around the Uhm partnership with with Amazon and could you give us a little bit more details on sort of the economics, there what part of the businesses that the.
Does that benefit and and kind of how you feel that going forward and that's it for me. Thank you guys.
Seattle, how the copy of your day, so I'm, sorry, and that was a partnership that'd be just announced recently.
The partnership is really geared towards the.
Let me share man.
The market where have you found the the needs of the market on very suddenly for the needs of the consumers, where they want something which is one of the stake.
100, compensating going on across the school system.
And is the lines and you have you what is is very effective at the same price. So.
That's gonna be the partnership it's it's going on.
It's a comprehensive solutions for consumer business and.
One one of your also offering the partnership is an opportunity for a much larger and devised bongos beyond our consumer what you see on consumers and their families take on it.
Yeah, and and and just to just to for clothes that out it's very early days on that front, but it's another additive new opportunity for us as we continued us as we continue to drive growth, but again I'm. So thanks for the question.
Thank you.
I sure. Our next question comes from the the line of Brian Ethics from Goldman Sachs. Please go ahead.
Hi, good afternoon, and thank you for taking the question I guess, you know either get of Peter of that get whoever wants to feel of this one on the enterprise side, you know I understand you're gonna have you know kind of flat down revenue growth on that side of the business and.
But really nice adjusted EBITDA growth, how adorable is that growth in other words, and you know help help possible the core customers and and can you quantify the cost of Takeouts that you the gonna fight and that business and and give investors, maybe a little bit more comfort that even though the top line made the flat you can we can.
Get some comfort and the growth of the you know EBITDA profitability of that that segment drive.
You bet, Brian, it's Peter and and Vencat will double click on this as well. So I think you summarized the do quite well the the business has been on a solid trajectory of improving EBITDA and and and improve and you'll be the margins and we see an opportunity to continue to do that the solid core base. That's very sticky that's been with us for many years that by.
And as a multitude of our products as the solution.
That's very very consistent and frankly, that's the more lucrative part of of the of the aperture. So when we think about it strategically that's serving us really well now there are operational elements that vencat will get into that provide us the opportunity to improve EBITDA, even more and some of those aren't directly correlated to enterprise and and of its.
Self there of G&A components real estate would be a good example, where we will likely spend less money and from and allocation standpoint, that'll help the business as well, but with the advent and cat if I didn't steal too much thunder feel free to double click a bit.
Alright, Thanks, Brian so.
Our strategies in Enterprise is you said is to drive EBITDA girl and the the key component of that strategies to make sure that we have great and makes for a business coming from and point and cloud security and and as part of that we're also focusing as you know.
On on the on the top 1500 customers as Peter mentioned, the drive greater than 80 per cent of the revenue with those to sort of focus areas.
It it's sort of it allows us to focus the both the R&D and sales and marketing costs.
We got on the strategic priorities right and it and you can do direct costs that we're able to optimize in both R&D and go to the market.
As Peter and articulated their significant other course, where taking a look at it.
Within the with respect the G and a so we do have expensive real estate all across the globe and what are rationalizing and saying you know how much we need for the future that certainly will contribute as of indirect allocated costs and.
And the other big area, we're taking of deep look at is you know we have multiple data centers and I T and fragmented systems and now as we modernize and simplify out of core infrastructure their significant operational efficiencies that also translated into economic.
Benefits as we continued new and optimize.
Ah the cost structure, so a combination of of folk strategic focus on the business and streamlining and a cost structure.
Makes us pretty comfortable about the EBITDA expansion of opportunity we have in front of us.
Okay. That's that's helpful and maybe maybe the follow up it sounds like some of those operating of opportunities may not be the most liquid opportunities and is there a framework that we can look at as.
As we go forward over the next few years, where you can maybe commit to margin expansion and every you know income echo margin experienced and he's quarter or year over year basis, or how how vital is that you know of that line item I just <unk> do you plan to have that day.
All sorts of so luck I mean, we want to make sure the letter on a consistent.
Overall operating improvement plan. So we we we think about this and in terms of you know we've been around for 30. Some years, we wanted to make sure what around for the you know for the customers and the solutions, we're providing them and therefore.
We think about that on a multiyear improvement plan with the clearly quarterly and annual operating improvement.
The efficiencies.
So all of the activities I mentioned, whether it's the refocusing on R&D or sales and marketing or G and a we do have a quarterly plan certainly to to think about EBITDA improvement, but we wanted to make sure we have is.
The sustained improvement not we're not going to do anything that obviously impact of our customers, but we will have a sustained improvement for a long period of time.
Thank you.
And I shall on next question comes from the line of Greg Moscow Witts from Mizuno. Please go ahead.
Okay. Thank you very much and thank you guys for taking the questions. If I could start with consumer because of the growth of this quarter was very impressive. The one question that that often comes up from investors around the status of sustainability and you know I don't think anyone has the illusion that 20 per cent growth and the new normal, but I think it would be helpful. If you could tell us why consumer.
And or should be a double digit girl, we're on a multiyear basis going forward.
You bet, Greg, It's Peter I I I would say, we we start with the fact that the the market is very substantive and the.
That to US is really important because we are looking at this over of fairly lengthy continue on and it's been consistent we've been growing and of.
Very solid clip and growing new subscribers at a very durable solid clip for quite a while and that was true and 2017 and 2018 2019, clearly you're the date and 2020, we have been growing we've been growing more of late so this is not a completely new phenomenon for us to see a double digit.
Growth story for the business and we've really expanded the omnichannel approach in recent years and a few ways one of which is we have a multitude of entities with longterm exclusive very important relationships that we've built and they're not just commercial relationships we go and.
The market together, we think in terms of the user experience together performance marketing ensuring that we are there at the point of emanation and throughout the customers digital journey and the added of element that of she's just touched on his mobile now with our mobile providers or.
The the the telecom entities, we don't count those as new subscribers. So and that's 669000 number that's non inclusive of the mobile carrier growth because technically the billing relationship is with the mobile provider. So we see opportunities to continue with this large tam through this channel to continue to grow new subs.
Now upon doing so what we've also been fixated on is ensuring that we are stronger and stronger and stronger related to what we measure in dollar based on retention and the dollar base retention rate has continued to go up so we're adding more subscribers and retaining more and renewing more we've.
Invested and performance marketing as I said improve conversion.
Retention and we've also seen as the aperture has gotten bigger and we've added more and more subscribers. They've also provided us with an opportunity to improve our customer sad and M. P. S scores and we take that very seriously. So they become part of of renewal engine, which becomes the bulk of of the revenue and the bulk of of the business and so.
And as we continue to grow net new consumers and continue to transition those consumers into the renewal base and provides of very healthy long tail and hopefully that gives you some context.
Very much that of thanks, thanks for the for that Peter that's helpful and you got on the enterprise side.
So it looks like the the revenue decline just slightly this quarter of about two per cent, but on a year. The databases enterprise billings have declined I believe by eight and nine per cent can you walk through why that the billing it declines have accelerated and 2020 verses 2019 as well as of what your expectations are around enterprise performance.
And and forward.
Yeah, I'll touch on it and went up a double click and I would just make the sort of blanket comment about billings billings are lumpy.
So when we think in terms of the core base and EBITDA expansion, that's been very very solid and frankly, the core base became even of percentage point higher this quarter as a percentage of revenue.
So you know for US it's really a question of looking at this with of balance lens between profitable and what has been less profitable and that gets back to that question about EBITDA expansion, but we're gonna be very deliberate we hold very steady and that core base and that's really producing the bulk but think had anything I may of me.
Feel free to China and for Greg.
Oh sure so Greg the and as I mentioned and you can always try to use the drive EBITDA growth and clearly we're gonna be focusing on some of the the biggest franchise, we have and whether it's and point of clubs security the.
They tend to be more subscription and nature and as we were transitioning our customers from hardware and the licenses into the software and subscription.
We are actually view this as a positive and make shift and revenue and totally and lined with our strategy.
When you combine that with our focus and the enterprise of serving the large for customers as Peter mentioned and that constitute go to the and 80 per cent of the revenue that gives us the very sticky base and frankly, you know we've been showing the.
Complex customers customer and mine went for a long period of time so.
You you have a a revenue and core of customer base, which is a pretty stable. Then you look at you combine that with some of the focus I talked about whether it's Ah you know R&D go with the market or G and a.
When you combine both of those we feel pretty good about the continued EBITDA expansion of opportunities as we take our customers are more into the devise the cloud strategy. So combined we feel pretty good about how much.
We've been able to grow in terms of the profitability and the the continued growth we see it in terms of the EBITDA brought from Brooklyn for the future.
Thank you thanks Craig.
I sure on the next question comes from the the line of Matt Hedberg from RBC capital markets. Please go ahead and.
Great Hey, guys. Thanks for taking my questions and the congrats on the the the I P O and.
You know I'm curious and and and Peter maybe for you you know I know you guys have been working on the strategy on the enterprise site to consolidate agents and I'm wondering if you can give us an update their cause to me it seems like a real opportunity to drive even more synergies on the enterprise side, especially with the building cloud portfolio.
Sure maybe matter what I'll do is just sort of give a broad overview of where we are from a portfolio of standpoint, because it's really differentiated and we just got some.
And some very very positive feedback from Gardner, which I'll touch on as well and the way. We're looking at it is very much related to what that core base needs. The you know where and 86 per cent of the fortune 100, nearly 80% of the fortune 520 year plus relationships with governments and it's a complex.
[noise] series of neat and these are hybrid environments. So when we think device to cloud that has to do with the vice protection from and point protection, which we've completely revamped and gotten phenomenal feedback from customers, that's the highest growth and customer sad and M. P. I of course, we we've gotten and the business and.
And we also admittedly were late T E D R. But the E. D. R solution said is growing and a really terrific clip with something called the insights and insights is something that frankly, we brought to market that others simply do not have that gives us the opportunity to provide our customers not would simply detection, but also a preemptive preventative gave.
<unk> on cyber criminal behavior, because we have telemetry around over a billion and points and we can help customers understand what may be impacting their industry and their business. So on that side of the house, it's become a really important transition for us a lot of really terrific work done by the team and then on the unified.
Cloud edge side, we're really the only ones, who bring together cozby, which we are upper right and.
And <unk> and Gardners Magic quadrant, we've been there for for years, but we're exclusively upper right.
This year with sticky D L P with the secure web gateway.
And that's served us really really well and again it's.
It's the converged solution for sassy is Gardner calls it a unified cloudage and that's been a really important part of helping the customers who have a multitude of needs from data of the infrastructure and it all comes together with the P. O with policy orchestration, which is a big differentiator for us, so very sticky and that base and and hope.
It gives you some context.
Well, that's great and I think it's it's it's really of segue into my second question, which you you sort of of nice late into and I and and maybe hard for you guys. The answer but you know when you think of some of the faster growing segments of your Mark and I know, there's been a lot of success and your base. How how do you think about how well penetrated the bases you know beyond E. T T. The on some of these newer.
Products the clouds, the cloud side clubs him Edr et cetera.
Well, what we believe first of all of the the the market call. It for a five year CAGR and the mid twenties called the 24 25 billion.
And is going to continue to be strong and growing and growing in key areas because customers will spend money on security and and our case, we're very deliberate about how we think through that.
But importantly, we've also seen that some of this is not necessarily binary at this point, meaning our customers are looking for more and more of a solution to help themselves from all of those different vantage points, particularly large enterprises, particularly government entities, where it's not simply about protecting.
One component and that's why bringing together are unified Cloudage has become really important and there's more penetration even within the confines of our base to cross sell and up cell and we're doing that and that's gonna be a continued focus for us as we think about what we brought to market and again really strong accolades for our solution set.
Again.
<unk> top of mind, because Gardner just came out with the M Q, but that's gonna be a truism for us across the product lines and we feel very good about the solution set that we're bringing as opposed to point products.
Thank you.
Sure. The next question comes from the line of Patrick Colesville from Deutsche Bank of please go ahead and.
Alright. Thank you for very much for taking my question and it's really great to be on this inaugural earnings cool.
So told me and then also the question and I could see him on that enterprise I guess I mean, the consumer saw it and put in front of me the enterprise sides and when I look at the numbers you guys gonna and put incredible job balancing growth and profitability and enterprise, but when I look at you know many of competitors and the crowds strike Z scared of and others and.
And they they don't really care of that much of a possibility that just spending very aggressively.
For gross and how do you compete against the.
That mentality.
Right well I appreciate the comments on the on the work the team is doing and the that will continue. This team is just a skilled set of operators and.
And we are going to be very focused on the segments, where we will grow profitably and the investment thesis is really one of deliberate imbalance and again. The you know there's nothing to comment about of how things will run and prior years, but one of the things that really we've been able to do over the last of.
Couple of years is be very very focused on the areas, where we see accretive value and those are device the cloud and I remember we've got other solutions that frankly will not be grocery that we've been and for years, but we think we can invest less there have that sticky accretive element for core customers and and enable.
US to continue to improve EBITDA, we don't want to get into the head to head match ups vs. Others on on spend and a certain segment, we want to be very very focused on the area of the customers tell us matter of of the most and I think we've done a good job of listening to our customers and that sense.
That's very clear and and then and in and out of the question do you commented on the you know relationships you have and to consume of segment and and and particularly with P. C. O. Yeah and I mean can you just help me understand remind me you know the kind of.
How how the contracts work around those you know and they typically kind of one the contracts the multi use the deals just helped me understand those relationships because they seem to be like a real key drive of of the performance and consumer which has been great.
A couple of comments and then the she shall certainly he'll add some color. So one of those is P. C shipments up or down we've been growing and for example, and 2019 P. C shipments were down and we grew at a very solid clipped. So we're not tied and tethered exclusively to P C or P. C shipments, it's another feeding mechanism for the.
Both of the business and we cover roughly 85% of the brand name P. C. O. Am's. These are long term relationships. These are are very exclusive relationships and we've had partnerships for many many many years with these folks, but I'll I'll, let a huge double click a bit more.
Yeah. Thanks, Thanks for Peter So you know the relationships are S. T. The of wondered out of groceries. Good system across all partners, whether that'd be P. C O U mobile providers, all guys going on so at Amazon and recently on the specific question the the.
These agreements are multi of your <unk>, we of hobbies agreements on and exclude the spaces for.
A long time and we continue to the new then there's nothing coming up for the new and 2021 and and you know we can rest of the amount of time and energy and this relationships.
Really do any of you as an experienced.
<unk> of our partners brought arcs, so that the out of the box experience the sooner fixed for that it's a customized experience and there's and all of that that gets derive booked for us as well as for my partner and I use that experience of does it all the time energy and partnership that can on it really value of engineer.
And that the sofa and and these are exclusive of relationships as as it is with all of the moment providers.
Thank you.
I show and next question comes from the the line of Walter Pritchard from City. Please go ahead.
Hi, Thanks, just following up on the last question, maybe just the sort of brought in and out and just thinking about the new subscribers coming in and any breath split as to how many are coming in through the P. C channel vs. Other channels and and how that's different from past years, and then have the follow up.
Yeah, it's all sorts of Peter I'll I'll jump in and again the huge mad some color broadly speaking all of the channels are growing and all of the channels are adding to new subs, except for mobile which is growing and of really wealthy clip, but we don't count those new subscribers. So mcafee direct is growth the the P. C O M channel is.
The growth, the and adding and he tail and retail they're all contributing to.
To both new subscriber growth as well as the continued growth of the business and again the the mobile piece of because we technically don't on the relationship we don't count as new subscribers, but that's that's quite grocery as well so and she shed and any other color I may of missed.
Alright so.
Lord of art channels are you know of.
<unk> the entered in the sense of it all grew.
Growing and all of.
Minnesota and.
And the same way and.
Today for the group.
Book subscribers that comes in and the spot for arms part of on direct the consumer subscriber and and do the new that my Mcafee directly to a relationship with them, which is the that the bulk of of the subscribers are and I'd be the appointment on the mobile basically phenomenon of our partners really take us to the market and they are off getting to the subscriber base, which of the captive subscriber base.
Okay.
Great and then I can see the question just on the expense side, you know a lot of companies of scene I think COVID-19 reduce the travel and other expenses like if I quite a bit any any way you could give us a sense of as to how much and kind of of normalized world you might see the the expensive, especially on the sales and marketing thought of low maybe and other areas as well higher than than you reported.
Yeah.
And then kettle jumping.
Yeah, Hey.
Walter like every other company and I think we have seen some.
Some degree of of expense savings is the result of Covid right, but at the same time.
We've been fortunate to be able to invest in the in in real time collaboration and communication tools, where our employees, they're able to you know work remotely work.
Quite productivity, so going forward certainly depending on you know, what happens and and and and post Covid World. We we do expect some degree of pick up but.
But we do things and some some of the expenses that we were looking at our structurally going to be not the same which is I. You know we mentioned, we're taking the deep look at for instance, and kind of how much real estate, we we would need so we're gonna take a look.
Where we can for our employees can safely and productivity work that'd be a permanent structural shift and.
Certainly when the time is right we will invest the right amounts in the go to market and sales, but at this point I don't have a forecast to offer.
But we're pretty thrilled with the level of investments and we made an hour of back and infrastructure, so everyone's able to be working super productively.
Thanks Walter.
Thank you.
I sure. The next question comes from the line of Chow Leoni from Bank of America. Please go ahead and.
The guys.
The most of my questions.
Just one clarification on one of the bigger picture.
Sure.
And would you mind to discuss the other income and expense I see that though and and non-GAAP basis of jumped quite substantially this quarter what are the components and what should we how should we look at it for the future quarters and.
And my my my other question is more about the mobile outside and what I'm, what I'm wondering is.
And where are we with the awareness factor of consumers on more by the meaning I'm sure that some of your customers are buying at this part of the package.
Of the day bye for the home or for personal use and then they also apply to mobile and then you have also channels, where where are we with penetration what drives more awareness too similar solutions that we have on P. CS and laptops to mobile and on a standalone basis could it be a big market that drives up.
Revenues.
I'll leave the O R. E question for Vencat for a minute and quickly touch on mobile. So it starts once again with understanding of this market has changed I mean, there was the 71 per cent increase and mobile malware attempted attacks just the sheer alone. It is it as of realization on the part of cyber.
Criminals that it is not simply about getting protection for your device of your phone, it's pertinent data of that matters and most of us use our phones and the remote control to our worlds and that is really important because cybercriminals know that it's your banking information, it's health care of information it's.
Things that frankly have value to of criminal and that is becoming more and more pervasive. In addition to the fact that it's no longer this one dimensional element, where I O T from home and all of the home components V. P. And included become part of a broader aperture is ashish discussed. So this market is growing.
We feel very good about our channel we feel good about the fact that we have expanded that channel even recently and I would say just to summarize it we believe we're and relatively early innings in that sense.
And that's like all of our channels of good profitable growth channel that we see continuing for quite some time, and where and pretty early days in that sense and and investment and the series of of investments. We're very happy we're making so with that I'll turn it to Vencat for Hawaii and the fishy shows additional comments on mobile we're happy to.
Happy to double click I'm, just cognizant of the time.
Sure the the big the biggest you know impact in Hawaii for US was the affects the impact this quarter, especially you know on on the income state and was fairly insignificant, but you know, especially of the euro shrimp and we have seen some.
And the sheet unrealized remeasurement that we've taken that but overall effects on income statement and has been fairly and significant.
But.
The biggest impact we've seen the is the balance sheet of Remeasurement, which is largely unrealized ethics laws.
Thank you.
Thank you.
I sure. Our last question comes from the line of the team Bolani from UBS. Please go ahead.
Yeah can you and thank you for taking the questions Peter I want to start out with you with respect to the Amazon opportunity <unk> and referenced and your prepared remarks, and I wanted to take care of that and get that a little bit how should we think about and the router contours of this distribution arrangement and if you can shed light on and the type of economic.
Do you expect to see from this partnership and the last piece of that and the assertion correct that disturbed as of lands you into the the so how's the call. It small off the home office type segment of the market and and you should of how do you see that in packing your direct to consumer and shelving coming for work.
And.
You bet and let me preface it by saying, it's very early days.
We are looking at this with a similar lens to what we would provide for a consumer but a bit more we're not moving up into even you know the the I'd say small side of the enterprise type markets I do want to make sure. We we caveat related to segmentation, but this is the.
Small business offer.
For environments, the frankly need need help and it's a holistic solution as we discussed so for P C's and Macs and I O S and Android devices, and we're providing just very loosely flexible licensing options.
The small businesses can add up to 25 devices. They get things like 24, seven virus removal and a V or anti virus support V. P and so it's really packaged with them through Amazon as a partner for that segment of.
Of small and I'd say relatively small businesses that are not protected today and again, we're not factoring this in.
For example to queue for guidance or anything along those lines and.
It's it's an expansion for us, but we're we're sort of dipping our toe if you will.
And that's in and thank you one for you just with respect to the enterprise business I know billings is not necessarily and metric that you run the business against but I'm wondering if you can kind of talk us through some of the considerations within the enterprise billings profile of the business and maybe.
Some of the puts and takes that you're navigating within the enterprise and.
And you look at the doctor's like large deals and product next and and contact structures really appreciate color on that front. Thank you so much.
Yeah, No absolutely you know just a couple of points the note with respect to enterprise.
As I pointed out I think we tend to so some of the largest enterprise customers and governments across the globe.
And the east tend to be large complex, you know hybrid environment and.
And we seldom abroad portfolio of products with wedding tons of it could be one of your it could be five years.
And no do you know to deal for alike. So this variability and transaction makeup.
You know from quarter to quarter produces some degree of Lumpiness.
Entitlement explanations, which which then translates do lumpiness and our buildings and therefore it makes it makes it hard to draw conclusions from a single quarters.
Billing scruggs.
The the more interesting metric to look that kind of normalizes all of the buildings Lumpiness for this is net revenue as as you look at the or multiple of quarters and then the second thing I would also note is as I mentioned, we're increasingly moving towards.
Subscription type of software and and subscription type products, whether it's in our and point of the clouds security products. There is a positive and mixed shift and revenue in line with our strategy. So combined both the the those too we don't you billings as of good measure and.
Especially and one of the things for you to consider is the revenue with from these core customers.
Which is over 80 per cent it actually and stop point this quarter. So that's that's a good way to look at at the end.
The price revenue going forward.
Thank you.
That concludes our Q&A session at this time and I would like to turn on the call back over to them and Peter leave C E O for clothes and comments.
Great day, Thank you all and and thanks for joining today's call, we hope everyone stays healthy and safe and and we look forward to update and you again next quarter. Thanks a lot.
Thank you, ladies and gentlemen, and this concludes today's conference call. Thank you for participate and you may now disconnect. Good day.
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