Q3 2021 NortonLifeLock Inc Earnings Call
Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily, but are you skipping it just standby and thank you for your patience.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily. Please from being at the standby and thank you for your patience.
Yeah.
[music].
Good afternoon, everyone. Thank you for standing by my name is and that will be your conference operator today I would like to welcome everyone wanted and Norton Lifelock fiscal 2021 third quarter earnings call. Today's call is being recorded in all lines have been placed on mute to prevent any background noise. After the speakers' remarks.
And there'll be a question and answer session. At this time for opening remarks, I would now like to pass the call over to and this is Mary Lai head of Investor Relations Ma'am you may begin.
Thank you Anne and good afternoon, everyone welcome to the Norton and Lifelock fiscal 'twenty 'twenty, one third quarter earnings call. Joining me today to review our results are been simple at CEO and Natalie DARR C. CFO as a reminder, there will be a replay of this call posted on the IR website along.
Our earning slides press release and supplemental materials to finding our non-GAAP metrics and.
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 Dot and Norton Lifelock Dot Com today's call can.
Pain and statements regarding our business and 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 current beliefs assumptions and expectations and speak only as of the current date for more information. Please refer to the cautionary statement and our press release and the risk factors and our filings with the SEC and in particular, our annual report on form 10-K for the fiscal year ended April three two.
'twenty and recently filed quarterly reports on form 10-Q and.
And now I will turn the call over to our CEO Vincent. Thank you Mary and good afternoon, everyone. I Hope you are all safe and well.
As we embark on 2021, I think it's important to recognize the sense of uncertainty and the ongoing challenges that we all face is individually or as a society.
Despite the social economic and health issues, we are facing I'm hopeful that collectively we will emerge stronger and more United.
I've known and Lifelock, the safety and well being of our employees is our utmost priority and I want to thank each and every one of them for facing all those challenges while continuing to show a deep commitment to drive our vision of protecting and empowering people to live day digital life safety.
And what has happened since our last earnings on top of delivering another solid quarter accelerating our growth and adding some exceptional talent to our team and our board. We also are proud to have been recognized by the human rights campaign Foundation for earning a top score on the 2000.
'twenty, one equality index.
We are proud of the diverse backgrounds represented by our entire team and known and lifestyle and we remain committed to building and cruises company, we know that delivering on that vision cannot happen without a committed talented and diverse team.
In December we announced Lifelock first acquisition.
Now that the deal has closed we are excited to welcome and U S employees customers and partners to the northern family.
We are really excited by the opportunity to provide a eros 30 million users and over one 5 million paid customers and the benefit of the newer interest of euro offering.
Together, we are now privileged to help protect over 80 million consumers globally, as we embraced and pointed responsibility, we have and securing the digital lives.
We are also quickly working to leverage our strong presence in Europe, which now also includes Bulgari a U K based cyber security company that added.
Added to the business last year.
On top of extending our reach deeper into EMEA, and we look forward to adding of U S and book guards capabilities to our portfolio.
Before I dive into Q3 results I wanted to revisit two key post transition commitments. We previously set as a standard on northern lifestyle company.
From returning to a growing customer base, our first since 2014 to delivering over 1.5 dollars annualized EPS I'm proud to say that we have established a company on the trajectory of sustainable and profitable growth.
We are the strongest cyber safety company today, 100% focused on protecting and empowering consumers to leave their digital lives safely.
While we are proud of these achievements, we know we have a tremendous responsibility to deliver a portfolio that stays ahead of cyber criminals.
We don't take this lightly as we innovate and work to keep our customers save and we knew that it will be transforming our company for a richer portfolio and expanded consumer reach and we're just getting started.
In Q3, we delivered solid growth and accelerated our momentum revenue was up 6% and non-GAAP EPS grew 52% reported billings growth was 10%.
First quarter of double digit growth.
We are closing the fiscal year out strong and more importantly, we're well on our way to creating a meaningful and sustainable growth business.
Leading the growth momentum our partner business posted double digit revenue growth up 15%.
We did it was strong in the quarter performing well through E tail and during the holidays.
Internationally, Japan was particularly strong as it relates to identity theft protection solutions, such as dark web monitoring and idea advisor sold through partners and retailers.
Finding the right opportunities and markets to build and expand these long term partnerships is one of our key strategic focus areas to broaden our reach and bring cyber safety to more consumers in Underpenetrated markets Steve.
Got you and for more developments in this area as we continue to transform the company.
Our direct to consumer revenue, which represent the majority of our business was up 5% we.
We saw broad based growth across the portfolio as well as strong performance through the holiday season.
While our North America business is considerably larger than the rest of the world. The international growth rate continues to show strength and outpaced the amerigas.
In the quarter and direct business grew double digits across multiple countries, including Germany, France, Australia, and New Zealand, where we have recently and it's dark web monitoring into a new one and 360 offering.
This is part of our strategic push to expand and northern I'd, many products internationally and bring more comprehensive cyber safety offering two international consumers, we definitely have moving to grow here, especially with the synergies and extensive global reach and we will be leveraging with the bureau, and the freemium model.
Yeah.
In Q3, our direct customer count grew over 300000 and sequentially and close to 900000 year over year, bringing our total count to 21 million.
This was our fifth straight quarter of net direct customer adds sequentially.
Customer retention rate remained stable at 85 per cent.
Our industry, leading monthly ARPA average revenue per user also remained strong at $9.
Both metrics are strong indicators that our current customers see the value of our products notwithstanding the effect of tenure and geographical mix, we continue to see opportunities to improve our pool as we enriched our cyber safety value offered to our customers.
And to improve retention rates, especially in the early years of the customer journey.
One of the key contributors to our customer count growth and retention success continues to be the known and 360 integrated platform. The first truly integrated cyber safety offering in the market.
At the end of Q3, approximately 60% of find stall base are using Norton 360.
This platform is designed to provide a comprehensive protection, while driving higher customer engagement.
This level of adoption shows that our approach to provide and easy to use platform and comprehensive protection through a membership model with and its well with our customers and we're working hard to continue bringing new functionalities simplifying the membership plans and constantly improving the user experience.
Yeah.
The combination of known and 360 platform, our international expansion efforts and our strategic shift to new forms of digital marketing is working and bringing cyber safety to new customers.
Looking back and the last 12 months with welcome approximately 4 million new customers to northern Lifelock, the majority of which was on the one and 2016.
We are seeing early improvements in renewal trends with these newer customer cohort, we're engaging with these customer differently communicating with new alerts measuring what works what doesn't and we're able to scale product countries more effectively through our in house E Commerce platform.
And the heart of all of this it's our technologies and accelerated pace of innovation that enables us to be nimble and bringing new and incremental value to customers.
Sometimes we may run the risk of feeling fast, but the reward is that we learn even faster to translate that into success as we move to own the consumer cyber safety category.
With the ever expanding scope of cyber crimes and the acceleration of the numbers of attacks that we've all witnessed in the news. We know it's critical to focus on product and service innovation to help keep consumers digital lives saved and to raise the overall awareness of consumer cyber safety.
Ross all audience.
We plan to continue to release new products and features at an accelerated pace that we have not achieved in years. Let me tell you about a couple of them launching Q3.
As part of our global expansion efforts, we successfully launched Norton idea advisor in Japan powered by Lifelock.
Here, we specifically targeted retail and service providers to reach new audiences and increased awareness on the value of dark web monitoring.
One of the Differentiators in this product is the access to a dedicated idea was duration specialist a Japanese speaking service agent to help resolve fraudulent claims from start to finish.
Another example is our enhanced known and 360 mobile experience, which provides customers access to day device security online privacy and identity features through one single easy to use and making it easier for customers to access and manage their day cyber safety tools from one dashboard.
And this is another example of our commitment to bring a richer and simpler experience to consumer cyber safety.
Looking back we have demonstrated our continued commitment to grow the top line drive disciplined operating leverage and pursue value creation for all stakeholders. It's.
It is important to me and our entire leadership team to build credibility and a sustainable and growing financial track record.
It's also worth noting that behind our strong third quarter performance you will find a very passionate team working hard to fulfill our vision to protect and empower people to live their digital lives safely.
We think customer first we innovate and grow with crappy, we own it and we open we are attending these are the core values, we live by and making the world Cyber safe is what inspires us.
Finally, before I pass it to Natalie I'm excited to share a little more detail on our recent additions to the board shall we Smith is vice chair and partner at Paul Hastings, a prominent global law firm. She brings extensive international experience and data privacy and cybersecurity and we'd respond to issues.
Similarly, Emily Health Rocket Science, Chief Trust and Security Officer brings significant experience in information security data privacy. In addition to being a key contributor in creating consumer trust to digitally transform and industry.
They are both passionate and accomplished leaders while already valuable member of the board team.
And now let me turn the call over to Natalie for more details on the financial results.
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 Q4.
We delivered strong performance in Q3 with growth year over year and quarter over quarter across our key metrics.
Our Q3 revenue was $639 million up 6% year over year and above the high end of our guidance.
And we accelerated reported billings growth to 10%, including a two point positive impact from FX and our ending contract liability balance.
Our growth momentum was driven by broad based strength across all geos and products as well as a successful holiday season.
Our total direct customer count increased to 21 million, adding 334000 customers quarter over quarter, and 876000 customers year over year.
This was our fifth consecutive quarter of net customer adds sequential.
Our customer retention rate of unit retention metric remained stable at 85%.
Our monthly average revenue per user or <unk> was over $9 this quarter up 1% year over year and stable quarter over quarter.
As we continue to grow our customer base. It is important to note that our first year of <unk> and retention rate for newly acquired customers is generally lower than our total average.
As we explore new business models and add more customers globally, our <unk> can vary as our mix changes.
We will look for opportunities to improve our pill and first year retention as we continue to grow and diversify our business.
We are still and the early innings, but our go to market efforts are beginning to take hold.
We are leveraging our distribution channels to reach more customers globally.
We accelerated growth and our direct business and Q3, driven by our growing renewable base.
As we continue to add new customers, we are seeing positive data points and retention directly correlated with our Norton 360 membership suite.
As we have accelerated the pace of our innovation and launch new and demand products and features we are beginning to see improvements and our cross sell and up sell efforts.
And we have the opportunity to accelerate further as we expand our reach to new audiences and continued to foster growth and our loyal customer base.
And our partner business Q3 revenue grew 15% year over year.
We continue to make strides internationally and signing new partnerships that we expect will scale over the long term.
As we have noted in previous conversations these partner sales cycles are longer taking one to two years or more to realize.
We continue to invest and these partnerships for the long term as they are strategically important for us to expand our reach.
Next Q3 operating margin was 51%.
We remain focused on driving operational discipline, and prioritizing investments and product innovation and diversified marketing.
With R&D, we continued to accelerate the pace of product introductions.
Rowing and expanding our product portfolio, and providing and increasingly differentiated value proposition for consumers.
With marketing, we continue to invest to drive new customer acquisition as well as diversify our spend into more digital.
And international channels to help widen our audience.
Measuring and Ah and ensuring effectiveness along the way.
We are disciplined and our approach and we'll continue to invest and sustainable growth.
Q3, net income was $229 million up 44% year over year.
Diluted EPS was <unk> 38 cents for the quarter up 52% year over year and at the high end of our guidance range.
We are now operating above the $1 50 annualized EPS level.
And have established a strong foundation to build upon.
As we look to the future we will continue to prioritize EPS expansion well, taking advantage of the sustainable growth opportunities.
Turning to our cash flow and balance sheet.
Q3, operating cash flow was $293 million.
And free cash flow was $291 million.
For a few quarters now we've been generating more than $900 million and annual free cash flow excluding stranded costs.
We ended Q3 with over 1 billion and total cash and a $1 billion $1 billion of Undrawn revolver capacity.
We continue to have a strong liquidity position and our levered at approximately two times net debt.
Yeah.
Now a quick update on our real estate assets held for sale we.
We see a lot of activity and interest and each of our properties and recently agreed to terms for the sale of one of our buildings and mountain Dew.
The buyers are expected to complete their due diligence and our fourth quarter.
While we've seen a lot of interest and continue to be and active discussions on all properties. We remain focused on achieving fair market value for the remaining assets for sale in mountain view, Dublin and Tucson.
Let me spend a few minutes specifically on capital allocation.
In Q3, we returned approximately $207 million to shareholders in the form of a regular quarterly dividend and share repurchase.
In the quarter, we paid a dividend of 12 and a half cents per common share.
Despite the limited open trading window, we were active in the last month of the quarter and deployed $133 million and purchased 7 million shares.
As of the end of Q3, there was approximately $420 million remaining and our $1 $6 billion share buyback authorization, which we expect to continue to deploy opportunistically.
As described in the press release, the board of Directors approved a regular quarterly cash dividend of $12.05 per common share to be paid on March 17th 2021 for all shareholders of record as of the close of business on February 22021.
Before I move onto our Q4 outlook, let me provide and update on our Bureau.
As you heard from Vincent we closed the acquisition of Avera and January which falls in our fiscal fourth quarter.
While it is early the integration process is well underway and on track to plan.
As a reminder, we expect to add approximately three points of growth to our total revenue.
And be financially accretive and the first year targeting to achieve 50% operating margin post synergies within six months.
Now turning to our Q4 outlook.
We expect Q4 revenue in the range of $655 million to $665 million, which translates to high single digit growth year over year.
We expect non-GAAP EPS to be and the range of 37% to 39 per share assuming stable currency rates and share count dilution from Q3 buybacks.
Our Q4 outlook includes the partial impact of avera.
As we enter the last quarter of our fiscal year 2021, we are proud to have achieved all of the long term commitments. We set when we stood up Norton lifelock, including revenue growth of mid single digit.
Operating margin at 50%.
Generation annualized free cash flow of more than $900 million.
And and annualized EPS of $1 50.
Achieving all of those is a true testament to our renewed focus on execution and building a consistent and sustainable track record.
We look forward to closing out the fiscal year strong with accelerating momentum and.
Scalable Foundation and we're excited about the tremendous opportunities ahead.
Thank you for your time today, and I will now turn the call back to the operator to take your questions.
Yes.
Operator.
Yes, ma'am and we wanted to ask a question you will need to press star one on your telephone keypad, we will allow one question for each participant in the queue and.
And we'll pause for a moment to compile the Q&A roster.
Our first question comes from the line of Gregg Moskowitz from Mizuho. Your line is open.
Alright. Thank you very much good afternoon, guys, congratulations and good Q3.
So so fits and you've invested a lot more and marketing over the last 12 months and it seems pretty clear inclusive of these results at your that you've already seen a really good yield and those investments. So looking forward how much more room for improvement do you see with regard to driving traffic to the site and increasing monetization.
Yeah, and it's important to note that your marketing investment is never done in a vacuum right. We've also launched nor and to a 60 or you and the half ago, we introduced a bunch of new products and new functionalities into our overall portfolio and we started to accelerate the spend or at least the penetration of certain international markets.
And I think as we continue to play on all three levers, including the marketing spend if you want.
We'll be able to continue to show good growth and with the acquisition of five year actually maybe and accelerated growth as we move forward.
Alright, perfect and then you mentioned.
And your prepared remarks that you are seeing early improvements with newer customer cohorts and that's interesting because typically that first year renewal rate is of course and first year renewals of course, the most challenging.
So my question is you know your retention has been extremely stable at 85% and.
I know, it's early but given some of the improvements that you're seeing is there potential to to get that retention higher.
And I think it's still early as you mentioned, the first year and the Cig and your retention is where we have the most improvement to achieve if I look at the out years for those two items in the full portfolio. We achieved the 90 plus percent retention on a unit basis and so we see the full potential between first year and that 90% is the.
Proven needed.
It has many different operations, increasing the engagement and showing the value, adding new functionalities and.
The results I mentioned is mainly on loan and 361, who have the ability to shore.
Cross category value <unk> to the users we have seen better retention rate in the first year than standalone product and still early to say right. We're still in the early phase of renewing the the early adopters have known and 360, but we're very encouraged by our by what day number sure.
Alright terrific, Thanks, and maybe just one quick one for Natalie so.
The billings growth of 10% reported 8% constant currency I just wanted to confirm that none of that includes of Euro and then also how much of a euro is sitting in deferred revenue as of June 31. Thank you.
Yeah, Yeah. Thanks for the question just really quickly avere is not in our Q3 results at all and so whether you think about growth and you think about the liability balance any of that and it's not.
And to be and our financials until Q4, okay. Even though it was closed at the end of January its not fitting and on the balance sheet at all is that right.
That's correct, Okay fantastic thanks for the clarification and nice job.
Thank you.
Your next question comes from the line of socket <unk> from Barclays.
Hey, guys. Thanks for taking my questions here and and congrats on the quarter.
Thanks.
Sure Vincent.
Maybe first for you just maybe zooming out a little bit.
Can we just talk a little bit about our bureaus freemium business model and sort of how you see that complementing what Norton currently offers.
Yeah, let me zoom out even one more with.
We definitely see more and more consumer moving the activities on line. The pandemic has on the accelerated that moving and and I think a lot is here to stay along with that as you know a cyber criminals are adapting and we've seen and increasing activity theirs and the awareness from a consumer standpoint to have a cyber safety protection is more relevant than ever.
We feel good about where we are as a company both investing as we discussed organically and Inorganically, we have a platform. The cyber safety integrated platform, we've launched Nolan and 360, covering three pillars security privacy and identity protection and restoration and.
And then along with that we said, we're going to continue and accelerate the growth by doing three things one is accelerating our penetration of international markets. The second one was two.
While we double down on a direct to consumer growth.
Go to market model explore new go to market models partner with companies like tell us to penetrate Canada or explore new business models. Obviously, a membership plan was the first in the market for cyber safety will continue to build on that and the third one is adding new functionalities. We came we saw tied on et cetera when I.
Take those three dimensions and viera plays in all three expanding internationally and beauty, the very strong and Europe.
We were and number three market share in Germany with a V. Rod we moved to number one and we accelerate our growth across western.
Europe and.
Zero to penetrate internationally, many markets will be different and asset the second one which you mentioned, which is a free model going to market in different ways is very important we have the direct to consumer and a premium model. We are doing b to b to C activities and trying to bring combined solutions to consume.
<unk> the free model for US is just one more tool in our toolbox as function of these could become more commoditized, we can have and offer them our first.
First access for all consumers to cyber safety using some of those in a freemium model and then using the muscle of cross selling and up selling and converting to the full portfolio over time, so it's a way of acquiring those.
And I bought if you want and experience around cyber safety to then later one demonstrated that.
And that value without spending more in marketing and the third element is they had a few nuggets and the technology. They are a very nimble and creative engineering teams and Theres. Some functionalities like we mentioned the gaming booster functionally from Borgata and we can integrate into our gaming editions of Norton 360, so well.
And you to look at and deal with capabilities from a portfolio perspective to enrich our overall expense so thats how <unk> plays into.
Into our growth moving forward.
Got it that's really helpful. Maybe from my follow up for you Natalie great to see the uptick and net adds this quarter I guess the open ended question is was there anything on on conversion rates or renewing cohorts and then it sounds like the renewal rate was maybe a little bit better but was there anything that surprised you and especially looking at the net adds.
Last quarter versus this quarter, what sort of changed as you look back at sort of the tea leaves.
Yeah. Thanks for the question. So look we've we've seen consistent customer adds.
You know five quarters in a row, if I take a look if I step back and take a look at just this fiscal year.
600000, net new adds and the first half now 300000 and Q3.
And with growth across the board you know across geos across product lines.
And positive contribution from holiday.
Now to answer your question around renewal and conversion, yes, we are seeing early improvements and our renewal rates are related to our new.
Customer cohorts.
And now look it's early but I would say the Norton 360 platform is definitely helping us its gaining good traction with now.
And now nearly 60% of our base.
And so all in all of that is helping us sustain that strong 85% overall retention.
Got it very helpful. Thanks, guys.
Thank you.
Our next question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.
Hey, Brad great. Thank you, so much hey, Vince and congratulations on a great quarter.
And to the team as well I wanted to just touch on international a bit more it's it's nice to hear about the success that you're having in Japan, and and I was hoping you can just better help us to better understand the international opportunity broadly away from the freemium.
No assets that you get with the Viera, obviously that gives you a lot more reach and in which theaters does the value prop translate best you know where might there be just too much competition and and how should we think about the cost of reaching these markets yes.
Yeah, you know what when you think about international and 70% of our business is still in the U S, 30% International and so when you look at the the geographical mix of the overall market. It is clear to see that we are underpenetrated internationally. So from a from a core security first entry point, if you want.
Zero I will definitely be a strong health, but where we add a real differentiator is when we bring our expertise and privacy and identity management and restoration from Lifelock and make it in the form of and international proposal, which was always the intent when.
We bought Lifelock, but was lead to come as we were trying to find the first angle with dark web monitoring, which is really protecting you multiple digital identities that you'll have out there.
We see a lot of very good and positive feedback from consumers and so now adding to that dark web monitoring activities.
And the restoration and helping the consumers to restore claims when there is some is definitely also a value add and a differentiator I think that opportunity to push northern identity International.
His broad across many countries and we will start with the Big one Japan was the first one where we've got real well, which we expanded into Australia, and New Zealand, Germany U K touching France, and we will continue to penetrate actively all of the the interesting market.
Thank you that makes a lot of sense and maybe just a follow up for Natalie <unk>.
Specific to the <unk> deal can you share with us when exactly and January did it close just so we can understand how much of a contribution it might have this and Q4 and and going forward and as well whats assumed in guidance in terms of contribution and and and if you can speak to the deferred write down what what's the mix of duration and their.
Yeah. Thanks.
Yeah, the the Avere deal closed on January eight and so.
Yes, that's when it closed in terms of the guide we definitely have partial impact of avera and we have shared with you the contribution on revenue.
Just from a from a growth perspective, and then from a from an EBITDA perspective.
Will we have folded them in and we'll look to really drive the business hard to get the synergistic savings we've communicated to you over the over the over the next six months.
Okay.
Okay. Thank you.
Okay.
Your next question comes from the line of Fatima <unk> from UBS. Your line is open.
Every month.
And this wasn't about you might be on mute.
Hey, sorry about that.
And maybe I'll start with ease and St.
And just with respect to the euro and some of the things you mentioned in your prepared remarks around maybe introducing some norton lifelock functionality into that base I know you've been very categorical about keeping a premium brand premium and U S. E. R. S freemium brand premium and so I'm curious how do you bridge that gap.
And with some of the goodness of the Lifelock capability without diluting the pricing power and the branding around Norton Lifelock and then I have a follow up for Sally Please.
Yes, and and you know the great news with our business digital business and we can run a lot of experiments. So we are not concluding yet from a brand perspective.
But definitely there is a way to get new consumer are or address consumers on the freemium model, which has certain functionalities, mainly commoditize provided value, but commoditized and then it's about adding the pass for Upselling and cross selling the different function and functionalities that today are either differentiators.
Or offered at a premium to the market and as we discussed our long term success is based on that pace of innovation, introducing new function and all the time as cyber criminality is evolving we continue to increase the overall level of protection for consumers.
Dark web monitoring to restoration services focus and privacy identity and all the next level. We obviously have a very rich funnel of new ideas that we're working on.
And and so the premium is one way if you want to get the first access to them.
See more closely the value of the overall portfolio.
For the short term as you mentioned, we're going to keep a view as separate as one Brian and noted on the other side, Bob usually we testing different when Tim up off of branding.
Fair enough and not only maybe shifting gears to you are around the strength in the partner segment of the business.
You gave some very helpful color around you know these partnerships take longer to get off the ground and it's an area of investment for you, but I am wondering what how we should think about some of the key drivers of strength this quarter within the partner business and what are some of the largest component in the partner business that we should be thinking about.
Going forward and that's it from me. Thank you.
Yeah. Thanks, so from a partnership perspective, it's pretty diverse we've got we've got.
A lot of different channels within the partnership business.
Overall, we grew 15% year over year and.
And we saw relatively broad based strength across all of those different channels.
The one that we are really.
Very excited about and really plays to our strength as employee benefits and.
<unk> benefits is.
Really is there is a great distribution channel that widens our audience, but brings users very close to.
Very close to our book of business as we have their direct relationship with with with those with those users or those customers and so we're really really excited about that but overall for the quarter. Just overall, just generally speaking broad stroke growth across the partner side.
Okay.
Very helpful. Thank you so much.
Okay.
Our next question comes from the line of Matt Hedberg from RBC Capital. Your line is open.
Yeah. Thanks, This is Matt Swanson on for Matt Hedberg.
Not really if I could just follow up answer team. His question I would think Q4 is going to tend to be the strongest quarter for that employee benefits segment could you just talk a little bit more about kind of the trends that you're seeing this year from metal.
Yeah, I would say aye.
I hear you on the timing and terms of course, we've got to figure out from an employee benefit calendar. Most people really get started understanding what partners, they're going to do business with et cetera, as those annual enrollments come come later and later in the year.
So we are definitely working hard the employee benefits channel for us has been pretty consistent.
We have been really working across the employee benefits channel.
And to gain more partners and to really get our Norton 360 <unk>.
<unk> proposition out there and really get the education and the audiences widened through the employee benefits channel and then as we look forward again just to reiterate we love This channel and we want to make sure that we are working with the with the partners and the right way there is a lot of different size and types.
And of partners that we can go after from a growth perspective.
And we're just really excited to take advantage of the opportunity, but you're right. The time is now I mean, and you really have to pay attention to windows employee benefits and you'll enrollments are so we're trying to get after it for sure and <unk>.
And if I can if I can add to that thinking back outside of the channel Q.
Q3 traditionally has been more of a non core and then Q4 has been more of a lifelock quarter aligned to the tax season in the U S where most of our business is protecting identity. So from that perspective on the identity side here coming into this quarter, we expect a very strong strong quarter building to net that is guidance.
Now we also are closing viera and doubling down on Nord and identity internationally. So that's not linked to the tax season, but it is definitely new areas, whether it's markets or.
Product positioning if you want for us to continue to.
To accelerate our growth.
That's a that's really helpful and then Vince and obviously, maybe not the first security company and when you're thinking about your core customer base as far as impact from sunburst, but when a major breach like that as you know front page news all over the place what do you think that does the demand environment just in terms of kind of mind share and aware.
And as you know being front and center for consumers around security and breaches.
I think your door and ride. The first level is continue to increase awareness and I can tell you. The highest retention rates is when we have customers who have been breach and we held them restore.
And what they've had and their customer for a long long time and then the rest it's about really building up the awareness that is not just.
Breach of your old data or your devices, but it's breach of your personal data and access to your.
As as and identity, if you won or digital identities now and I think.
It seemed and dependent when more activity move online as we mentioned with that cyber criminals are adapting and have a wider scope to play in.
And it's upon us.
As a company known and Lifelock to continue to build a portfolio to share the relevance and staying a step or two or three ahead of those risk let consumer fees.
Thank you for the time.
Our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.
Excellent. Thank you guys for taking the questions.
Hey, most of my questions and answered just a couple of clarification questions. If you will.
In terms of ARPA is there any significant differentiation between like the international average our crews and and the U S that we should be keeping in mind that on a go forward basis.
Yeah, I think that the.
The value perceived value markets, obviously changes the value perceived by also the pillars that you subscribe to into a membership level also changes right. So if you are a norton 360 level three customers that has most of the security password managers.
VPN access it's one Levered off book, you add identity protection and if you add identity protection and restoration, Dr. Paul will grow and therefore from that perspective, lifelock being mainly and the U S. We are getting a higher ARPA in the U S and and then as you move into Western Europe, we start to add some of those.
And he protection and restoration, so we're able to grow our book, although it is less than our aggregate and then if you move into a more international closer to emerging markets and will have lower Apple. The way. We think about it is really about a set of all combined leveraged by cohort and by market. So in aggregate, who may have pressure on the non <unk> retention rate.
But as long as we continue to grow more customers and by cohort or by markets continue to improve the value we deliver to customers, we're moving into the right direction.
Got it got it that makes sense.
And then.
And of your.
And for Q4 explicit fee is it three percentage points of growth in Q4 or did you not give an explicit number for the Q4 contribution as of yet.
Yeah. So overall the business will contribute on an annual basis at about three bonds from a revenue growth.
75, and how should we think about Q4 and particular in terms of contribution, yes, and net that he mentioned and we close.
And the early months of January its not every quarter exactly the same day or sorry, a bit of seasonality, but if you model. It you are somewhat in the same level.
Okay got it.
And that helps a great quarter guys. Thank you very much.
And.
Yes.
Our next question comes from the line of Walter Pritchard from Citi. Your line is open.
Hi, two questions.
Hi, How're you doing Vincent.
Question for you on the product side, one relative to the mobile product can you update us there on what youre seeing on phones, and tablets and conversions and how youre thinking about that strategy as you move into next year and then a lot of focus here on the channels and benefit channels and so forth run identity I'm curious if you've.
And as you've sort of put the marketing dollars into the channel into direct channel how you've thought about some of the device attached channel of Pcs and other things that might attach traditional sort of security sales and.
Circling back on those markets as you've understood customer acquisition here better Yeah, Let me take the product.
First.
Politically and we're just a question again on product.
And our mobile and mobile yeah, Yeah, I'm, sorry, sorry, yeah, yeah, yeah, yeah, so so mobile very important.
User experience right and we acquired through multiple channel I know in the past as security started on the device than on the desktop and then move to and laptop and then move to a mobile I get very often the question of do you need security and new cell phone for example, and the answer is we've moved to a user centric view.
<unk> cyber safety, which include security, but also identity and privacy and we see a lot of our customers using their cyber safety dashboard and tools, both on desktop and on and on tablet or cell phones and therefore.
Mobility from a user experience perspective is hugely important to us simplifying that ex parents as we continued to enrich the value is also a core element of our of our investments. So you will see more of on simplifying making cyber safety easy to to use to consume and giving consume.
Full peace peace of mind.
In terms of the channels.
You know, we have a direct to customer and I'll pass it to Natalie <unk>.
And we have a second angle, which is partnership is very important for us to continue taking that user perspective to work on b to b to C offering combining our value add with other offering to provide full total protection to consumers depending on their situations.
And and I think that's the one we approach it's not only <unk>.
<unk> device hardware centric world, but it's really a user service centric world that we're taking is an approach that and I don't know if you want to add anything on yeah. I was just going to add look at from a customer acquisition perspective, we don't necessarily plan to the eyes of just a lifelock versus Norton and I would say, it's about reach it's about expanding audiences.
It's about doing it and an effective way and efficient way so from a channel reach perspective, we focused and the last year really trying to diversify of course, historically, we've been more and the long form TV and radio we've been diversifying into online digital channels. So that we can get really relevant and interesting content out there we can do.
<unk>.
The users that are that are coming to our platform. We've got really really strong brand awareness. We've got brand strength that we will continue to leverage and strengthen and the market as we diversify and and really try and attract new customer acquisition as well as get the word out there on all of.
And our product innovation and our product introductions as we build and strengthen the Norton 360 sweep.
Yeah.
Great. Thank you.
Next question is coming from the line of Keith Lee with Oppenheimer. Your line is open.
Hi, Thank you for taking my question and congrats on another strong set of results.
And as pointed out this thing on Natalie.
Just on the capital allocation front.
In terms of the free cash flow because my way is now about $2 $50 million to $300 million. Each quarter was wondering if you could just remind us on the capital allocation plans and they said like any any areas that you look to further invest and I know you just went through the other acquisition just wanted to get your heads around how to spend this.
Cash and.
Cash flow generation.
Yeah. Thanks for the question and I'll get our capital allocation strategy remains relatively unchanged and what I mean by that is we have said we are we have been for the last couple of quarters has been on track to generate $900 million of annualized cash flow.
And from a capital allocation perspective, we've talked about three main tenants. The first one being the dividend, which we paid the regular dividend and the quarter and then.
As we progress we said we would strike the right balance approach as it pertains to opportunistic share buyback and acquisition and so the actions in Q3, I think speak for themselves in terms of if you look back and you think back to new approximately November.
And.
All things considered now you guys know why we didn't necessarily.
We had the acquisition activity going on.
And as our trading window was open.
And we Opportunistically bought shares.
And the share buyback to the to the extent of $133 million and so as you as you take that into account high say do ratio in terms of leveraging and maximizing the value of our capital allocation tenants and you look forward.
It is going.
Our strategy remains unchanged, we will continue with the quarterly dividend and then strike that right balance on opportunistic share buyback, but we've not been shy to say that we are interested in M&A activity, especially as as we look forward and look for those sustainable growth opportunities.
Thanks for that and maybe just one quick one and two.
Total like areas that you intend to look at.
I know Theres up international opportunity you can tell the gaming up too, yes fall like this and like just.
Chuck.
Has there now like which area of focus net.
Yes.
Yes.
It all started with a vision right and we want to both protect and empower everyone. That's connected to the Internet to leave day digital lives safely and that's our vision and that gives us a wide range.
Opportunities to fulfill that we have not fulfilled yet.
And so when when you look at our overall strategy I would say number one is continue to scale up the cyber safety platform three pillars today security privacy and identity and building that up as.
As we continue to do that adding digital services that address the division is very important and we'll continue to do it increasing into the gaming verticals and with new functionality is now integrating some of the book got function and is that a really interesting and.
And so we have a long list. If you one of the opportunities that we are we are working with our engineers and our product people and and the third element of course is to continue to expand outside of the U S to be a truly global and recharged every one to five been connected to the internet that have a have a digitally.
<unk> on line.
Thanks for that and in other words.
Yep.
The next question will be coming from the line of Gregg Moskowitz with Mizuho. Your line is open.
Okay, great. Thank you for the follow up and first of all apologies from earlier of Euro Billings related question, you know somebody simultaneous earnings call somebody January ending quarter. So got thrown for a moment per but I did have a follow up for Natalie so.
I know that you are a data driven executive just given your background and now that you've played and this seat for several months I guess I'm wondering are there are opportunities to leverage data and the way that you think is translating or potentially could translate into more business for for Norton and lifelock.
Oh, absolutely I would say and I don't know how I would answer that question no. There. We just have opportunities everywhere I think from a from a.
Our value and culture of putting the customer first and we have so many opportunities to to use analytics to get closer and closer to the customer and understand their behaviors understanding their needs and wants and and and how we can serve.
That the best.
If I get into specifics of course, we will continue to build out our marketing analytics.
Every day, but it's not just in a silo and I think about marketing analytics, I think customer analytics and it's about making sure that we are at the very top of the funnel expanding our audiences in a diverse way and an efficient way and making sure that we've got.
The content.
Out there that really showcases our value proposition everything from the expanding Norton 360 integrated platform and a suite of products that Vince and has talked about.
And whether you talk about where you're at in in the in the in the funnel in terms of whether your brand new and we need to.
Explain the value that we can bring to consumers globally.
Or if you are and existing customer perhaps on the security side and we can we can find ways.
Two to share the value we can bring to your life from a from an identity perspective theres just so many opportunities to just get to them.
And as close to the customer as possible understand where they are and their journey and in their life and really use data analytics to predict.
And how we can take that next step in the customer journey.
There are so many out there are so many opportunities to build that out alright.
Alright, that's great and Ali Thanks, very much.
Operator, we have time for one more question.
And that question will be coming from the line of Shaul Eyal with Oppenheimer. Your line is open.
And Keith so much for squeezing me in.
And in addition to ease up prior question Vincent and I.
More of a technology related question I think also it is related to your Japan launch.
When I look at your north and the idea adviser.
And in your solutions associated with the gaming industry.
And there's definitely plenty of dark web capabilities are these capabilities homegrown.
Do you actually use your own sensors and the dark web or was it facilitated through some third party. Thank you for that.
So we have.
And as Lifelock had a mix of integrated third party technologies and on algorithm and that builds on top so it's a it's a mix of the two and we'll continue to build upon that to offer it not only in Japan, but across all countries someone was asking hey, if you launch it in Japan and why.
And you're launching all countries internationally exactly for that reason because he wanted to adapt your data architecture, you sensors and your approach to the country and the data that's relevant in each country and so we're taking a country by country approach to build up the.
And the solution.
Thank you.
Thank you.
At this time and there are no more questions I will turn the call back to Vince.
CEO for closing remarks.
Thank you and the overlap between the physical world and the digital World continues to grow.
More and more activities are moving online from shopping to socializing almost every aspect of our life as a digital component.
Unfortunately, many of those activities are left unprotected a weekly protect it at best leaving many doors open for cyber criminals.
Our vision is to protect and empower people to live their digital life safely and.
And while we have already accomplished a lot since we launched Norton and Lifelock over a year ago, We're just getting started.
We plan to leverage our leading technologies and integrated product portfolio, a relentless focus on customer experience.
Adjusted Global brand.
And our unmatched scale and direct distribution as well as a growth focus financial model.
And I have to summarize it in forwards and what's our future is bright.
Thank you for joining and for your support and we look forward to connecting with you very soon.
Okay.
This concludes today's conference. Thank you everyone for your participation you may now disconnect.
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