Q3 2022 NortonLifeLock Inc Earnings Call
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Good afternoon, everyone. Thank you for standing by my name is Paul and I'll be your conference operator today I would like to welcome everyone to the Norton Lifelock fiscal 2022 third quarter earnings call. Today's call is being recorded in all lines have been placed on mute to prevent any.
Any background noise.
After the Speakers' remarks, there will be a question and answer session. At this time for opening remarks, I would like to pass the call over to MS. Mary Lai head of Investor Relations Ms. <unk> you may begin.
Yes.
Thank you Paul and good afternoon, everyone welcome to the Norton Lifelock fiscal 2022 third quarter earnings call. Joining me today to review our Q3 results are Vincent <unk>, CEO and Natalie Bursey CFO .
As a reminder, there will be a replay of this call posted on the Investor Relations website, along with the earnings slides press release.
Finding our non-GAAP metrics I'd like to remind everyone that during this call all references to the final metrics are non-GAAP and all growth rates are year over year, unless otherwise stated a reconciliation of non-GAAP to GAAP measures is included in our press release, which is available on our IR website at Investor Dot Norton Lifelock dotcom.
Today's call contains statements regarding our business financial performance and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which may be considered forward looking statements and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on that.
Beliefs assumptions and expectations and speak only as of the current date for more information. Please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC and in particular of annual report on Form 10-K for the fiscal year ended April <unk> 2021, and now I will turn the call.
Over to our CEO Vincent Thank you Mary and welcome everyone. This was another strong quarter double digit growth on both the top and bottom line and we continued to drive improvements across several key business areas that we believe are critical to our long term success.
Q3 revenue and bookings grew 12 and 11% respectively.
The growth profile, we delivered was broad broad based reflective of diversification across our product portfolio, our channels and our geographies.
And with 16% growth in EPS, our profitability remains strong and continues to grow faster than revenue.
Later in this call Natalie will provide you with more details on our Q3 results, but let's take a step back for one minute.
It is clear to all of us that we are living more and more of our daily lives online shop.
Shopping working learning, creating sharing you name it we're doing it all online.
All of it is designed to make our lives easier and better but it does come with the very real risk of more cyber criminality.
Everyday this team wakes up driven by a singular purpose, making the world cyber safe for everyone and ultimately powering the digital freedom.
So D. We are protecting and empowering approximately 80 million users in more than 150 countries, but we are just getting started.
Our strategy is built around our customers and their digital lives. We are focused on accelerating innovation, expanding access and reach and relentlessly serving our customers' need.
Yeah.
Our innovation engine continues to thrive in Q3, we introduced ever a breach monitor where we actively scan the internet and alert users if their email is it part of a data breach in identity and in privacy, we continued to expand our reach internationally combining dark web monitoring.
Anti truck and <unk> navigator and bringing it to over 20 countries.
Not only do we bring new products to market. We also improve upon category leading products that we have offered for years.
For example, using machine learnings, we've rolled out new alerts detecting unusual transactions for a lifelock subscribers better protecting people from various foods or unusual activities.
They after day this team brings energy and new ideas about how we can better build out the known and 360 cyber safety integrated platform.
Within various plans of Norton 360, our members automatically receive the benefits of our latest innovation.
Simplified and frictionless Onboarding experiences new device detection. In addition through QR codes easy backup activation software up data improved integrated VPN game booster.
Currency mining and what it options.
And hence identity protection features like identity lock and social media monitoring.
These are just a few of the new features made available into our Norton 360 platform over just the last few months.
And it's not just innovation. It is our continued commitment to protecting our users as highlighted with multiple EV Test awards and the most recent the SCE labs best consumer anti malware awards for 2021.
We know we own the right truck has over 14 million customers are now on Norton 360, with more than 1 million members added since our Investor Day last me.
We are thrilled that over 60% of our direct customers are now protected by Danone in 360 platform and it keeps growing.
Whether it is launching entirely new products, bringing these products to more people are improving our industry leading platform. We know that innovation is a core driver of our success.
Yeah.
When customers make the decision to trust us to help protect their digital lives they stay with us.
We have improved our net promoter score by five points to high Forty's in the last 12 months.
Thats strengthening engagement is also reflected in our retention rate, which is something we are particularly proud off in Q3. It was slightly above 85%. If you exclude the first your customers' retention is at 87% in aggregate and as high as 90% for some cohort of customers with the identity offering.
It speaks to the power of our Norton 360 platform with identity protection as traditionally in this industry renewal rates for the first year customers are security only customers are lower.
But even in this category. We believe we have room for improvement we've already improved our retention to 83% up three points since we acquired them.
Through our evolving and innovative product portfolio and expanding distribution channels. We have now added customers to the platform consistently over nine consecutive quarters.
Total direct customers are now over $23 4 million up 12% or $2 4 million customers added year over year and 126000 sequentially.
The growth was broad based although slightly higher mix in security as expected for a December holiday driven quarter.
In our direct to consumer channel, we observed some market pressure on at prices that suddenly pushed up our customer acquisition cost, we partially offset those increases with improvement in shopping card conversions.
One of the key investment areas in our go to market strategy is the expansion in indirect channels.
The net direct customer count increase that digest shared does not include customers coming through our partner channels, including employee benefits or to the App store for example.
In those two channels alone, we added almost half a million customer year over year and over 100000 customer sequentially.
And interestingly almost two thirds of our new customer from App stores have installed the Norton 360 odd you.
You will see us continue to expand and invest in our multichannel approach to reach more customers.
While it is great that we've brought innovation to the market and its customers to our platform and retain them. It is also clear that we are delivering value.
In Q3, our average revenue per user or <unk> was $8.87, but excluding avera, we achieve a record organic at well above $9 driven by higher Norton 360 adoption and successful cross sell and upsell activities.
Avi Rush installed base is more focused on traditional security feature with drives and outward just below $5.
We view this as one of the many opportunities we have to continue to grow and provide more rounded protection to all customers have here and internationally and I thought he will provide more details on our pool in her section.
To wrap up I'm also excited to announce that we are driving to an accelerated close date for the merger with a vast as you will recall, we originally expected to close in mid calendar year 2022.
However, while there remains some outstanding regulatory conditions that we need to be satisfied or waived before we can close we currently expect to close on February 24th 2022.
We have made great strides towards combining the two companies, including receiving approvals from both Norton and Lifelock in Nevada shareholders satisfying regulatory conditions in the U S. Czech Republic, Australia, New Zealand and securing permanent financing commitments.
On the remaining regulatory conditions, we have submitted antitrust findings for the UK, Germany, and Spain and are fully engaged with each of them.
We fundamentally believe that this merger will allow us to increase our pace of innovation and better serve consumers around the world.
In the meantime, we will keep driving our business forward, we've made great progress and frankly Conway to merge with that together, we will accelerate the transformation of consumer cyber safety and power digital freedom for everyone.
And now I will pass the call over to Natalie to cover details of the financial results and the activity supporting our merger we have asked.
Thank you Benson and Hello, everyone for today's discussion I will focus on non-GAAP financials, starting with our Q3 results and then provide our outlook for fiscal year 2020.
We delivered another excellent quarter, our Q3 revenue was $704 million and at the high end of our guidance range.
Revenue was up 10% in USD and up 12% in constant currency, including a two point currency headwind as the euro and yen weakened against the U S dollar.
Bookings growth accelerated sequentially and year over year up 10% in USD and 11% in constant currency, we continue to effectively utilize the levers we have at our disposal to accelerate growth.
Our total direct customer count increased to $23 4 million, adding $2 4 million customer year over year, and adding 126000, net new customers quarter over quarter.
This was our ninth consecutive quarter of sequential net direct customer add.
Just a half a million net new customers added already this year.
We remain focused on acquiring more customers at the top of the funnel and an increasingly competitive landscape.
Q3 growth was broad based we saw strength in both the U S and international regions.
Our new products and services in key international markets have improved our overall global reach.
While our customer mix still skews higher in the U S. We are capturing more international opportunities as we scale.
Looking at our performance in Q3 across key operating metrics overall unit retention was slightly above 85% in Q3.
And our monthly average revenue per user or <unk> expanded sequentially to $8 87.
Collectively this contributed to 9% revenue growth in our direct business versus 5% growth in Q3 last year and no growth the year before.
We believe this consistent growth momentum is built on the foundation of our Norton 360 platform.
As well as our expanding product portfolio and the increasing value we provide to our customers.
Retention is a major area of focus for us.
Renewal rates remain strong across the world.
Our newer customers, which now reflect the larger mix of our customer base.
Our cross sell upsell efforts are also beginning to bear fruit.
Supported by new product velocity and expanding feature releases in global markets.
While driving strong engagement throughout the customer journey, and bringing more value to our customers.
We in turn continue to increase retention and drive growth in our <unk> over time.
Our partner business continued to grow double digits in Q3 with revenue up 17% scaling in multiple channels, including employee benefits and App store.
Our employee benefits channel continues to grow in double digits as we broadened our identity offerings to more employees in North America.
Our App store channel was up double digits for the fifth consecutive quarter driven by the success of our Norton 360 App.
While our indirect business is just over 10% of our total business. We continue to dedicate more resources in this area as we focus on broadening our go to market reach and drive. This is a key tenant of our long term growth strategy.
Turning to profitability, we continue to deliver high operating leverage Q.
Q3 gross margin sustained at 87% and operating margin was 52, 8%.
180 basis points year over year.
We remain diligent in our cost structure in pursuit of efficiency opportunities and to create capacity for reinvestment to drive growth.
We are operating our G&A functions at a at a cost of approximately 4% of revenue.
Down from 10% of revenue just two years ago.
We continue to make investments in sales and marketing, while navigating through the competitive advertising environment and higher ad cost.
With R&D, we focus our energy on increasing the pace of new product launches, while also effectively driving efficiency.
Looking ahead with a vast we will continue to operate with a disciplined approach in our cost management management in order to drive synergies, we committed and pre integration plans are already underway.
Q3, net income was $260 million up 14% year over year.
Diluted EPS was <unk> 44 cents for the quarter up 16% year over year and at the high end of our guidance range.
We remain committed to driving EPS expansion and achieving our long term EPS objective of $3.
Turning to our cash flow and balance sheet Q3, operating cash flow was $330 million and free cash flow was $328 million.
Year to date operating cash flow is $648 million growing over 80% year over year.
We continue to maintain a strong liquidity position and a healthy balance sheet.
Our net debt leverage lowered to approximately one point in times in the quarter, one five times in the quarter, but please note. This does not include any of our expected acquisition financing as that does not become funded until the deal closes.
In Q3, we returned approximately $73 million to shareholders in the form of a regular quarterly dividend of $12.05 per common share.
For Q4, the board of Directors has approved a regular quarterly cash dividend of $12.05 per share to.
To be paid on March 16th 2022 for all shareholders of record as of the close of business on February 22nd 2022 as described in the press release.
We still have approximately $1 $8 billion remaining in the current share buyback program.
Which is not being deployed at this time due to the pending a vast transaction.
As a reminder, depending on the vast merger shareholder elections, and incremental share buyback of up to $3 billion as possible to the extent that a vast shareholders elect for the majority of stock options.
Before I get into our guidance, let me give you a brief update on the avast merger financing.
As you May recall back in August of last year, we successfully syndicated our term loan a commitments for the acquisition financing.
At the start of this calendar year, we launched the syndication of our term loan b commitments to be prepared to the deal close.
We've received strong interest and great reception in the debt markets.
In fact, the demand was notably over subscribed.
We're pleased to report that we have successfully raised all of the required financing we had planned for this murder and we'll be ready to fund the accelerated date for the deal close.
Now turning to our outlook, we have narrowed our full year fiscal 2022, non-GAAP guidance to the high end of the range.
We now expect to achieve fiscal 2022 annual non-GAAP revenue in the range of $2 795 billion to 2.8 O 5 billion, assuming stable currency rates quarter over quarter, which translates to approximately 10% growth year over year in constant currency.
For fiscal 2022 annual non-GAAP EPS, we expect to be in the range of $1 73 to $1 75, narrowing again to that high end.
Please note. This guidance does not include any impact from the anticipated a vast merger close.
We look forward to closing out another successful fiscal year, we remain well positioned as the leader in cyber safety.
We are growing momentum a very healthy business model and strong operating capabilities.
I want to reiterate what we said last quarter as.
As we navigate forward, we will continue to challenge ourselves to anticipate prioritize and meet customer needs and a growth focused manner.
Thank you for your time today, and I will now turn the call back to the operator to take your questions.
Please do keep in mind, we are not able to answer any questions related to any specific M&A at this time.
Operator.
Thank you ma'am, we will now begin the question and answer session. If you would like to ask a question. Please do so by pressing star one on your phone again. Please press star followed by the number one on your telephone keypad. If your question is answered you may you move your cell phone to keep pressing the pankey, please standby or compiled.
A roster.
Your first question is from the line of socket Calia with Barclays. Your line is open.
Okay, Great Hey, Vincent Hey, Natalie how are you guys doing.
Very good thank you for asking.
Absolutely. Thanks for thanks for taking my questions here and great to see the results.
Vincent maybe I'll start with you.
I understand the disclaimer just on I'm talking about specific M&A, but.
I think the most surprising news with the release here in my view is the the earlier expected close for a vast on February 24th and so maybe.
Maybe to the extent you can can you just share with US just some of the regulatory hurdles left right just to understand the timeline from here to the 24th and then also.
And as much details I guess youre allowed to what gives you the confidence in that earlier closing compared to the June timeframe that we earlier thought that we thought about earlier.
Yeah and to be honest with you I never believed that.
I would say what I'm going to say, which is despite the fact that we posted a double digit quarter over quarter. The most exciting news is for me too that we are now scaling the close of the merger with a vast for February 24th we as you imagine a super eager to get started we've made great progress in our planning.
Activities and and we know that this merger will offer an increased capacity for innovation for global reach to make cyber safety Alicia for consumers. So.
We've been we've been patiently working all the processes as I mentioned in my prepared remarks, we made great progress on many fronts, we still have a regulatory regulatory conditions to meet in the UK, Germany and Spain. We've done now all of the findings and we are openly and.
In actively if you want collaborating with.
We'll do a story this answering all of the questions they have.
Based on the progress and I won't go into every detail. We now confident that we will be in a position on February 24.
To either meet all conditions of wave all conditions and be able to close so that's a as you mentioned a great news.
Yeah, absolutely mobile will look forward to that.
Natalie maybe maybe for you just to just to.
Zero in on the core business.
To Vince's point, I mean, great to see the double digit bookings growth you talked about a couple of the levers in your prepared remarks, the better retention.
The <unk> and continued customer acquisition can you just go one level deeper into sort of how you've been able to accelerate that growth.
Digits here.
Yeah, Hi, socket. Thanks for the question.
In our prepared remarks, you heard us right that the growth was pretty broad based but the U S and international and across security and identity.
We continue to post double digit growth I think is is exactly what we've said is it's really having our new products come to market faster.
Which is allowing us to offer increasing value to our new as well as our existing customers we.
We continue to.
Focus our efforts in expanding our customer reach across the globe, that's driving both domestic expansion as well as international expansion.
We've got you know what.
Zero.
Really seeing the freemium to paid conversions as well as combine and diversified through the partner in indirect channels I think all of that really coming together and we're focused on all of those key tenants to drive that double digit growth.
Got it got it that makes a lot of sense Vincent if I could squeeze another one in it's a product question.
I thought the social media monitoring solution that was announced recently was very interesting.
I was wondering if you could just talk a little bit about the competitive landscape there and the additional value that you can capture with a tool like that because I guess in the world of you know Unfortunately, cyber bowling I imagine that's an interesting products. So can you just dig a little deeper into that yeah.
Yeah, I'm, sorry, with U S and to be honest with you. So we have a very broad purpose right really protecting and empowering everyone to have that.
Digital lives being safe and getting the maximum value for it as we know as we move more online we of course expose either the users so our kids or family to more risk coming from that type of criminality that continues to evolve all the time.
I mentioned at our analyst day that moving up the stack of value from that core device security to multi device to then.
<unk> password manager VPN than adding identity features and then moving into privacy features is what our mission is to build just the best cyber safety platform full stop and an untapped offering additional services that would have a lot of value because that part of that cyber safety platform I mentioned a category we.
Really look at very closely within that privacy and protection is your reputation online reputation privacy reputation management.
And then protecting against all sort of activities that would exposure cyber bullying being one of them and so social minute monitoring is just another of features if you won in a in a long roadmap that we keep developing to protect our children against.
Different words different exposure that you would not want to have in creating an alert system and blocking system that that that's putting that you should see as part of kind of a seed development as we continue to build up the different categories. When it comes to competition I have to tell you we see a lot of innovation start ups.
Either geographically located or product category focused that bring interesting new ideas and this is why we like the position that we have and we will even reinforced with avast, we're going to free up capacity for innovation and continue to accelerate the rate of that.
All you will bring into the overall portfolio so.
You should see it as a long term development and an understanding that we continue to move the value and build up that full definition of what cyber safety means for an internet user.
It makes a lot of sense I'll get back in queue. Thanks, guys.
Thanks.
Yeah.
Your next question is from the line of Matt Hedberg with RBC. Your line is open.
I think the guys. Thanks for taking my questions and congrats on the on the double digit growth.
You know Vincent you talked about capturing more international business and obviously have asked will accelerate that but wondering if you could provide a bit more details on what's working internationally and maybe how is Norton 360 resonating and.
In international markets.
Albert <unk> question. So so.
Every geography is important but as you know northern came with a more U S centric base right.
70% of all of our business coming from there and when we started as a company two years ago I felt we say hey, we have a big opportunity internationally.
First with the current product portfolio and we did that then we realized that in many local country. Theres. Many features that are more free features and introducing in our portfolio the ability to manage a freemium model was important we acquired <unk>. We did a lot of testing and realized that actually combining in one country under the same moon.
<unk>, a full life cycle from freemium to premium to 40 cyber safety platform is actually working and we were able to grow almost all lineup all cohorts. When we're doing those tests locally. So that has been of course, a proof point that gave us the confidence to say hey, the combination with avast would be definitely a fantastic.
Very powerful move to offer more innovation to these customers, including the commitment to the freedom. That's number one number two is we have seen it with every rabbit also with Norton.
As we continue to move more value.
The if I can call it value chain and when you look at the pyramid that the base the basic security moving into your you data being protected in your data informed alive protecting your full live and that's an identity of multiple identities and protecting that we can see both of course, the the value creation of the ARPA going up and then the retention.
Going up along with the customer satisfaction.
We started to launch more.
Combined product and tight track starting at the basic with dark web monitoring in many different countries to introduce the notion of that identity protection and you will see us more comedy than planed to drive that digital identity internationally.
In Europe as you know digital identity has a different meaning than in the U S and so having a presence in each region and understanding the boost to the local market in a global framework is very important and it will be fully committed to that.
The third one I would say internationally that.
We have seen is once a customer gets more of that value that dimension under either northern identity or or or different single product antitrust. The others, we've seen retention improving some of the aviva.
Retention improve.
Internationally and we can see in the in the various countries every country is different.
Our renewal rate, but they move up when they move up the value chain become more member of our cyber safety platform that gives you an idea if you're one of the.
The different levers, we will have to continue to accelerate growth as we share.
Share best practices with a with a friend that Dave asked.
That's no that's super comprehensive. Thank you Bill I think we all recognize the international opportunity is significant for you guys. The only thing that really stood out to me.
You had a lot of positive things to say about indirect success as well no I think he said, it's just over 10% of your business you are focused on driving more success there.
Maybe tell us what are some things there obviously, it's been more of a direct book historically, but it's really I think exciting to see a lot of a lot of indirect successful it seems like another level of lever of growth.
I totally agree with you.
Be very clear.
We know that to reach out to 5 billion Internet users.
We can just do it through a DTC business model, we have to continue to partner with its going indirect through a simple channel or combining with other solutions to offer.
A better bet, a mix or a fully integrated value. Combining for example is an insurance provider and a cyber safety offering et cetera. So expect us to continue to develop our our channels that way and I think we mentioned publicly that employee benefit was one of them. That's more U S centric, we've increased that investment a year ago in that and we.
Now see deflation to that.
They are too it's not only a channel because then we get feedback around our adjustment to the product portfolio and we can add more.
Value for Damply benefit.
Customers, so customers that come through that channel, we want to be of course, you want to move fast of course, you went in dark chunk to be bigger, but we want to be very thoughtful making sure that our brand is recognized that we have engagement with the customers, which is not the case with every legacy indirect channels, making.
Making sure we have the ability to continue to move up the value chain of customers. Those are some of the criteria, we really consider before really pulling the trigger on increasing investment in one area, but it's a lot of opportunities there want to be towards fall with particularly excited so would you come back with all the time with that but when avast will come in they have a a V S.
So hold channels, so focusing on the key economy are.
The homeworker personnel around that cyber safety, we expect to increase that channel as well so and we have 99, northern lifelock. So so differently expecting direct channel to continue to be an expanding part of our go to market strategy.
Super exciting, but thanks, Vince and thanks everybody.
Once again, ladies and gentlemen, if you have a question or additional questions. Please press star one now again at Star one on your telephone keypad.
Your next question is from the line of Fiona Heinz with Morgan Stanley . Your line is open.
Hi, everyone.
Okay.
I'm on the line from Hamzah no offer.
First question is on the net subscription adds which is a little bit below typical seasonality.
If you could just please expand on that a little bit has there been any change in renewal rates.
Yeah.
Yeah. Thanks for the question so look growing our customer base has consistently been and will continue to be a key ingredient to our strategy.
And we've just posted our ninth consecutive quarter of quarter over quarter net net ads.
But you know we've chosen to report our customer add few defined as direct customers will continue to invest in driving this area very very fruitful to acquire customers through direct acquisition.
But it's not the only avenue to customer.
Customer acquisition, I think you've heard us talk.
A couple of times talk about the indirect channel. These are diverse channels that we can go to market and really expand our reach.
And we're putting resources behind that we absolutely want.
More customers direct paying customers through our funnel and that's why it's so important for us to focus on how we expand our reach globally in all different channels. The direct channel is becoming increasingly more competitive both.
From a competitive spend perspective, but also just add costs.
And so we're trying to strike the right balance and really leverage all the diversity of the channels that we have out there.
And to acquire users and our indirect customers that will over time feed into our installed base.
There's one and I want to say I noticed doubling down on what Theyre already said until you mentioned it briefly but we have a lot of also indirect customers.
A year ago, we launched Norton 360 on mobile Entre eat and I O S.
In employee benefit and.
Mobile App, we increased 100000 net new customers over 100000 net new customers.
In those two channel quarter over quarter, we saw for the first time actually in mobile up 65% about two thirds of the mobile app purchases, where Nolan 360.
Which is a very big change that is impacting how we report the direct customer count we've made some some analysis a vast for example is including the mobile app into their customers. So as we merge with advisory and take a fresh look on how we report this customer count. So investors can have a full view on how we looked at our business across all.
Dimensions.
Okay got it that's very helpful and one follow up if I could.
So how should we think about rfps going forward now that the acquisition is lap any thoughts on price increases given the current inflation that we're seeing thank you.
Yeah, so as it pertains to price increases inflation etcetera, I know, it's it's being talked about across the globe very very top of mind and relevant for our business though.
We're.
Software based so we really don't have a ton of logistical and raw material inflation in our business. What we focused on when we think about price when we think about inflation. It's more so how are we driving customer value. How are we bringing innovation faster to market how are we making sure that we.
Are the number one customer choice in the.
In the decision, where they where they choose how to protect themselves and their family and that's how we focus and that's how we think about our price we want to make sure that the price value equation makes sense and not necessarily focusing on price increases just because it's top of mind across the world today.
And when it come to grocery balance retention, all through new customer acquisitions.
If your question is can you go higher than than the $9 average. The answer is yes, we still have the majority of our customers that don't have identity protection, but are just on the core security normally nobody's anymore, just under a V that have more than just security like password manager et cetera, but they haven't really made the leap yet on understanding.
The benefit of having identity digital identities being protected and I think that's really our effort creating the.
Our innovative portfolio to really drive that increased adoption of identity protection.
Okay. Thank you both very much congrats on Arizona.
Thank you.
At this time there are no more questions I will turn the call back to Vincent.
C O coupon.
Yes, Thank you Paul and thanks, everyone for joining us for this call. We appreciate your continued support of course.
And we look forward to connecting you to connecting with you very soon so stay safe and be well. Thank you.
This concludes the conference call. Thank you you may now disconnect.
Okay.
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