Q4 2022 NortonLifeLock Inc Earnings Call
Ladies and gentlemen, this is the operator.
She is scheduled to begin shortly please continue to standby. Thank you.
Again, ladies and gentlemen, they just the operator today's conference is scheduled to begin shortly please continue to standby. Thank you.
[music].
Good afternoon, everyone. Thank you for standing by my name is Jeff and I'll be a conference operator today I would like to welcome everyone to the Norton Lifelock fiscal 2022 fourth quarter earnings call. Today's call is being recorded and all lines have been placed on mute to prevent 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.
Thank you, Jeff and good afternoon, everyone welcome to the Darling Lifelock fiscal 2022 fourth quarter earnings call. Joining me today to review, our Q4 and full year results are missing palette, CEO and Natalie Jersey CFO.
As a reminder, there will be a replay of this call posted on its investor Relations website, along with our slides and press release.
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.
Recon of non-GAAP to GAAP measures is included in our press release also available on our IR website at Investor Dot Norton Lifelock Dot com.
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.
Or based on current beliefs assumptions and expectations and speak only as of the current date for more information. Please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC and in particular, our annual report on Form 10-K for the fiscal year ended April 2nd 2021.
And now I will turn the call over to our CEO Vincent. Thank you Mary and welcome everyone before I start I want to acknowledge the current geopolitical uncertainties. The world is facing a hearts and support go out to those impacted including friends families and customers and of course, we hope for a week and peaceful resolution.
As we come together for this call also wanted to take a moment to thank each and every northern lifebelt temporarily for doing Gabe cards to deliver the success. We've had today northern Lifelock third year of growth is the result of an ambitious team working to build a great business together.
Safety is more needed that never our vision and strategy are clear and our culture of authenticity and action that we are building upon everyday gets me very excited about our future.
Q4 is our 10th straight quarter of top line growth with revenue and bookings of 8% and 6% respectively in constant currency.
The quarters performance was particularly important as it lapped a strong double digit growth quarter, a year ago and the anniversary of Avera acquisition.
Although slightly more pronounced in <unk>, then again privacy our growth in Q4 was once again broad based across products and regions as our customer needs are truly global.
Our customer base is now 50% international as we continue to focus on developing our product offering to be available in over 150 countries.
To reach new customers, we have continued our strategic investments in both direct and indirect channels.
It was direct customers are now over $23 5 million with nearly 600000 net new customers added year over year and over 120000 customers added sequentially.
Our indirect or partner business delivered double digit revenue growth for the sixth straight quarter up 20% in Q4, and we added almost 100000 customers sequentially in the employee benefit and mobile channels alone.
We delivered these results while we expanded our Q4 operating margin I head up the advanced merger and grew EPS, 15%.
Not only will go more into the Q4 financial details later on the call.
With $2 8 billion in revenue up over 10% year on year fiscal 'twenty two was the third consecutive year of bookings growth and customer expansion.
It was made possible by our ongoing investments in product innovation and go to market activities shaping up the portfolio and expanding into new ways to reach customers.
Fiscal 'twenty two was also an important year for us and he delivered great progress towards our three to five year long term objectives, one of which is delivering $3 in EPS.
Less than three years ago, we launched the first integrated consumer cyber safety platform known in 360, and now we have over 14 million members trusting us to protect them more comprehensively.
Our Norton 360 is unparalleled scale and reach in over 50 countries today and growing.
Customers recognize the value we provide which is also supported by a strong retention rate of over 85% and annual our pool of $107 as we exited fiscal year 2022.
We still have plenty of work and room to educate more of our customer cohorts on the need for more comprehensive cyber protection, which is an integrated part of our growth strategy moving forward.
So let me provide some more details on our organic strategic areas. That's reported in fiscal year 'twenty. Two result, and it will continue to be key to our strategy moving forward into next year.
First was product, we maintain our accelerated pace of product innovation and introduced more than 10, new products and features this your broadening our product line to incremental privacy and identity solutions just to name a few northern anti track my privacy assistant social media monitor.
Ring and the expansion of social and dark web monitoring to 16 additional countries in the fiscal year.
In the areas of identity and privacy, we continue to step up our international efforts expanding our product portfolio into new countries.
In Q4, we launched northern identity advisor plus in the U K to help consumers resolve their identity theft issues. It is a robust identity monitoring solution that also provides access to a dedicated identity restoration specialist to victim of identity theft in Germany, we launched of your identity.
Assistant, which includes both dark web monitoring and localized support from identity restoration specialist.
Moving forward, we still have a big opportunity to expand our product portfolio internationally, especially in the areas beyond core security.
The second area of investment is our go to market in the last 12 months, our initiatives evolve rapidly as we adapted to changing environments and customers behaviors and expectations in.
In our direct to consumer business, we balance social and traditional long and short form of marketing activities.
During the year, we continued to increase our investment in top of the funnel and performance marketing, while we faced higher advertising costs. We continue to believe we have plenty of room to increase our effectiveness and returns on our investments as we operate well within our target range for customer acquisition cost.
That is particularly true as we continue to increase the value and retention along the customer journey towards toward him cyber safety.
Our partner business continues to outperform expectations with a record 23% revenue growth in fiscal 'twenty two.
This is the result of growing indirect customers and signing up new accounts in our telco mobile and employee benefit channels, providing us with solid momentum into fiscal year 'twenty three.
Our partnership with Telus in Canada, which was our first offering of identity theft protection and restoration services outside the United States as begin to bear fruit.
<unk> also gained meaningful market share in Japan, with our dark web monitoring mobile attach product.
Our mobile and employee benefit channels were both up double digits for the sixth consecutive quarter with about 300000 net new customers added for the year in these two channels.
Going into fiscal year 2023, we will continue to focus on building, a multichannel environment, including direct acquisition marketing partnerships employee benefits retail and E tail Oems service providers and new pathways established earlier this year such as the premium channel.
To that effect Travis Sui Devine, who joined US as CEO of Aviva has taken the leadership of our newly formed commercial organization focused on the old customer acquisition activities.
Building on last year's momentum, we are working to strengthen our business with more intentional go to market efforts focus on market segmentation targeted geographies and increased sales motions to drive higher adoption of our comprehensive cyber safety offering across the globe.
So we have talked about product innovation and go to market as two of our key growth drivers a third one is our branding initiatives.
<unk> last 12 months and increase our net promoter score to over 45.
We put our customers first in everything we do we ensured the voice of the customer is heard and we generally embraced an end to end customer experience.
We know that in this area. It is a never ending journey with US we have embarked upon with plenty of opportunities to improve and delight our customers.
So product innovation diversified go to market channels, a multi brand strategy and customer insight and satisfaction are key priorities and critical components of our strategy to maximize our growth moving forward and scale up the best cyber safety platform for people everywhere.
Cyber attacks have only innovated and evolved to become an unfortunate part of everyday reality consumers.
Consumers need more than just device security there will be more touch points into identity privacy and other trust based adjacencies.
Our mission is to build easy to use technologies and solutions that help safeguard consumers.
So looking ahead, we are well positioned to drive the transformation of consumer cyber safety and pursue our long term objectives, while we recognize the geopolitical events or macro level headwinds can create bumps along our journey, we know that consumers will continue to need comprehensive protection of their digital lives.
As we pursue our vision, we have multiple growth levers strong profitability proven financial resiliency and we are backed by a robust balance sheet and cash flow generation.
Of course, we also know we have a lot of work ahead as we enter our new fiscal year, you should continue to expect from us innovation and portfolio expansion and the pursuit of new opportunities in customer acquisition cross selling and retention activities.
Finally, a brief update on our proposed merger with avast.
Our anticipated closing of the merger remains mid to late calendar 2022, we.
We are actively engaged in the phase II review process with the UK market authorities and continue to strongly believe that this transaction can only benefit consumers across the globe in a very competitive and dynamic market in.
In the meantime, we will continue to move our business forward. We are still very eager to come together with us to accelerate the transformation of consumer cyber safety and power digital freedom for everyone.
Now, let me turn the call over to Natalie to cover the results in more details.
Thank you Vince and Hello, everyone.
Today's discussion I will focus on non-GAAP financials, starting with our full year fiscal 2022 results.
By our Q4 performance details.
Then provide our outlook for Q1 fiscal year 2023.
Fiscal year 2022 was a strong year for our business, we met our growth expectations for consistent execution of our plans and in turn completed a successful first year towards our long term objectives.
We finished fiscal 2022 with over $2 $8 billion in revenue growth of 10, 4% in constant currency slightly above our guidance.
Our bookings for the year grew 8% in constant currency, our second consecutive year of high single digit growth after years of flat to low single digit growth.
We achieved an annual operating margin of 52, 7% up 300 basis points year over year.
On the bottom line, we delivered a $1 75 in EPS over 20% growth year over year and at the high end of our original guidance of $1 65 to $1 75.
We have scaled to over 23, and a half million direct customers, while maintaining our industry, leading customer retention of 85% and monthly <unk> of $8 90.
As we prepare for the merger with Avast, we ended the year with approximately $1 billion in free cash flow up 38% year over year.
Shifting to our Q4 results, we delivered another excellent quarter, and that's rising macro headwind demonstrating our operating discipline and the overall resiliency of our business.
Our Q4 revenue was $717 million up 8% in constant currency and up 6% in USD, including a two point currency headwind translating to an in quarter impact of $15 million.
Since the start of the calendar year and even more pronounced in March and April we have seen both the euro and yen depreciate against the dollar.
It is the second quarter in a row in which currency has been several points of headline headwind to our top line growth.
We anticipate these headwinds to increased as the spot rates have continued to trend unfavorably.
Q4 bookings grew 6% in constant currency on top of a record 13% constant currency bookings growth in Q4 last year.
This was our 10th consecutive quarter of sequential net new customer adds.
We added 576000, net new customers year over year, and 123000 quarter over quarter.
Q4 growth was broad based with a higher mix in identity as expected given the timing of the U S tax filings.
Looking at our performance in Q4 across other key operating metrics overall customer unit retention was slightly above 85% and our monthly average revenue per user or our two expanded sequentially again to $8 90.
Retention is a major focus for us and it remains strong including newer cohorts that have renewed since last year.
We drove retention improvement this year, even as our customer base mix shifts more towards first year and newer customers.
As a result, our direct business grew 4% in Q4 and 8% for the year.
Our partner business continued its strong growth momentum in Q4 up 20% year over year, and marking the sixth consecutive quarter of double digit growth.
Our international business continued to climb as we gained more traction and broadening the distribution and adoption of our identity offerings.
Our indirect business now represents nearly 13% of our total business compared to two years ago. When it was 10% of our business.
While our indirect business is a longer sales cycle and it takes time to scale. We continue to dedicate more resources in this area as we focus on broadening our go to market reach.
<unk>, our customer acquisition channels and driving this is a key tenant of our long term growth strategy.
Turning to profitability Q4, gross margin sustained at 87% and our operating margin for the quarter was up 54% 54, 5% up 400 basis points year over year.
Driven by both our revenue growth and our cost discipline.
In anticipation of the avast merger, our G&A functions continue to run lean now at less than 4% of revenue.
This does not mean, we are not investing.
We have continued and repeatedly funded our business by optimizing our cost structure and being intentional in how we allocate marketing dollars for healthy ROI.
With regards to R&D, we make investments in new product development to drive our innovation efforts.
We invest for growth and we will continue to operate with a disciplined approach in driving our growth initiatives, while remaining nimble and ready to execute on the cost synergies we committed for the merger.
Q4, net income was $271 million up 16% compared to last year.
Diluted EPS was <unk> 46 cents for the quarter up 15% 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 Q4, operating cash flow was $326 million and free cash flow was $324 million.
Our net debt leverage lowered to approximately one two times net in the quarter, but please note. This does not include any of our expected acquisition financing as it does not become funded until deal close.
As a reminder, we previously announced that we successfully raised all the required financing we had planned for the avast merger.
In Q4, we returned approximately $73 million to shareholders in the form of a regular quarterly dividend of $12.05 per common share.
In addition, we settled a partial repurchase of $100 million from our 2% senior convertible note due in August of this year.
This was completed in March and the repurchased shares represented 16% of our total outstanding note.
For Q4, the board of Directors has approved a regular quarterly cash dividend of $12.05 per common share to be paid on June 22nd.
2022 for all shareholders of record as of the close of business on June eight 2022 as described in the press release.
As of the end of Q4, we have approximately $1 $8 billion remaining in the current share buyback program as we have not deployed any buybacks due to the pending avast merger.
However in light of the longer timeline to close the vast we.
We have taken certain steps to resume share buybacks in a limited capacity with the consent of both have asked in the U K takeover panel.
Now turning to our outlook for Q1 with.
With the ongoing macro environment.
And the significant strengthening of the dollar in recent weeks, we anticipate increasing currency headwinds but.
But I want to I want to emphasize that the underlying health of our business remains strong.
We expect Q1 non-GAAP revenue in the range of $705 million to $715 million, which translates to 5% to 7% growth year over year in constant currency.
And reflects an FX headwind of three points of growth.
We have assumed April average currency rate considering the material U S. Dollar depreciation we have seen in March and April .
We expect Q1, non-GAAP EPS to be in the range of 42 to 44 cents per share, which reflects <unk> <unk> of currency headwind year over year and approximately two cents of incremental dilution from the new accounting guidance on convertible debt with a cash conversion feature.
As a reminder, we have $525 million in convertible notes, which will mature in August .
For the full fiscal year 2023, we expect bookings growth to be in similar ranges of mid single digits in constant currency.
Considering the ongoing CMA discussions and timing of the avast merger, we will not be providing an annual P&L guidance at this time.
We hope to provide more details when we close this merger.
In summary, we had a momentous year and I want to thank our team for executing and delivering our fiscal 2022 results.
I am proud of what our team has accomplished so far and look forward to continuing down our path to achieving our long term objectives.
I believe we have the ingredients to scale and the right playbook to grow our company.
We have multiple growth levers that we will continue to pool, including new product innovation.
Driving more cross selling up so.
Improving customer experience.
Expanding customer reach and more M&A.
We will remain disciplined in how we operate.
Keep in mind, we are still in the early days of our transformation and our growth may not be a straight upward trend line, there will be ebbs and flows.
However, we will proceed forward with our strategy and drive fiscal year 2023 to be another deposit and achieving our triple double.
Double the number of customers.
Double our earnings per share.
With double digit rates of growth.
As always thank you for your time today and I will now turn the call back to the operator to take your questions operator.
At this time I would like to remind everyone in order to ask a question you will need to press star one on your telephone.
To ask a question you will need to press one on your telephone to withdraw your question you May press the pound sign.
First question from the line of Hamzah Polar Waller.
Of Morgan Stanley .
Your line is now open.
Okay Alright.
Alright, good evening out.
Thank you for taking my question.
So I just had a clarifying question for you first.
Thank you said.
FY 'twenty three bookings growth would be in the mid single digit range did I hear that right.
Yes.
And I think from from what I can tell on an organic basis that generally tends to trend in line with revenue growth.
On a trailing 12 month basis. So I'm curious if there's any disconnect in and that relationship at all.
Oh, there's a disconnect I would say, yes, and just some concept yeah.
Bookings one year will indicate where our revenue is trending the prior the next year with the exception of course of any of our override revenue streams that don't that don't get counted booking so yeah, you're you're on the right track there.
Got it got it.
In short arms that we do not know anything special outside of Luckily He's mentioned delayed 12 months there is no.
Anything special that we know about and so yes bookings and revenue should trend.
Okay. Okay, and then just on the on the macro.
I think you alluded to some macro and some currency headwinds in particular, but the underlying demand environment still remains strong I'm just curious incrementally if you guys are seeing.
Anything around just you know in terms of looking at online traffic in terms of looking at customer interest if theres been any indication of a more material slowdown obviously the macro situation is less certain and so I'm just curious if youre seeing that at all and some of your leading indicators of demand.
Yeah, and we're not immune to the macro level headwind right with differently aware of inflationary pressures you've seen the PC ship.
Shipment decline here in the first calendar quarter.
We definitely see marketing.
Expense rates, increasing which is also a sign of a tighter environment and everybody pushing and.
And so we navigate through that as we mentioned.
Not immune to that but we do have a lot of different levers as we look at our business to drive growth.
You know on one side, it's all about educating consumers on our comprehensive cyber safety portfolio as we expand identity and privacy outside of the U S.
It's something we believe will have a big big opportunity as we continue to drive initiatives on retention, increasing first year retention has been a priority for 12 months and we've made progress in that and we'll continue to make progress and then the third one is really about the <unk> as we expand the higher offering, especially in international we met.
Now about half of our customers are.
Located outside of the U S, where the op was about half of that of the U S. On average wherever you see it's not the same per country and for offering but we.
We do feel we have a big opportunity now all three levers.
To navigate through the macro level headwinds differently.
Q1 calendar had a lot of uncertainties and volatility says as of course, you've seen and as reported by many other companies.
Got it it makes a ton of sand, maybe if I could sneak in one last one just around.
The launch of the identity protection solution in UK, and Germany, I'm curious what the reception of that has been from customers and how would you assess the maturity level of those markets as it relates to those progress.
The U S.
Yeah definitely so.
Digital identity for me is kind of the next.
Element of your digital life, you want to protect it if it all started about protecting your device.
And then over time, you're involved and wanted to protect your devices than all of your data and transactions moving to the cloud and now suddenly there's some a few auctions became a lack of a digital identity.
We are digital user if you one has multiple identities even a lot more elaborate cheap somebody has five to seven devices identity digital identity ECS is 10% to 50 digital identities and so protecting doors may mean different things for our country in the U S very social security number.
Century, very creative centric other countries different elements and then each countries internationally continued to mature more into this digital world as you May know the European Union's is launching now.
The second version of a digital wallet and all of that creates.
<unk> for hackers. Unfortunately, and then for us to provide protection I think it takes time to build momentum internationally over a year ago, we launched.
Lifelock in Canada in partnership with Telus and here in this last quarter, we've seen momentum picking up we know it's a multiyear effort. Similarly in Japan, we launched in a different way different format than Canada, and we've got great traction there being the leader in this space just this quarter, we launched in the U K we know.
That's the market that is a more mature to adopt a similar angles service oriented like in the U S than Germany. Other countries are still maturing and I think we are we are here for the long term and we know it is a long term initiative to build the comprehensive digital protection for consumers outside of the U S.
Thank you Paul for the floor.
Yeah.
Again to ask a question you will need to press star one on your telephone.
Our next question from the line of Circuit <unk> of Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here.
Hey, Vincent Hey, Natalie.
Hey, Natalie I just wanted to I just want to clarify something from just the last line of questioning so.
I think that I think we talked about sort of mid single digit bookings growth implied in the Q1 guide and maybe just the disconnect with revenue growth. My understanding was that the disconnect was FX.
Is that is that the wrong way to look at it or or did I, just maybe I misunderstand.
Any any any thoughts on that just is it FX, that's primarily the difference between bookings growth and revenue and the and the as reported revenue guide.
Yeah, I mean, the difference between bookings and revenue as bookings is what we recognized in period and then revenue is of course as we wrote off the balance sheet. We've got not only the end period combined with partner and then we've got the deferred revenue balance rolling off the balance sheet.
The FX comes into play is the deferred balance falls off.
And so we need to we obviously need to deal with that as the FX.
Impact as it rolls off the balance sheet.
I don't I don't see them, we we talked about.
In the range of mid single digits for bookings.
To reiterate for Q1.
Guy just you know a constant currency of 5% to 7% I'm not sure what disconnect we're talking about.
Okay.
Okay.
Understood second Vincent just just to add on that a mid single digit booking floors rate is somewhat in line to you you can assume that for your revenue.
Unless you have a significant shift in trends in bookings then that would take 12 months to catch up and then you have is not that he mentioned the currency that get always we evaluated the deferred revenue balance get reevaluate at today's spot rate and so that that can create a slight disconnect as well.
Okay understood sorry didn't just just wanted to make sure I understood because it was just.
Totally get it maybe maybe just onto onto some some more fun stuff Natalie for you or actually maybe Vincent for you can you just talk about the economics of subscribers that come through the employee benefit plans I mean, clearly those are lower ARPA.
But I mean, we're talking about sort of higher customer acquisition costs anything that you can just on the direct side that is anything that you could just comment on the margin impact or the renewal economics of just subscribers that come from those do those employee benefit plans.
So so first of all coming back on your on your currency no need to apologize currency outside of currency. It would be ahead of our plan currencies. The major headwind, we have faced and we're trying to navigate through it we know it's temporary and we managed through the the implication that was also we report our numbers in constant currency swings.
<unk> can really assess the true operational momentum we have and we've also isolated the impact of that currency on EPS.
At the end of the day. It is what it is but it is important for investors to have full transparency on that so no issue here when it comes to E. B now the employee benefit channel very exciting channel.
The reason, it's exciting it's majorly the livestock offerings. So its in the identity space.
And many of the accounts, we sign up are being sponsored by the employer.
Sometimes the employees are being asked to pay a portion of it sometime its fully subsidized.
It's a big important channel in which we can continue to grow up the offering.
Dr. <unk> is a slightly in line to our overall.
Our portfolio, our pool and in identity I would say, it's a channel that's about 20% lower.
In terms of the channel cost, if you won or lower or two in that identity.
But the cost structure as you know for US is more step function cost structure, it's another valuable cost structure and so with a direct contribution of any incremental customer.
Customers that would benefit from our lifelock offering in the E beam channel is a great drop through so economically we feel really good about our about the channel that we continue to invest in.
Got it got it that's helpful. Natalie maybe just last one for you if I could squeeze in.
You mentioned you mentioned just the.
The share buyback authorization that we haven't been able to use for awhile can you just walk through the mechanics of of is there a maximum that youre allowed to buyback just kind of given the.
While we're in waiting mode for fastest any any sort of mechanics that you can lay out and kind of how the buyback could work potentially between now and.
Potential deal close.
Yeah. Thank socket.
Share buyback, we as we said on the call and as you guys know, we haven't been able to do any in fiscal year 2022. So we are looking forward to in 2023 to be able to use that we've talked about it as a key tenant of our capital allocation strategy, but we've just been restricted so we're really looking at it.
Go forward I'm really trying to figure out is there any opportunity.
In order to get back in and do opportunistic share buyback.
It's really it's very very.
A specific in terms of not only when we can do it.
Got it obviously to work across the aisle width of asks in the U K takeover panel.
So the mechanics are very very specific and there's very very limited opportunity for us to do it.
We are we have worked with them.
And and gained some very limited ability to do it as we look forward into 2023, but.
We still have to work out the mechanics on the execution.
Got it that's very helpful. Thanks, guys.
Thank you.
At this time there are no more questions I will turn the call back to Vincent to that.
Oh for closing remarks.
Thank you, Jeff as I reflect on our transformation plan from a year ago I'm incredibly proud of our strong results and the team's execution.
Suddenly there are some ups and downs and growing pains, but we are intensely focused on consistent execution investing and driving for growth to scale our business on a global level I'm incredibly optimistic about our future. So thanks for joining thanks for your continued support of Norton Lifelock and we look forward to connecting with you very soon and stay safe.
And stay well.
Okay.
And this concludes today's conference call. Thank you everyone.
Yeah.
Okay.
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Yes.
Thanks.
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