Q3 2023 Gen Digital Inc Earnings Call
Yes.
Good afternoon, everyone. Thank you for standing by my name is Frances and I will be your conference operator today.
I'd like to welcome everyone to <unk> third quarter fiscal year 2023 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 Miss you may begin.
Thank you Frances and good afternoon, everyone welcome to <unk> fiscal 2023 third quarter earnings call.
Joining me today to review, our Q3 results or had been simple at CEO and Natalie <unk> CFO .
As a reminder, there will be a replay of this call posted on the IR website, along with our slides and press release.
I'd like to remind everyone that during this call all references to the financial 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 Doc Gen Digital dotcom.
Today's call contains statements regarding our business financial performance and operations, including the impact on our business and industry that 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 and those statements are based on current beliefs assumptions and X.
Dictation 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 most recent reports on Form 10-K, and Form 10-Q, and now I will turn the call over to our CEO Micha. Thank you Mary.
Good afternoon, everyone and welcome to our Q3 earnings call to start I wanted to first thank each gender employees for their contributions in 2022 merging.
Merging two companies is never easy and I am proud of their dedication and the tremendous progress we have made.
Quickly getting the integration done right creates the foundation for Jan to keep empowering millions to leave their digital lives safely.
We are at the intersection of digital transformation that touches all aspects of our lives and then ever evolving threat landscape.
Our digital security identity and privacy.
Although malware is still one of the biggest threat vectors hackers and scammers continue to shift to attacking individuals and their data not just the device anymore.
The shift to the individual means that your information needs to be protected.
Please go ahead.
Yes.
In today's world protecting devices from malware.
Not enough.
Formation.
Discovery.
It's more common internationally.
And by the way has ever been.
The slides.
Landscape and sophistication has grown not reduced whether it is theft identity fraud privacy are fake news people just financials their reputation and overall digital safety under threat.
We are committed to fulfilling consumers immediate needs and giving every person connected to the digital world.
Towards total cyber safety.
Jen brings together trusted brands, such as northern Avast, and Lifelock and combines many capabilities.
Our combination of technology product marketing and sales channels.
It's a stronger foundation for <unk> long term growth plan.
It's transferred our product innovation efforts.
Diversify our business increases global scale and opens new go to market opportunities.
We set a strategy to be the best cyber safety platform for consumers and we have the growth levers to get us there.
As we shared on the last call the gross leverage our expanding global reach by leveraging our omni channel strategy, increasing value for customers expanding to identity and privacy solutions and growing loyalty from customers by improving user experience and retention.
Before I highlight our Q3 results and pass it to Nathalie, Let me share the progress made on the integration.
As you would expect we've hit the ground running fast in the first three months, we've integrated our backend systems and processes and deploy a unified go to market structure, enabling us to optimize our investments across all brands.
We identified and eliminated about 700 duplicative jobs or activities.
We are in the process of deploying a new location strategy.
Leading to facility reductions and this week, we are integrating our quote to cash processes.
Product integration will be the long pole way, we are striving to not only maintain but accelerate our pace of innovation, which supports our revenue synergies and broader growth objectives.
In this case, we are strategically driving the integration of our technology and engineering teams to ensure that we continue delivering innovative products that address the dynamic threats people face every day.
Overall, you can see our progress in expanding operating margin. We are on track to achieve the 300 million plus annual cost savings exiting fiscal year 2024.
Integrated teams are now coming together cross continents, sharing knowledge and adopting best practices and technological knowhow with a focus on driving customer loyalty platform adoption cross selling activities, which are at the core of our revenue synergy plans for the next two years.
Let's turn to Q3 results the market trends, we saw in Q3 were consistent with what we have been seeing in the last few quarters persistent pressure on global ecommerce traffic and lackluster overall consumer demand and inflationary pressures.
We believe that consumers have taken a more cautious approach to the spending in this challenging environment.
Despite the macro factors, we delivered our 14th consecutive quarter of growth.
And when we look at our direct and partner business combined which we call our cyber safety, our Q3 bookings and revenue were both up 4% in constant currency, when including including Avast historical results in the base.
Growth was spread across regions brands and product lines, we expanded operating margin by three points year over year and four points sequentially EPS grew 2% with the negative impact of currency and interest expense masking the strong execution and operational strength of our business.
Yeah.
Direct business grew 3% similar to last quarter's growth rate in this soft environment, we continued to strategically deploy our marketing spend to achieve the highest returns and efficiency prioritizing higher <unk> and customer retention, but not taking our eyes off the ball on the top of the funnel.
Growth was supported by strong cross sell especially with double digit growth in our privacy offerings and slight sequential improvement in advisor retention.
While our direct cyber safety customers count declined by slightly over 200000 quarter over quarter.
On the partnering business side, we continue to make strong traction with our diversified and omnichannel approach delivering another double digit growth quarter.
What was this quarter was primarily driven by what I'd share gains from existing partners as we continue to demonstrate our value proposition.
As you've heard me say many times.
Jim success its product innovation.
And the integration of the two companies will only accelerate our combined capabilities.
In Q3, we introduced several new products. We launched noted an executive benefits program, which is a product that includes both lifelock and reputation defender solutions and is designed for employers that one personalised concierge support for the C suite executives and other high profile individuals.
We continued to expand our identity business internationally with the launch of credit monitoring features in the UK market.
In the U S. We launched two new products first avast identity secure was launched in December which includes identity theft protection alerts assistance and less reimbursement.
Additionally, lifelock added an industry first feature called utility alerts, which monitors new utility or telco accounts that are opened in customers names.
In privacy, we have launched a mobile app for our Norton antitrust product to extend our reach and we've also expanded our global reach with the launch of Norton privacy manager assistant to Canada for the very first time.
Our strategy in the short and midterm is to expand the value offered to our current customers through new product launches and an improved user experience that comes with them within our platform that we've developed.
We believe these focuses will grow loyalty and retention.
Innovation is a top priority and we will continue to invest to have the strongest portfolio that keeps our customer cyber safe.
Let me wrap up my comments here by saying that our growth strategy remains intact. We will continue to execute to drive profitable growth in this changing environment and create long term value for all stakeholders and now let me turn the call over to Natalie to cover our results in detail Natalie.
Thank you Vince and Hello, everyone for today's call I will walk through our Q3 results give an update on synergies and wrap up with our outlook for Q4.
It will focus on non-GAAP financials and year over year growth rates unless otherwise stated.
Our Q3 results reflect another solid quarter of performance and consistent execution.
We came in above the midpoint of our revenue guidance and at the high end of our EPS guidance.
We drove our 14th consecutive quarter of bookings growth supported by a resilient customer base and expanding product portfolio and our channel and geographic diversification efforts.
We grew Q3 bookings, 29% in USD and 35% growth in constant currency.
When including a vast historical financials cyber safety bookings grew 4% year over year in constant currency.
Our major contributors to growth in Q3 included <unk> expansion as we scale our cross selling efforts.
Stable retention with our existing customer cohorts.
Growing double digits with our partners for the ninth consecutive quarter.
And driving our direct business to mid single digit growth supported by several new product launches.
Q3, non-GAAP revenue was 906 $936 million up 33% in USD and 38% in constant currency, which includes a full quarter of SaaS contribution.
This also includes an unfavorable FX headwind of $34 million year over year or five points of growth the highest it's been all fiscal year.
When including a vast historical revenue cyber safety revenue grew 4% year over year in constant currency.
Now, let me walk through our cyber safety key operating metrics for the quarter direct revenue of $818 million grew 31% in USD and grew 3% when including a vast historical financials.
Considering the continued macroeconomic pressures persisting in the market, we are proud of our performance and driving higher value and loyalty with our existing customers as measured by <unk> expansion and retention improvement this quarter.
Direct monthly average revenue per user or <unk> was $7.09 in USD and expansion of 11th quarter over quarter.
We drove growth through our expanded cross sell and up sell efforts just like we said we would do back in November .
Our scaling privacy offerings have strong traction with our existing customers who choose to attach these incremental services to their existing subscriptions driving high double digit growth in the quarter.
Cyber safety membership adoption has increased again this quarter as customers choose the incremental value and services, we offer through our integrated platform versus standalone offerings.
Direct customer count ended at $38 4 million a decline of 219000 quarter over quarter as we continued to face into a challenged macroeconomic environment.
Traffic to our e-commerce sites is lower than last year and is impacting our new customer acquisition funnel.
We continue to invest in a diverse mix of marketing spend to help drive more traffic to our site, while optimizing the channel mix and dynamically adapting to market shifts and efforts to drive higher customer acquisition.
We strive to delight and retain our existing customer base and its working with direct retention sequentially up and landing above 75% with pockets of improvement in different cohorts.
One of the primary synergy opportunities we shared in November was the avast retention improvement.
In a short period of time, we made early inroads with the loss retention rates sequentially and while the improvement was nominal we are encouraged by the early progress.
Okay.
Looking ahead, we expect traction with revenue synergies to be measured directly through <unk> and retention improvements over the coming quarters.
Moving on to partners, we drove partner revenue to $95 million, 40% growth year over year as reported in USD, and 11% growth when including <unk> historical financials.
This was our ninth consecutive quarter of double digit revenue growth across our partner channels are result of our growing international product portfolio, enabling us to sign new partnerships and capture more new business with existing partners.
We continue to leverage existing telco and retail partnerships to drive the distribution of our expanded product offerings.
Our employee benefits channel as a differentiator in the market with a strong growing pipeline spanning across small midsized and large employers.
With our broad reach and distribution, we will continue to invest and are well positioned for growth in this channel.
Turning to profitability Q3, operating income was $526 million up 41% year over year.
We expanded operating margin to over 56% as a result of our continued cost discipline, our accelerated integration efforts and our strong execution of cost synergies.
Through Q3, we have reduced our overall operating expense profile from 35% to 31% of revenue.
Synergistic workforce reduction from approximately 4500 employees to roughly $38 50 facilities rationalization from a hybrid workforce strategy in early <unk>.
<unk> of duplicative enterprise contracts are structural contributors to our lower operating cost.
We are making inroads to the 60% plus margin framework, we've outlined last quarter.
At the end of Q3, we achieved approximately one third of the annual cost synergy target from an exit rate perspective, and we remain on track to achieve cost synergies of over $300 million as we exit fiscal year 2024.
As planned this creates more operating leverage to reinvest in product innovation and sales expansion as we move forward in our growth efforts.
Q3, net income was $291 million up 12% compared to last year.
Diluted EPS was <unk> 46 cents for the quarter up 2% year over year or 9% in constant currency, including <unk> of currency headwind.
Interest expense related to our debt was $148 million in Q3 with a negative EPS impact of 17 cents.
Total cost of debt in the quarter 14 cents worse than last year.
We anticipate the currency headwinds to continue in the interest rate conditions to remain volatile with a projected rise in so for in the near future.
Turning to our cash flow and balance sheet Q3, operating cash flow was $306 million and free cash flow was $305 million, which includes approximately $150 million of interest expense payments for this quarter.
This brings our fiscal year to date free cash flow to a total of $428 million, our ending cash balance was over $800 million.
We maintain a balanced approach in our capital deployment in January we made a $250 million prepayment of our <unk> and <unk>.
Q3, we deployed $500 million of opportunistic share purchases repurchases.
23 million shares and we have approximately $870 million remaining in our current buyback program.
We also paid $80 million to shareholders in the form of a regular quarterly dividend of $12.05 per common share.
For Q3, the board of directors approved a regular quarterly cash dividend.
Cents per common share to date on March 15th 2023 for all shareholders of record as of the close of business on February 22023.
We are well positioned with over $2 billion in total liquidity and we have no near term maturities due until April 2025.
With our strong cash flow generation and disciplined capital deployment, we will continue to utilize our capital to deliver EPS expansion and target net leverage of approximately three times.
With a balanced approach to pay down debt and deploy opportunistic share buyback.
Now turning to our Q4 outlook for Q4, we expect non-GAAP revenue in the range of $935 million to $945 million.
Translating to low to mid single digit growth in cyber safety expressed in constant currency.
We expect Q4, non-GAAP EPS to be in the range of 44 to 46 per share as cost synergies are partially offset by increased interest expense based on current super forward curves.
Beyond Q4, we remain focused on our long term objectives and are still targeting to achieve $3 annualized EPS exiting fiscal year 2025 with the following underlying key assumptions.
Our cyber safety business continues to grow mid single digits.
Post synergy structure of 60% plus operating margin.
Free cash flow deployed towards debt pay down and share buyback.
The sofa curve trends indicate rates below 3% exiting fiscal year 2025, and our diluted share count expected to be around pre avast merger levels.
In summary, this was a solid quarter and in line with our long term plan.
We are proud of our continued growth the level of execution across our teams and the accelerated achievement of synergies.
Amidst the headwinds we face we remain focused on delivering the best products and services to our customers both current and future.
And we remain committed to driving incremental shareholder value with our robust business model high ratable revenue streams healthy customer base and strong cash flow generation as we take advantage of the huge secular growth opportunity in front of us.
As always thank you for your time today and I will now turn the call back to the operator to take your questions operator.
Thank you.
Would like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question press star followed by Kent.
Again to ask a question Thats Star one.
As a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question from a cat calia.
Please go ahead.
Okay. So I guess.
Great. Thanks, Vincent Hey, Natalie Hey, guys. How are you I guess.
Good good thanks, Thanks for taking my questions here.
Thanks, and maybe just to start with you.
Kind of a kind of longer term questions.
To start with a longer term question I know the revenue synergies or are a little bit more of a of a multi year process, but I guess was the first full quarter of a vast under your belt. How do you feel about what you've seen for for Firstenergy opportunities right, whether that's processes around retention or cross selling curious how you feel about.
Those revenue synergies again kind of having more time as a combined entity.
Yeah, no. It's a very good question, we said on the last call. We will first we focus on fast integration of operations than all of our products to put in the best position to grow the value for our customers on the last call.
For those who were not on the call we identified about $200 million of revenue synergies to be realized over the next two years.
Half of those revenue synergies were about improving retention.
Northern lifelong before the acquisition of Avast and retention of about 85% on the customer side, when we merge with avast, our broad portfolio in the.
The aggregate portfolio dropped to 75% and based on our initial assumptions. We felt that we can improve that retention by a bunch of five good points on operational activities that we had identified.
As noted in Lifelock, including moving more customers to our membership level and making sure that they benefit and use all of the functionality of the platform.
After 90 days in I think not that he mentioned in her script that we improve advisor retention nominally so not enough yet to make it a trend of material that you gave us good confidence that we underwrite thoughts having identified the right operational plan to improve over the next few quarters.
The next big revenue synergies, it's all about cross selling opportunities.
Three quarters of our customers being more security focus still device centric and offering them the opportunity to grow in the identity and privacy space in the quarter the launch of new identity features or privacy.
<unk> gave us confidence that those would be well received.
Over the next few quarters, we're going to accelerate that cross sell upsell activities.
One of the conditions is to have the product strategy fully defining the product integrated so we can do in identification of the weaknesses for the customers and helping them being fully protected.
And then the remaining other activities is between e-commerce optimization marketing recalibration across the business models report.
Diverge, a little bit of our marketing spend on the free to paid conversion. So good result, so I think all in all I would say that there would reconfirm our $200 million estimate the <unk>.
<unk> does not change, but our confidence in getting there.
Is there we know in the short term that he mentioned some macro level changes.
Global Traffics and others, but when do we based our the next two year model and coming to the $3 EPS. We confident we can rely upon a mid single digit closely to to get their half of that growth rate is coming from those revenue synergies.
Okay.
Got it got it that's very helpful. Natalie maybe maybe for you and great to see the $500 million in buyback in the quarter. I think you said it was $250 million of a little bit of Delevering here early in Q4 can you just talk to us a little more broadly about how you are factoring in capital return it to and so maybe the Q4 guidance and maybe.
Longer term I mean, you mentioned some nuggets there just around the $3 EPS, how should we sort of think about that kind of mix of share buyback and de levering.
Yeah, Hi, suck it. Thank you for the question to answer your question very specifically for the Q4 guide we have nothing factored in there in that model beyond the mandatory debt pay down.
But as you know we are very very consistent with our capital allocation priorities. We will continue to strike the right balance across the accelerated debt paydown and opportunistic share buyback as we all know there's financial benefits to both of those as we maximize return back to our shareholders. We've stated delivering as a priority it is and as the cost of debt.
You've heard it now a couple of times in today's call the cost of debt for US is a major major hurdle, one that's going to get worse before it gets better so.
You can count on us that is as we continue to.
Generate strong cash flow and we continue to repatriate our international cash we will we will be very very active in deploying capital allocation in the most advantageous way as we look into the long term model.
Our capital allocation priority stayed very very consistent we still have we have a large amount of outstanding debt.
So for curve.
You know that anybody can see it doesn't it doesn't seem that you'll get a much better until fiscal year 'twenty five so as we navigate through not only Q4, but fiscal year 'twenty four.
Youll see us strike that right balance across the opportunistic share buyback and accelerated debt pay down.
We got to do both.
Absolutely absolutely Vincent maybe just one last one for you a little bit a little bit more shorter term. So obviously, a much more challenging macro backdrop.
We saw that saw that.
And the net add metric.
I'm just kind of curious if you could parse that out a little bit.
And maybe Thats just a focus on kind of the analog piece how did gross adds two how did sort of churn do you know how do you kind of thinking about that in the coming quarters.
Yes, so when you step back at.
At a high level three growth drivers one is the revenue we get per users, which really is about adoption of some of the products or the full portfolio. The retention activities. So more customers being retained satisfied with our values and then and then the tool customer ads not just the direct customer and others.
We report.
<unk> slide growth sequential on retention slight improvement driven by a vast mainly and will continue to work on dose behind.
Many.
Investor ask me, Okay. How do you do that obviously, we have a lot of operational knowhow, but product innovation and membership adoption are the two.
Very important driver there and I think you've seen that we have a good cadence there Ben Toms total membership.
We.
We look at membership as a total including from partners, even though they're not our direct customers they benefit from our overall membership and so we'll continue to invest into that.
The problems you have you seen double digit growth and we're pretty happy about the performance. There. We continue to work on the funnel when it comes to direct customers with stable retention across all lines and across regions and slightly growing at <unk>. It's all about the net.
Gross adds to the new top of the funnel if you want.
Trend, we have seen now for a couple of quarters. So that's so it's no different this quarter than it was last quarter or in Q1.
Slightly more robustness on the identity privacy combined pillar, if you want a little bit more weakness on the security when you may be closer to two to the device same dynamic was it Europe or Americas.
And I think for us it's all working on that marketing spend optimization as we continue to innovate the portfolio.
Yeah.
Very helpful I'll get back in queue. Thanks, guys.
Okay.
Thank you.
Thank you for your questions.
Our next question comes from the line of Hamzah fodder Wella with Morgan Stanley . Please go ahead.
It was up.
Good evening.
Thank you for taking my question.
Yeah of course.
I wanted to.
On the net add question, because I think that.
Probably what folks might be picking up a little bit but.
It sounded like the overall environment was pretty consistent with.
With your expectations.
For this past quarter.
But I think last quarter, we saw that at.
Coming in a little bit more stable at least on the on the Norton Lifelock side I'm curious was there anything throughout the quarter.
Perhaps what you saw towards the end of December were.
The consumer maybe got a little bit weaker as it relates to Gen digital.
Yes, I understand the question. So actually Q1 Q2 Q3, the trends were somewhat in SaaS and in dynamic the same and youre right that last quarter.
Norton and Lifelock lines. If you won that were sequentially slightly more on the pressure.
So less under pressure versus of us in this quarter, it's actually the reverse.
I would not indicate that.
Like one quarter change within the proportion of what we're looking at is not material enough and I think overall you can see above the same same dynamics slightly worse in Europe and America are the same dynamic across two continents and slightly worse in security close to the device and identity and privacy.
And I think when we guided back in November .
We had said hey, we don't see a change in that trend and I think for the next few quarters as we closed the fiscal year, we see similar similar trends and Thats why we right now really focusing on integration product integration, increasing output and retention as we continue to optimize between the different brands and business models, we have.
Yes.
Got it.
Just maybe a quick one for for Natalie.
The dollar has gotten.
Quite a bit weaker year to date I'm, just curious how youre thinking about FX headwinds in relation to the fiscal Q4 guide and perhaps any commentary you could give for <unk>.
Beyond that.
Okay, Hi, Hamzah.
Yeah from a from a guidance perspective, we just assume a no changes to currency rates. We don't guide we don't guide based on projected impacts of currency fluctuations in the market.
Yeah.
And I'm.
I'm sorry.
Two percentage points.
Just wanted to add on that.
Between one dollar versus euro at one who see this as 190 <unk> change in big views, but it's not materially different for us to change how personally would drive and inside the company. We drive all of our teams in constant currency and each sales team and direct to consumer teams are managing their business on the bookings in constant currency.
So.
Okay got it thank you.
Thank you for your questions.
There are currently no questions registered so as a reminder, it is star one if you'd like to ask a question. We will pause here briefly ask questions are registered.
Okay.
At this time there are no more questions remaining this will conclude today's Ken Q3 earnings call.
Thank you for joining and have a great rest of your day.