Q1 2020 Earnings Call
Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily. We thank you for your patience and ask that you. Please remain on the line. Once again todays conference is scheduled to begin momentarily. Please remain on the line.
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question during that time to please press star followed by the number one on your telephone keypad, if youd like to withdraw your question so depressed about <unk>.
Thank you I would now like turn the call over to Cynthia Hiponia Ma'am you may begin.
Great. Good afternoon, everyone. This is Cynthia Hiponia, Vice President of Investor Relations at Symantec and I'm pleased to welcome you to our call discuss our first quarter fiscal year 2020 earnings results.
And Symantec divestiture of its enterprise security App that we posted the earnings material in slides to our Investor Relations events Web page speakers on today's calls or were killed symantec's interim president and CEO and Vincent collect executive Vice President and CFO .
This call will be available for replay via webcast on our website.
I'd like to remind everyone that all references to financial metrics are non-GAAP unless otherwise stated please refer to the supplemental materials posted on the Investor Relations website for further definitions of our non-GAAP metrics.
Please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP measures in the press release and supplemental materials posted on our website.
We believe our presentation of non-GAAP financial measures when taken together with corresponding GAAP financial measures provides meaningful supplemental information regarding our operating performance for reasons discussed below.
Our management team uses says non-GAAP financial measures in assessing our operating results as well into the planning and forecasting future periods.
We believe our non-GAAP financial measures also facilitate comparisons of our performance depart periods, and then investors benefit from understanding or non-GAAP financial measures.
non-GAAP financial measures are supplemental and should not be considered a substitute for financial information presented in accordance with GAAP.
Today's call contains forward looking statements based on conditions as we currently see them. Those statements are based on current beliefs assumptions and expectations speak only as of the current date and as such involve risks uncertainties that may cause actual results to differ materially from our current expectations.
In particular, our statements regarding our proposed Failover enterprise security assets and plans. Following completion of the sale are subject to a variety of risks, including interest that's transaction does not close please refer to the cautionary statement in our press release for more information.
You will also find detailed discussion about our risk factors in our filings with the FCC and in particular in our annual report on Form 10-K for the fiscal year ended March 29, 2019 with that let me now turn the call over to Rick.
Thank you Cynthia and thank all of you for joining us today.
When I joined Symantec I was informed there's never a dull moment at the company well Needless to say, it's been quite an inning since I joined Symantec in April and I have been very fortunate to have Vincent <unk>, who is here with me today, having joined US in early may.
During that time, we as a management team under took a deep dive of the organization.
From the products and underlying technology to the go to market strategies for both enterprise and consumer.
We implemented cost cutting initiatives and expense control programs, while identifying key growth opportunities.
For both enterprise and consumer.
Despite the leadership and organizational changes and external noise. Our team delivered solid Q1 results with non-GAAP revenue operating margin and E. P. S. All above our guidance.
We were up both year over year and quarter over quarter.
As many have heard me say I'd, rather be lucky than good and I'm Lucky to work with this talented group of executives and employees, who have the compare capability of delivering superior results to both our customers.
And the employees and shareholders now, let me turn to the Big news today.
What first attracted me to Symantec was a clear opportunity to unlock the value in both our enterprise and consumer groups.
Our announcement today, the sale of the enterprise security assets to Broadcom for 10.7 billion in cash.
Oh achieved this by obtaining at an attractive valuation for enterprise security.
For an asset that produced approximately 50% of our revenue and approximate to 4.5.
Billion.
In revenue.
<unk>, which is about 2.5 billion and 10% of our operating income in the first quarter of fiscal 2020.
Think about that for a moment 10.7 billion in cash for approximately 10% of our operating income.
As stated on our earnings call last quarter, we're committed to our integrated cyber defense platform, which has produced a strong and competitive portfolio of industry, leading enterprise solution.
Broadcoms acquisition of these solutions validates Symantec's enterprise integrated cyber defense strategy.
And ensures seamless service for existing customers.
And the continued development of innovative and market, leading products and that dynamically growing market.
Combining symantec's technology with Broadcoms reach and proven operational excellence will delight customers and create a powerful force in the market.
And enable our enterprise business to grow without us having to invest in fixing our go to market model.
As Vince and then I will discuss in our comments this transaction delivers a superior outcome to our shareholders.
And there are four key elements to understand.
The attractive valuation we are receiving for our enterprise assets 10.7 billion for a big business that generated 10% of our operating income for quarter one.
Granted a huge opportunity for growth.
But.
Given the go to market strategy, we had it employed we work consistently falling short of that objective.
Second the size in cash expense of stranded costs and the remaining company and how long it will take us to eliminate those costs Vincent will discuss this in detail.
The <unk> third thing is the attractive long term model for the consumer cyber safety business also known as Norton Lifelock.
Our comm and finally for our commitment as a board and management team to reader return capital to shareholders.
We believe that the 10.7 billion is an attractive valuation for a business with industry, leading solutions in a fast growing market.
Now using my reverse Polish H P 35 calculator, let me put this in perspective.
The 8.2 billion. The after tax proceeds is roughly the equivalent equivalent of $12 per share.
We believe that posted 12 month transition period.
Period, as a Standalone company, our consumer cyber safety business can generate $1.50 and non-GAAP annual earnings per share.
Oh, you can play a multiple of 13 to that number.
Added to the $12 per share we are getting for our enterprise assets and you get a share price in excess of $30 a share for Symantec.
Now, obviously, a stable dividend generating company and a loan.
Interest a negative interest rate environment.
Well, clearly garner higher than a 13 X multiple.
We believe this represents a nice premium to the share price prior to our announcement today.
Now once the agreement is close the remaining company will have approximately 1.5 billion and stranded costs.
Which we have determined will cost approximately 1 billion in cash to eliminate.
Vincent will address this in more detail, but we believe we can self fund the majority of these restructuring costs using the value of the underutilized assets such as real estate, which is located in highly attractive locations.
We believe this transition period will take approximately 12 months from the close of this agreement to realize all of the cost savings after which we will have a more nimble and on encumbered pure play consumer side safety business.
We will be able to use the significant cash generation from operations to fund growth and continued innovation within Norton Lifelock.
We have all seen recent breach headlines that affect tens of millions of people.
These incidences are just one example of what is driving.
Consumers increasing need for cyber safety.
As corporations harden their defenses against cyber crime.
Cyber criminals will continue to try and effect in fact consumers, making them potential carriers into the business where they work.
No different than the periphery <unk> proliferation of the flu virus during.
Flu season.
It is our job as a consumer company to inoculate.
These carriers.
In our consumer B to B to C strategy will play a major role on the front lines in the battle against Cybercrime.
Now with a large and growing market Norton lifelock addresses consumers' increasing need for cyber safety.
Our integrated solutions built around our core technologies across device security identity protection privacy and home and family safety, our enhanced value to all our members consumer side cyber safety delivered solid results in the first quarter driven by the increasing value. We have delivered to our members we increased investments in advertising and promotion at the beginning of fiscal year, 2020, and well continue to invest into direct customer acquisition programs to drive direct member additions.
Our partner programs continue to grow members and our retention rate is approximately 85% across the business.
We believe in the long term, our consumer cyber safety business can grow revenue and the mid single digits with operating margins.
Oh <unk> of approximately 50%.
And earnings growth above revenue growth. This model can provide an attractive dividend yield and generate free cash flow of approximately $7 million annually.
So, let's summarize we've announced a transaction that we believe delivers an attractive valuation for our enterprise security assets.
We've identified our stranded costs and how long it will take to remove them from the remaining business.
Yeah, we have provided our view on the long term financial model that a pure play consumer cyber safety business can achieve with an optimized cost structure.
Now let me outline the signals, we have said on returning capital to shareholders.
We intend to deliver a $12 per share special dividend to shareholders. After the close of the transaction, which represents approximately 100% of the after tax proceeds from this transaction.
We announced an increase in our share repurchase program of $1.6 billion.
And we expect to raise our quarterly dividend by 67% to 12.5 cents per share or 50 cents annually. After the close of the transaction.
And additionally.
Our <unk>, we are committed to continued return of shareholder capital as the cash flows of the company permit.
The sale of our enterprise security assets delivers a win for our enterprise and consumer customers and for our shareholders Hock Tan Broadcoms President and CEO will begin the integration planning process immediately hock has built a leading technology company and summit and Symantec Enterprise security will be another key asset in a software company portfolio.
Looking forward as we work towards closing this agreement in December quarter, we'll continue to focus on the operational discipline and execute on multiple initiatives to drive revenue growth in the consumer cyber safety business I'd like to thank all of our shareholders for their patients they have shown.
And we hope you see the commitment of the board and the management team have to you.
And our employees.
Let me now turn the call over to Vincent the best higher Symantec has ever made who will review our quarter one results give our outlook for the second quarter.
And provide more details on the agreement.
Thank you Rick as Rick mentioned, we demonstrated our capacity to execute on our plan and delivered solid Q1 results.
This quarter, we delivered rose, but broad based performance on revenue growth and profit levels across our business.
We also developed a restructuring plan to improve productivity and simplify the way we manage the business.
And finally, we negotiated the sales of our enterprise security assets to Broadcom for 10.7 million in cash.
Presenting about 36 time, if why 19 enterprise segment operating income both 27 times after tax.
The completion of this transaction will unlock the embedded value in enterprise security, while enabling consumers cyber safety to emerge as a pure play market leader with strong earnings power.
No doubt that this transformational transaction repositioning our company as a pure play consumer business wouldn't be at the center of every discussion. However allow me to first comment on Q1 results.
In this first quarter of fiscal year 2020, we delivered better than expected revenue of $1.251 billion up 9% year over year in constant currency.
Excluding the extra week that we had this quarter revenue grew 2% year over year in constant currency.
For this quarter, we generated an operating profit margin of 30% up two points year over year, driven by revenue growth and disciplined cost management.
Fully diluted earnings per share was 43 cents up 23% year over year.
In the quarter, we generated $325 million of cash flow from operations.
In our enterprise Security segment, we delivered revenue of $615 million up 11% year over year in constant currency and up 4% year over year, excluding the extra week.
Revenue was $40 million above the high end of our guidance due to higher mix of sales yielding upfront revenue in the quarter as well as higher than expected weighed about revenue.
Our Q1 enterprise security reported billings were $497 million up 10% year over year slightly better than our expectations built into our revenue guidance communicated three months ago.
In Q1, we generated enterprise security operating margins of 7%.
In our consumer side cyber safety segment, we generated revenue of $636 million slightly better than expected due to higher partner revenue and strength in our subscription revenue.
We delivered revenue growth of 7% year over year in constant currency and flat year over year, excluding the extra week.
In Q1 average revenue per user ARPU increased to eight point $83 per month up 2% over you have a you normalize for that extra week.
Average direct customer count was 20.2 million down 3% year over year.
We also think millions of consumers through our partners and partner revenue was up 5% in the quarter.
In Q1, we began increasing investments in direct customer acquisition marketing spend.
The increase in marketing investments will continue into Q2 in order to capture our long term growth opportunities as we look ahead to operating as a pure play market leader in this space.
Keep in mind, there is a lag effect on when do we begin to see the positive impact on subscriber growth.
From one dollar customer acquisition programs launch these investments I expected to be funded by reductions in infrastructure and G. any cost.
In Q1, we launch our integrated solution memberships on the Norton and Lifelock web sites in the us.
Internationally in Canada, the UK and Germany. The note on Dot Com Northern Dot Com site website now offers integrated offerings that includes secure backup VPN and privacy controls.
Adding value to our membership subscriptions will allow us to grow subscribers and ARPU.
As such we believe we will see a more meaningful impact on both ARPU and customer accounts in the back half of X Y 20, and the more meaningfully weigh in if why 21.
Finally, consumer cyber safety operating margin was 53% compared to 44% a year ago, a growth of nine points year over year moving forward, we intend to maintain an optimal level of investment to support our growth objectives.
It was in the operating margin target of around 50%.
I am incredibly excited by the long term prospects of our consumer cyber safety business.
Which will have full ownership of its own destiny. Following the completion of the sale of our enterprise security assets.
Before I turn to Q1 balance sheet and cash flow I want to say a few words about our cost structure.
The three main change yourself operations across the company, our speed of execution productivity and customer focus as part of a plan. We developed over the last couple of months, we announced today, a 100 million restructuring program aimed at improving productivity and reducing complexity in the way we manage the business.
This plan includes a 7% reduction off has gone and closures of sort inside.
We expect the majority of these actions, which we have already started study to be done by the third quarter.
In the quarter, we generated cash flow from operating activities of $325 million compared to 331 million in Q1 19 as expected Q1, Capex was $49 million with the majority associated to the enterprise business.
We now indeed, we ended Q1 with $1.694 billion in cash and short term investment.
In the quarter, we executed the repurchases of $541 million worth of shares leading to a weighted average diluted share count of 642 million.
Now turning to our guidance.
Due to the announcement of the sales of our enterprise security assets, which we expect to close in our fiscal third quarter. We are not providing full year 2020 guidance at this time.
For Q2, we are increasing the guidance range. So we think the uncertainty that might be caused by the announcement of the sale to find to prosecute the asset.
We are forecasting a Q2 fiscal year 2020 revenue range of $1.155 billion to 1.2 to deal with 5 billion comprised off.
$565 million to $600 million in enterprise security and 590 million to $605 million in consumer cyber safety.
At the midpoint of our guidance it implies approximately flat year over year for the total company.
We are forecasting operating margin to be in the range of 31% to 33% and finally EPS is forecasted to be in the range of 40 to 44 cents per share.
Actually yes, 40 to 44 cents per share assuming a fully diluted share count of approximately $648 million and the tax rates constant to Q1.
We are confident that we'll smoothly and successfully managed to enterprise security I said seal and expect to ensure minimal disruption through the quarter.
Now let me go into the more exciting piece of the news we have announced at the end because there is a lot to absorb allow me to be a little bit repetitive with what we have already shared so far.
We agreed to sit on to prosecute the asset to Broadcom for 10.7 billion.
This committed $8.2 billion after tax which will enable us to return $12 per share through a special dividend.
Following the asset sales, we plan to eliminate approximately 1.5 billion of stranded cost.
Which we expect to accomplish within 12 months.
The closing of the transaction.
We believe we can complete the task without disrupting the consumer side, specifically given the business largely run independently.
We expect that it will cost us approximately a billion dollars in cash to eliminate those trying to cut cost and we will fund those in large part by the sales of underutilized assets such as real estate.
After the transition period, we will emerge as a pure play consumer side, specifically business with a long term growth.
Addition, beard nonfuel basis, and I'll repeat that because I think we may have heard recording $700 million and that was a mistake suggests a cop may thank you.
We expect the consumer cyber safety to generate annual free cash flow of approximately $900 million. After the transition period, the majority of which we expect to return to shareholders via mix of regular dividends and share buybacks.
Consistent with this objective we expect that our regular quarterly dividend will be increased to 12.5 cents per share or 50 cents annually. Following the close of the transaction.
In addition, our board of directors has increased our share buyback authorization by $1.1 billion to a total of $1.6 billion.
We expect the incremental share repurchases will be executed over time after the close of the transaction when all sales proceeds have been repatriated.
Accordingly.
The completion of this buyback authorization has been factored into our EPS calculation and expectation for consumer cyber safety.
We believe this disciplined approach to capital allocation together with our expectations for the growth of consumer cyber safety should deliver an attractive total return to shareholders.
Following the transaction, we expect to maintain a debt balance approximately consistent with the debt on our balance sheet today as the go forward business will retain approximately 80% of the fiscal year 2019 operating income.
Our current debt of $4.5 billion would represent approximately 3.5 times gross leverage on the consumer side with safety business. After adjusting for the elimination of the stranded cost.
We believe this approach is appropriately leveraged.
Returns leverage returns to shareholders, while also managing fiscal risks and maintaining financial flexibility and is supported by the predictable and highly cash generative nature of consumer cyber safety.
We are very excited about unleashing the full potential of consumer cyber safety, which will emerge as a focused pure play leader in the consumer market.
Our Norton Lifelock products have the number one revenue share in both consumer security and identity protection and strong brand recognition.
Our integrated solutions built around the core tenants of security privacy identity protection and home and family safety and redefine how consumers think about cyber safety.
We expect that the ability to fund further investments in product innovation and sales and marketing will create an attractive financial Mondo model and enhance total shareholder return.
There has been a lot of information shared today, So let me summarize them once again.
We delivered strong Q1 results with EPS growth of 23% year over year.
We announced the sales of our enterprise security asset for 10.7 billion in cash about 36 time in fiscal year 2019 operating income.
We have identified approximately 1.5 billion of stranded costs, which we expect to eliminate over 12 months at a cash cost of $1 billion and funded by the sales of underutilized assets such as real estate.
We are retaining 80% of our fiscal 2019 operating income we're refocusing the company as a pure play market leader in consumer cyber safety with earnings power of approximately a $1.50 per share after transition.
With an expected $12 special dividend per share an increase in our buyback authorization to $1.6 billion.
An expected increase in our regular dividend, we are focusing and we are focused on maximizing our total shareholder return.
In short, we expect to return in cash about 59% of monday's market capitalization to our shareholders. While at the same time, keeping a not to ship in a predictable business that generates over 80% of today's operating income.
And with that Rick and I are happy to take your questions.
Ladies and gentlemen, as a reminder, if you'd like to ask now. Your question you may do so by pressing star followed by the number one on your telephone keypad again Thats star one to ask an audio question.
Our first question line of Cortina Boolani from Jvs.
Good afternoon. Thank you for taking the question I have a couple if I may maybe to start out with.
The aggregate headcount Symantec has been in the 12000.
Neighborhood, so I am wondering.
As you undertake this divestiture how employee footprint split out between Standalone.
Consumer business, and then now divested enterprise security business.
Absolutely. So we have 12000 employees that they were marching in our improvement plan towards a $10000 in aggregate for the phone company. We've started to reduce the headcount as you may seem in our report and we do more as we go forward and when you talk about the remaining company post transition period will have about $2.5 billion of revenue and we believe that a million dollars per employee is the right long term target 2500 is the long term target we should be very close to that after the end of the transition period.
Understood and you talked very specifically about measured rate that investment while maintaining.
Sort of a 50% Zip code.
An operating margin perspective for the consumer business they wanted to better understand.
Where in particular those marketing investments will go on as we think about historically their spend.
Varying degrees of success, you've had with retail partnerships and OEM arrangement, so I really wanted to better understand.
Where exactly the marketing investments will be.
Absolutely let me first first really explain the the room, we have in our PML, we've been running this business the consumer business at around 50% in the fiscal year 18, you see now in our segment, 50% margin fiscal 19, 48% very very much along that line.
Marketing expense have been rationalized over time as they were trying to free up allocation at the corporation level to fund the turnaround of the enterprise business.
And thats the normal process of of corporate budgeting and locations you look at the Q1 results. We've just posted the consumer segment is running at a 53% operating margin.
And we believe there is a sub investment if you when compared to the opportunity to be able to turn around the customer account.
Mainly so direct marketing online marketing.
He is our target and we believe we have one to two points of margin here, we can invest in our business without changing our long term target of 50% and be able to grow in this.
Low single digit today to the mid single digits.
We also at the same time have moved from product and point of sales license product. If you want sale into more of a membership approach and the trying to upgrade customers from basic membership to higher membership, providing additional functionality from security to identity to privacy.
Is the long term strategy of the business and not to enter into it now perfect I think the thing to recognize what this businesses there are multiple.
Knobs to grow revenue.
And Vincent just articulated clearly that knobs.
Greater membership.
And greater membership is also a function of the value of the product offerings that are we that we're creating which as part of our strategy to improve that value targeted at.
Our safety within the home and even in small business now the other lab that we don't talk much about is ARPU.
Okay, and clearly while our overall.
Customer or our membership has continued to grow we have had this slow decline in direct.
Acquired customers.
And that is due to the fact that we had made a conscious decision.
A couple of years ago to bring down the spending in advertising and promotion by about $40 million.
And we have.
Put in programs to basically determine and monitor incremental increases in advertising and promotion to determine the optimum investment levels in order to begin growth in our deck.
Directly acquired customers.
In addition to that we're putting in programs with our partners that will also allow us to increase the number of directly acquired members.
And all of this allows us to basically it more efficiently get the customer and therefore offer them a full range of services that we don't necessarily offer to all the partner channels. So there is a multi prong strategy that the business has put in place. It started at the beginning of the fiscal year, we're beginning to see results in those areas and allowing us to focus on that business solely and not have it encumbered at all.
With with the performance of enterprise should allow us to get that back to the.
Mid single digit growth that we desire. Thank you.
And our next question is one of Jonathan Ho from William Blair.
Hi, Good afternoon, I just wanted to start with.
Maybe the Norton and the Sep endpoint business can you maybe give us a sense of what if any overlapping.
Impacts there might be I guess from the separation and just how to think about that in terms of impacting R&D.
The sell side.
In terms of overlapping capabilities.
Yeah, well clearly.
You know endpoint is endpoint, obviously in the case of SAP SAP goes into a control panel and its ideally suited for enterprise applications, where Norton anti virus virus does it really do that its not as extensive but.
There is some overlap, but our focus and our definition going forward is the consumer marketplace and that consumer marketplace also and includes small business.
Because we obviously have had a norton small business product offering.
You know along the way and there is a clear delineation and I don't really envision a huge conflict because.
If you're in a large enterprise and you want to control endpoint.
You really require.
You require more.
Ability to control it wearing the consumer it's the individual who is controlling it now having said that the common thing is is that they both provide valuable threat intelligence.
SAP provide threaten threat intelligence in the enterprise environment, which is a what I would classify a more benign environment because corporations are controlling.
Cyber threats at multiple points in their network, where in the consumer business.
Our access to threats consumers go anywhere on the net and therefore are subjected to more potential viruses that they can inadvertently bring into the corporation. We share that data, we will be sharing that data with broad calm and our enterprise business I'm going to make sure that all our customers rather whether they were our former enterprise customers or are continuing and growing consumer companies get the best engines and the best coverage dynamically and I think it's a win win for both companies.
Im excited for our enterprise people and I'm equally excited for our consumer people because they've got great ideas and they understand the market and there is great opportunity and as I said in my my talk as the corporation get to Harden criminals are more and more are going to try to use.
Consumers to get into the corporations and I think as I said in the very first call I think it's very important that consumers be inoculated prior to going back into their place of work. So thank you very much for that question Jonathan.
Excellent and then just as a follow up how do you think about balancing the need to maybe return value back to shareholders along with your growth initiatives is there some type of formula that we should be thinking about and.
I guess relative to prior.
Your management teams that have tried to achieve the same goals. How do you think about this a little bit differently.
Well first of all the.
First of all the beauty of focusing on consumer is a very steady consistent business. So the predictability of cash flows the predictability of growth. The predictability of profitability is a lot greater so our ability ultimately to hone in on what percentage were going to do dividends what percentage were going to do buyback.
And what percentage were going to reinvest will be much much easier to define as you can imagine in the enterprise business with the episodic nature of the revenue.
When it's overlaid on top of a consumer business.
Huge big elephant orders that come in that come in or don't come in at the end of the quarter can can really greatly affect your cash flows. Consequently, inhibit your ability to develop a pretty well refined capital allocation strategy.
We're not announcing one today, but we will after the deal closes.
Try to give you a a solid picture of what our intent will be with capital allocation, but as I said in my talk clearly the board and the management is come is committed to return of capital to shareholders as is appropriate and as optimize for our investors. So that's my answer and thanks.
Jonathan next question.
And our next question from line of Karl Keirstead from Deutsche Bank.
Thank you Vincent is there is there a way to allocate the.
$1.5 billion of stranded costs to the consumer.
And enterprise piece, so that we can take a stab at calculating the multiple of EBIT, you're getting for enterprise X.
Its share of the stranded cost because it seems to me that might be a more fair way to look at it given that broadcom is not absorbing that.
Or maybe you disagree thanks.
No absolutely let me tell you about how we think about it right for the consumer business as a segment in the enterprise segment are fairly separate distinct businesses and in the PNM reported we have fully allocated those cosby based on their utilizations to the right segment.
You see today that fully loaded the consumer business is running ads in Q1, 53% operating margin targets and we have a long term target to ready to run it at around 50% plus or minus one or two points depending on the course objective then to price business has the remaining cost plus the cooperates functions that are serving that enterprise business.
The $1.5 billion of stranded costs is made up of those two pieces the assets of the enterprise business that Broadcom will not take plus the portion of the call fleet services that are serving today. The enterprise business. That's done type costs that will cost us about $1 billion in cash to any minute over 12 months.
And the consumer business should continue to operate fairly independent.
Based on that.
If you want to Ken Yeah, what I'd like to add to that is one of the one of the beauties of this transaction is that.
Broadcom is taking the business and they have an infrastructure for the go to market that already exists.
Which allows an easy transition of our ongoing business to that platform.
And what it does is.
In the situation that.
Our whole team was working on to restructure to deliver the results.
Within the Symantec whole call.
You, obviously have the problem that you can't shut down your route wrist shutting down your revenue stream, while you know you're running the business as a consequence as they move this over we have these stranded costs that are immediately vacated and so it makes carving them out much easier and during this deal. We also retained as part of this deal assets that have embedded.
Gains in them that are substantial that we can use to offset this cost Vince said, it's going to add just want to add one thing because you question maybe missing that.
Maybe there's a perception that he's a modeling exercise we went extensively through rgs to offset leased asset by asset to target them. Do we think there is always the broadcom business I do think there's the here and how we going to eliminate those assets over the next 12 months. So we have a very rigorous approach thats more into transaction level, then under modeling level.
Okay. Thank you so much.
And our next question this line of John Difucci from Jefferies.
Hey, Jim.
Hey, Thanks for taking my question.
So I look at it.
So what you're saying about the consumer business and.
If you look historically, it's to the decline for years until the Lifelock acquisition, which certainly benefited from the timing of the equifax breach.
And I am just trying to sort of figure out how you're going to.
Accelerate this from low single digit growth to mid single digit growth over the long term I get what you're saying, Rick about cross selling and selling more products and.
But thats something semantics been trying to do for a long time. So is there something different that that's the you see at this point in order to make this happen.
Well I think one of the things is Lifelock was an absolutely great acquisition. There is no question about it and there continues to be a great acquisition and our ability to make equivalent type of.
Services available outside of the United States are an opportunity to take that model, which goes back to protecting individuals' identity, which we do have new products to do we're going to expand that model of lifelock outside of the United States and Oh by the way Equifax was a bump.
But within that Lifelock continues to grow and be very successful I think you even heard.
David Faber this morning.
Highlighting how he uses lifelock and even though we're not going to have a coupon on this call for everybody to call in its it shows you the value that everyone sees because there's hardly a person on the planet.
Who hasnt had their identity somehow compromised and so we don't see an end to the growth and Lifelock in fact, what we see is our opportunity to take.
The attributes of Lifelock and expanded outside of the United States, where it's been enormously successful and Thats. The only thing is different so I have can if I can add so we were targeting a 3% to 5% over the next couple of years. It has grown 3% over the last two years and you rise currency the business is flattish.
Then we three areas, we're focusing on the one is the customer on investing more in direct marketing. The second one is what we mentioned which is these ARPU, adding functionalities to.
The offering and we've got increasing the membership and then and then increasing the retention rate also which we've moved from from from.
Lower to now 85% I think if I looked at the number we had around 80% a couple of years ago. There was on the gross would what I would call is a GDP plus type of growth. So it's not all have ambitions I do believe with all the value of these and other environment not us we singly focused on consumer we have the potential to do more but would be would be very prudent and will focus on operational discipline setting targets that we can deliver and phones construct to be investing in innovation and sales.
Okay. Thank you and if I could just a quick follow up it's actually on for Rick.
Rick I believe you are your title is still interim CEO , you've obviously had very very active here since you've come on board.
Should we be expecting you to continue to work history.
In partnership with Vincent.
This whole transition.
Or not and if you have any spinney any comments on that would be helpful.
Yeah, My active involvement as a personal flaw, but the reality is I could not be more proud of the entire management team and I could that have a better partner than Vincent and.
You know I enjoy working with them, but as I said in the last call.
Three ending relief pitcher and.
We clearly had a beginning in quarter, one and we've got a big job between now and close and as we announced in our press release, we are also.
Taking the opportunity to really that both internal and external candidates in order to run the ongoing consumer business.
Vincent is going to drive.
Clearly.
Via the major player and I could not have a better partner.
Then Vincent to do this and the I believe the whole management team believes that.
And so again I am still a relief pitcher I'll be a relief pitcher for a little bit longer, but I am not in any way shape or form a person all permanent.
Structure here.
I Love the company and love the people love the products Great mission and.
And I just hope all the investors see it as I do that it's a great opportunity and what we've done here is really.
Freed up.
The ongoing remainco to be enormously successful and if I can add to that because I knew investor always worry about interim CEO and I've read a few reports we have a very solid management team has spent a lot of weekends and lot of these assets. We believe this transaction and the team has a lot of experience in separating assets and really driving what needs to be driven over the next 12 months and independently from that the consumer management team is also very strong because all of investor focus on enterprise over the last two years that haven't been too much exposed to dot.
But I think we have a very strong capable.
Consumer business for them.
And our next question is one of Keith Weiss from Morgan Stanley .
Excellent. Thank you guys for taking my question and congratulations I mean, you just really got a great price for that enterprise assets.
So so fabulous job and monetizing that that business for for the share languages.
A couple of just like I guess more detailed questions.
In terms of sort of share technology between the consumer in the enterprise endpoint business.
It is to what degree is there kind of share technology do you have to license like the engine back from Broadcom or anything of that ilk in terms of.
Sort of the of the share the common technologies between the two.
And then the other way are you getting paid by Broadcom for that data like the consumer data you are going to send to them.
So I am going to turn this over to the expert and one of the key people involved in this transaction whose irreplaceable.
Hugh times.
Hi, This is Hugh here CTO over at Symantec, and yes, I think one of the one of the great benefits of this transaction is we do you still get to enjoy the benefit of the diversity of threat intelligence data that exists both in the enterprise and in the consumer and we certainly will benefit from that.
In the remaining consumer company and Broadcom I believe will also benefit from that threat telemetry and your point is well taken I think weve spend a lot of time at Symantec over its long history in building engines and endpoint technology that really is.
Leading in its class and will continue to be able to benefit from that intellectual property and from that code base with this agreement.
Yes. So there are does that imply there is a cross licensing agreement third there's Ross.
There is a cross license we are focused on the consumer business and small business.
Okay and.
Broadcom is focused on the enterprise systems are enterprise customers that that is the agreement, but we cross license.
Both ways, but each of us simultaneously own.
Specific patents ours are the ones that are most closely aligned with the consumer business.
And Broadcoms are most closely aligned with the enterprise business. There are some overlaps and in those overlap cases their shared we have some that still have enterprise capability. They have some that still have consumer capability, but.
It's.
It's in the best interest of both companies customers and our shareholders and the world at large that we have these capabilities. Thanks got it and then on the consumer side of the equation in terms of the go to market.
You talked about increased marketing activities, one of the things that I think really precipitated the declining sort of market share in declining.
Based on the consumer business is when you exited a lot of those.
Distribution agreements with that with the Big PC Oems is there any consideration or should we be thinking about potentially you guys heading back into those types of agreements are bidding again for like in each be distribution deal or anything of that ilk on a go forward basis.
Okay. So I would tell you and Vincent spoke to the quality and the depth of management, we have within consumer that was a financially driven decision that when you look at the cost too.
Go into an OEM relationship with Pcs, which is not a hugely growing market by the way.
The cost to acquire that customer is so high they're all our alternative ways to acquire customers that are much more efficient and the payback was way too long for acquiring a PC company and so they elected to pull out of that going forward. The thing I want you to understand as we will look at all ways that we can to acquire new customers, but it's all going to be.
Driven with a financial lens as the reason we go into those particular businesses, it's not going to be driven by everybody else does it and Oh Gee. It gives a big topline number ive told everybody for years anybody can sell 10 dollar bills for nine Bucks the real big key is to be able to sell.
Really those 10 dollar bills for about 40 Bucks and that's our goal in life.
And our next question is from one of Phil Winslow from Wells Fargo.
Yes. Thanks for taking my question I know you keep referring to solvers relief pitcher basis pretty good place.
So.
Just a question Erskine.
Just a question on the.
On the unit count metric on the consumer side, we talked about just now I guess some of the things that have weighed on that what are you talking about for your near term guidance of getting back to you.
Single digit mid single digits.
Revenue growth how are you thinking about the trend in that unit count obviously, we've talked about ARPU, but what do you think we see sort of the unit count.
Joe declines.
Using and then could that grow again in Europe .
Okay. There's two there's two variables again.
To grow the top line one is ARPU, which is your average price per user and the other one is user. So we don't even have to get to positive directly acquired customers.
You know in order to get growth, we just need to slow the decline, which in fact, our data suggests weve already done and were tight trading the.
Advertising and promotion to keep.
You know turning that too.
Till we can get it to justice zero, that's sort of the optimum.
And then we can start adding customers and simultaneously upselling customers. The beauty of direct Lee acquired customers such that we know who they are as an individual gives us contact and on every.
You know basically renewal as we generate more products, we can give our customers more value and in the renewal process. We have the ability to sell more of our product with someone we know and has a high likelihood of buying that's how we think of this business and that's really how we're going to run at going forward and that's the variable, but realistically our decline right now is slowed.
So dramatically and then as I said, our actual customer.
Acquisition is up you know our users are up but part of that through our partnership we don't get the same ARPU and we can't effectively sell all the other value. We have so we want to be able to do more give those customers more value. So we're going to also be working with our partners to make sure. They can sell more value and now that we're we won't have to fund any other business than this.
We can look at the piano Ella this business and allocate resources based on its net present value of future cash flows by what we're doing and we won't be I have to get a mixed up.
It's simple and.
And we have management, that's very very capable I. The one thing on this call that I want to tell you that there is no way.
Unless you have the.
Quality of people that we have here you can pull off an asset sale.
In less than a quarter.
And believe me, it's not a one man show and when Vincent talks about detail.
Down to the asset today, we know exactly whats transferring out of this business and we know what's remaining into this business from the head count we know what is transferring out of this business. What our objective is for the ongoing business and the unfortunate part of what we have to reduce within this business, which will also include people who have been instrumental in making this deal happened I could not be more proud.
To work with people that I am where these people. So that's my view I think on that.
And were new to the party here. These are the same people who have been at Symantec many of them for years.
Okay, no change and people whatsoever.
So I'm very bullish and a consumer business.
And our next question is one of Brad Zelnick from credit Suisse.
Fantastic. Thanks, so much and congrats on all the news and Rick even though you are new to the party. It seems like you are getting the hang of it pretty quickly.
But my question.
Is a variant of some of what was already asked but on consumer if I look at your first quarter consumer results and second quarter guidance and if I, then extrapolated normal seasonality into the back half of the year. It looks like you would have been guiding the year below your original range. If you hadn't pulled the guidance. So my question. If we look at your deviation from your original full year plan. How much of this is churn versus being behind on on gross adds or perhaps just being behind on your marketing spend and can you maybe share a view of the business. If we were to look at Norton units versus Lifelock units and I know some of those are our commingled at this point, but is there any color you can share that would be great.
Yes. So this is vincent so we we guided abuse the.
In a conservative way, knowing that we're going into a major transition.
We're not guiding the full year. Our Q1 results are on track to plan actually slightly better than expected.
And we we continue to focus on investing marketing spend.
Into into the.
The overall program to transform from point of seems to membership sales.
Obviously, the marketing investment, we just done one to four.
Spend and see little weather returns on we have a very precise model we measure we Johnson.
We plan to gradually go down so that's where we are yeah, Brad and this time of year is normally slow.
Okay. We've just started to ramp the advertising and promotion. Okay. We have earlier announced programs that are with our partners that has also greatly accelerated okay. We have not seen any.
If anything in the second quarter, we have much less of a fall off of customers. The best half of the year is yet to come for us obviously.
And so it's just we're in a transition zone you can imagine the amount of work that has gone on.
Within this company you know, we'll be out and we will be talking to all of our investors.
About the business and I do believe it's nothing but good news so while I'd like to give you.
You know a spreadsheet that all tied out from top to bottom you know.
Spreadsheets can say anything you want to make them say, we want to deliver results.
And leaves and it seems that we are at the end of the Q and eight I would like to turn the call back over to Vincent present for the ending remarks.
Well. Thank you for joining us today, obviously, there has been a lot of news a lot of good news for our shareholders. While I'm pleased I can tell you on on the side and on the table in the company. We are incredibly excited first to partner with Broadcom to make this transfer of the enterprise business, a very smooth process for customers, who will be upon or two routes coming making that happen successfully and secondly, I think the excitement to become a consumer companies focused solely on that consumer opportunities share across the whole team. Thank you and we look forward to updating you as we make progress thanks very much.
Ladies and gentlemen, this does conclude today's conference call. We thank you greatly for your participation you may now disconnect.
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