Gen Digital Q2 2022 Earnings Call Transcript

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Provided by Quartr
November 3, 2021

Key Takeaways

  • Q2 non-GAAP revenue rose 11% year-over-year to $695 million, supported by broad-based growth across geographies and product lines.
  • Non-GAAP diluted EPS expanded 19% to $0.43, at the high end of guidance, benefiting from 87% gross margin and G&A under 5% of revenue.
  • Net direct customer adds were 178,000 sequentially and 2.6 million year-over-year, marking the eighth consecutive quarter of sequential growth and reaching 230.3 million total customers.
  • International business grew double digits and partner revenue increased 25% year-over-year, driven by employee benefits and expanded freemium and identity offerings.
  • Shareholders approved the proposed Avast merger, expected to close mid-2022, which management says will accelerate innovation and global scale.
AI Generated. May Contain Errors.
Earnings Conference Call
Gen Digital Q2 2022
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good afternoon, everyone. Thank you for standing by. My name is Jerome, and I will be your conference operator today. I would like to welcome everyone to the Norton LiveBlack Fiscal 2022 Second Quarter Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. At this time, for opening remarks, I would now like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Ms, you may begin.

Speaker 1

Thank you, Jerome, and good afternoon, everyone. Welcome to the Nore and LifeLock fiscal 2022 Second Quarter Earnings Call. Joining me today to review our Q2 results are Vincent Pilette, CEO and Natalie Dursey, CFO. As a reminder, there will be a replay of this I'd like to remind everyone that during this call, all references to the final metrics are non GAAP and all growth rates are year over year unless otherwise stated. A reconciliation of non GAAP to GAAP measures is included in our press release, which is available on the IR website at investor.

Speaker 1

Nortonlifeloft.com. In addition, we previously announced the merger of Norton LifeLock and Avast. The information shared today will be limited to what has already been disclosed Today's call contains statements regarding our business, financial performance and operations, Including the impact of the ongoing COVID-nineteen pandemic on our business and industry, which may be considered forward looking statements and such statements involve risks and uncertainties That may cause actual results to differ materially from our current expectations. Those statements are based on our 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 ks for the fiscal year ended April 2, 2021.

Speaker 1

And now, I will turn the call over to our CEO. Vincent?

Speaker 2

Thank you, Mary. Welcome and good afternoon, everyone. We've come a long way since we became a consumer focused standalone company exactly 2 years ago today. As I reflect on Norton Knifelog's transformation, I'm extremely proud of our team. We committed to operating within financial discipline and bringing meaningful and sustainable growth to this business, and We have relentlessly been building a strong track record and remain focused on meeting our long term objectives.

Speaker 2

As you've heard me share before, we are focused on driving growth by improving customer experience, Scaling our integrated cyber safety platform and accelerating the pace of our product innovation from core security to trust based By putting our customers first and relentlessly executing to our plan, We believe our long term goals are within reach. Our strategy is working. And as we delivered another quarter We are delivering strong profitability and continued EPS expansion, up almost 20% year over year. Our high single digit bookings growth was in line to our long term objectives and is reflective of our normal seasonality, with the first half of our fiscal year historically being seasonally lower. The start of Q2 was impacted by expected weaker summer demand And COVID reopening as more people mobilized or prioritized to travel and other activities.

Speaker 2

As we balanced all of our operational metrics And investment, we finished the quarter with strong momentum, delivering our 8th straight quarter of net direct customer adds sequentially. Our direct customer count grew over 178,000 sequentially, and we added over 2,600,000 customers year over year, bringing our total customer count to $230,300,000 In Q2, our direct to consumer revenue, And unit retention stable. We have continued to build a richer and more robust product portfolio As we reach more consumers on a global basis, while driving higher engagement with our existing customers, Our net promoter score continues to improve from low 40s last year to 49 this quarter, reflecting our focus on customer experience and providing peace of mind to our customers as they live their digital lives. Our international expansion efforts continued in Q2 And grew double digits, similar to last quarter. We continue to invest in our freemium model as it increases our consumer reach and awareness, And we are encouraged that our nascent expansion into identity internationally is now available in more than 20 countries across Europe and Asia.

Speaker 2

It is a critical component of our ability to provide more value to our customers outside of the U. S, replicating the success we have had with Our partner business posted double digit revenue growth for the quarter for the actually 4th straight quarter, up 25% in Q2. All channels contributed meaningfully to these results. Amongst those, the employee benefits channel delivered another very strong quarter. We've expanded beyond the United States, offering our employee benefit solutions to Canadian employers and unlocking a broader customer base.

Speaker 2

Investments in this area are paying off as we have strengthened our sales team and market coverage in the last few quarters. We intend to expand our overall partner business, and we will continue to invest in our multi channel approach, evaluating all potential opportunities and markets globally. Overall, we are on track to our plan and committed to investing in what we see as a long term secular growth opportunity to develop the best cyber safety portfolio for consumers. As a result, we continued to accelerate the pace of our product innovation pipeline As we work to bring cyber safety to every digital user and release products that help protect consumers' devices, privacy and identity. We opened the quarter with the release of Northern Utilities Ultimate, a new performance maintenance offering that helps create a faster and smoother And more secure experience for consumers, whether they're gaming or browsing or streaming content or more on the Windows PC.

Speaker 2

We expanded Northern Family with new features, including favorite locations to help parents establish approved geographic locations and receive notifications when their child's device arrives or departs those set locations. We also introduced Alert Me, which helps parents stay informed about their children's location by setting specific dates and times to receive automatic check ins alerts from the location of their child's device. Both of these new features were quite timely as many kids headed back to school in person. On the identity front, we added payday loan lock to selected U. S.

Speaker 2

Lifelock plans to help block the opening of fraudulent payday loans And other short term loans. And we've added new features like social media monitoring in more markets to provide consumers with broader protection as a digital footprint expands. As awareness grows globally for identity protection, we continue to evolve our roadmap to protect As we continue to strengthen our privacy pillar and help provide additional ways for consumers to control their online privacy, We released Northern Anti Track in the U. S, a new app and browser extension that helps prevent websites from tracking and profiling users In ways, normal private browsers of VPNs cannot do. That way, people can protect and control their digital footprints from companies and websites that track online activities and collect or sell their personal data.

Speaker 2

We've seen positive momentum from this new product release as consumers are seeing ways to protect their privacy. And I'm pleased to share that Northern and Tireshark as we expanded now to APG anemia earlier this week. Privacy overall is one of the 3 pillars of our cyber safety portfolio, and we should continue to see investment in this area to help consumers manage their privacy and reputation online. In Q2, we also released our first environmental, social and governance report. This report highlights Northern LifeLock's ongoing pledge to bring together our team, expertise and technology to help build a safe, inclusive and sustainable future.

Speaker 2

We are making good progress on this front, and I'm proud of all of our employees, the commitment we have made together to develop a responsible company. I encourage you to check all of our achievements in that area on our IR website. Additionally, we were recognized By the Business Intelligence Group 2021 Sales and Marketing Technology Awards, or what they call the semis, we ranked Northern LifeLock as one of the top Medium Sized Companies of 2021 for innovation in sales and marketing technology. We were recognized for our efforts Upgrading customer service operations with the development of a new internal sales platform that was built by our own in In house engineers and launched in the spring of 2021. This technology enabled us to better deliver key customer services Within a single easy to use interface, the platform also replace a legacy vendor supplied solution, driving cost efficiencies for the company.

Speaker 2

This is a great example of the teams leaving on value. They advocated for the customer. They were empowered to take initiative. They identified the opportunity and they delighted customers while improving our business operations. And more importantly, they delivered.

Speaker 2

Before I turn the call over to Nathalie to discuss the financial results, I would like to provide an update on our proposed merger with Avast. We have made great progress, and we continue to be enthusiastic about the combination of the 2 companies and the opportunity to accelerate innovation in cyber safety. We crossed an important milestone today with Northern LifeLock shareholders voting to overwhelmingly support our ongoing transformation through the proposed merger with Avast. With the next key step being the Avance shareholder vote scheduled for November 2018. We're also actively and collaboratively working through the Trust and other regulatory processes in all relevant jurisdictions, and we believe we are on track to close mid of next calendar year 2022, As previously stated, our strategy has been to protect and empower consumers as more and more of their lives move online, And this transaction will allow the combined companies to invest in and accelerate innovation for new cyber safety products.

Speaker 2

And now let me turn the call over to Natalie for more details on the financials.

Speaker 3

Thank you, Vincent, and hello, everyone. To all our customers, Shareholders and listeners around the world who are celebrating DeWally today, may the Festival of LightSpring joy and happiness to you and your families. For today's discussion, I will focus on non GAAP financials, starting with our Q2 results and then provide our outlook for Q3 and full year. We delivered another solid quarter rounding out a strong first half of our fiscal year. Our Q2 revenue was $695,000,000 Up 11%.

Speaker 3

Our growth remains broad based across geos and products. Bookings growth of 7% was supported by our renewal efforts, expanded product offerings and continued international expansion. Our total direct customer count increased to 23,300,000, adding 2,600,000 customers year over year And adding 178,000 net new customers quarter over quarter. This was our 8th consecutive quarter of sequential net direct customer adds. In a quarter where there is seasonally lower demand, our strong net adds in Q2 is evidence that there is growing demand for our products, And we feel proud to have added over 300,000 net new customers in the first half of our fiscal year.

Speaker 3

Our operational metrics remain strong with 85% unit retention and our monthly average revenue per user OR ARPU increased on a sequential basis to $8.85 As a result, our direct business maintained consistent growth momentum, up 9% in revenue. We continue to drive higher engagement with our existing loyal customers through the accelerated pace of new product releases, while scaling up our cross sell efforts. We are also reaching more audiences with the expansion of our identity protection offerings into more international markets, providing broader cyber safety protection to newer cohorts of customers. As Vincent mentioned earlier, our partner business again posted strong results in Q2, up 25% year over year With continued strength in employee benefits as well as growth from other distribution channels. Although it accounts for approximately 10% of our total, Our partner business remains a key tenant of our long term growth strategy and will continue to be an important investment area for us, We are constantly evaluating the effectiveness of our spend to optimize how we reach consumers and market our products to maximize the return on these investments for both the short term and long term in an increasingly competitive advertising environment.

Speaker 3

With RD, we have focused our efforts on increasing the pace of new product launches, while maintaining a robust Evolving product pipeline for our customers. And we still fund these investments through productivity gains and lower infrastructure costs, Operating at 87% gross margin and with G and A less than 5% of revenue as we drive long term sustainable growth. Q2 Q2 net income was $255,000,000 up 19% year over year. Diluted EPS was $0.43 for the quarter, Also up 19% year over year and at the high end of our guidance range. We remain focused on EPS expansion in achieving our long term EPS objective of $3 that we shared back in May this year.

Speaker 3

Turning to our cash flow and balance sheet. Q2 operating cash flow was $60,000,000 and free cash flow was $59,000,000 which included seasonal tax payments. Year to date operating cash flow is $318,000,000 in line with our net income improvement and growth. We ended Q2 with over $1,500,000,000 of total cash, which includes the cash proceeds from the July sale of our Mountain View Ellis buildings. We remain levered at approximately 2x net debt and maintain both a strong liquidity position and a healthy balance sheet.

Speaker 3

In Q2, we also returned approximately $73,000,000 to shareholders in the form of our regular quarterly dividend of $0.125 per common share. For Q3, the Board of Directors has approved a regular quarterly cash dividend of $0.125 The close of business on November 22, 2021, as described in the press release. And a reminder that while we still have approximately $1,800,000,000 remaining in the current share buyback program, we cannot deploy it in the short term due to the pending Avast transaction. Now turning to our Q3 and full year outlook. We expect Q3 non GAAP revenue in the range of $695,000,000 to $705,000,000 assuming stable currency rates quarter over quarter, which translates to 9% to 11% growth year over year.

Speaker 3

We expect Q3 non GAAP EPS to be in the range of For the full year, we expect non GAAP revenue growth of 9% to 10% year over year in constant currency And non GAAP EPS in the range of $1.70 to $1.75 narrowing the range to the high end on both revenue and EPS versus what we shared with you back in May at our Analyst Day. We look forward to building on our Growth momentum and consistent profitability in the second half of this year, and we are well positioned to deliver on our objectives. Even with the macro impacts around inflation, foreign exchange rate fluctuations and the evolving pandemic conditions, We have successfully navigated through and continued to hit expectations. As we look forward, we will continue to challenge ourselves to anticipate, Thank you for your time today and I will now turn the call back to the operator to take your questions. Please do keep in mind, we are not able to answer any questions related to any specific M and A at this time.

Speaker 3

Operator? Thank

Operator

you. Your first question comes from the line of Saket Kalia from Barclays. Your line is now open.

Speaker 4

Hey, good afternoon. Hey, Vincent. Hey, good afternoon. Hey, Vincent. Hey, Natalie.

Speaker 4

Thanks for taking my questions here.

Speaker 2

Yes.

Speaker 4

Natalie, maybe just to start with you, I was wondering if

Speaker 2

you could just Double click

Speaker 4

a little bit into the billings metric. I think we heard 7% growth in bookings, which was really good to hear. I think the billings growth is a little bit lower than that I come to about 5%. Can you just walk through maybe some of the puts and takes there? I know that maybe there was a Slightly tougher compare, there's always currency, I mean, just maybe you could just touch on that growth kind of compared to bookings, kind of compared to billings growth in prior quarters.

Speaker 3

Sure. Thanks, Hockett. Look, I'm not surprised at the question around 7% bookings. I'm going to focus on bookings in the response But I'm also not surprised that our Q2 results as it's in line with our models, our internal models. As you know, we don't guide bookings, But we did share that Q2 is historically a seasonally lighter quarter.

Speaker 3

We also recognized early on that Even if you look at the external search traffic metrics either on Google metrics, analytics, etcetera, and you hone in on Our branded and non branded terms, we knew that search volume was lower than prior quarters and what we saw last year. And then we also saw very early on that the advertising spend being put into the market across our competitive landscape was up. The other thing I'd encourage you guys to look at is, as you know with our recurring business model and as you know with customer acquisition when they get to 1st year retention and renewal, there's a healthy step up in terms of the bookings amount that we get as those customers choose to renew with us. So you really have to date back to last year in Q1, we added 379,000 net new customers. Again, factor in the seasonality component from Q1 to Q2, last year at this time we added about 117 ks net customers.

Speaker 3

When you factor into the model, the step up in the renewal bookings that we get from that renewable customer base, It would point you to a 7% result for us.

Speaker 2

If I can add just a few step backs, I could Quarter in, quarter out, obviously, we represent bookings, so investor can understand the underlying metrics. But revenue and bookings Trend about the same way, not every quarter, but on a multi quarter trend. And we guided revenue for next Quarter 9% to 11%, again, we don't guide bookings, but we see this trending somewhat in that range.

Speaker 4

Got it. Got it. That's very helpful. Vincent, maybe for my follow-up for you, a lot of good things happening internationally. Can you just remind us how big is international currently as a percentage of the business and sort of what's I guess how big can you see international long term as a percentage of total?

Speaker 4

And is that more of a Antivirus type of market, is that more of an identity monitoring market? Is it a little bit of both? Curious how you sort of see international Sort of longer term?

Speaker 2

It's a good question, Saket. I'll give you the short Belgium answer. International is not big enough. It's a We represent about 30% of our business. As you know, we acquired Avira to accelerate our growth internationally.

Speaker 2

As you said, a lot of good efforts. Initially, our offering in those outside of the U. S. Countries did not include identity elements. We now start to build up the portfolio to move above and beyond that security, moving into protecting the digital lives, exploring element of Restoration and so what I call solutions, which includes services.

Speaker 2

I think on the long term perspective, outside of the U. S, we have a huge Structural growth opportunities, obviously, the proposed merger with Avast will boost all of that. It will be more balanced. When I look at different industry, technology or even the demographic, as you know, we Should be more forward in the U. S.

Speaker 2

60 international versus the reverse on a unit basis and we're going to continue to expand.

Speaker 4

Very helpful. Thanks guys.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Hansa Pudarwala from Morgan Stanley. Your line is now open.

Speaker 4

Hey, good evening, guys. Thanks for taking my questions. So I'll keep it to one question. Natalie, since you alluded to inflation, I'm curious So what Norton LifeLock is thinking about in terms of pricing on renewal, particularly into the next fiscal year? Thank you.

Speaker 2

If you don't mind, I'll take it and I'll step back a little bit in a broader context. First, as you know, we've acquired Avira. Our number one If it's to scale our cyber safety platform and you're going to see us continue to invest into the freemium model, Expanding the freemium model to above security, expanding to other countries, and that's our first point of entry. We would love that the 5,000,000,000 Internet users All fully consciously protected from cyber criminality. When it comes to then our ongoing process, obviously pricing, Structure and how do you upsell and move to a premium model have different structure.

Speaker 2

1st year price as you know as Promotion to get in the first time you get in and then you have the renewal price at the normal MSRP that we have set. Environment is a competitive environment and so our pricing philosophy follows the value we provide to the members As we continue to add new product and new value to that membership, then customers opt to higher level of membership, and that's the whole business model the way I've described

Speaker 4

Thank you.

Speaker 1

Thank you.

Operator

At this time, there are no more questions. I will turn the call back to Vincent Fillet, CEO, for closing remarks.

Speaker 2

Why don't we wait 1 minute to see if there's nobody? Last time, there was no more question. We had 2 minutes later, plenty of questions trying to get in. So Let's check one more time, operator, if you don't mind. Sure.

Speaker 2

Okay. Well, we'll obviously always Management is very open and available for any questions our investors or analysts would have. We'll have plenty of 1 on 1 sessions between now and the next few days. I do want to thank our shareholders that have overwhelmingly approved the issuance of shares For the acquisition of the merger with Avast, we see that as a vote of confidence, confidence into our strategy, confidence into the specific transaction, Confidence into the Board and management. So thank you, everyone, and we'll be connecting very soon.

Operator

Thank you. This concludes the conference call. You may now disconnect. Thank you.

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