Gen Digital Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 6 speakers on the call.

Operator

Afternoon, everyone. Thank you for standing by. My name is Lauren, and I will be your conference operator today. I would like to welcome everyone to Gend's 4th Quarter and Full Year 2023 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 like to pass the call over Ms. Mary Lai, Head of Investor Relations. Ms, you may begin.

Speaker 1

Thank you, Lauren, and good afternoon, everyone. Jen's 4th Quarter Fiscal 2023 Earnings Call. Joining me today to review our Q4 and full year results are Vincent Pilette, CEO and Natalie Dursy, 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.

Speaker 1

A recon of non GAAP to GAAP measures is included in our press release, which is available on the IR website. Today's call contains statements regarding our business, financial performance and operations, including the impact of our business 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. Those statements are based on current beliefs, assumptions and expectations and speak only as of the current date. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings in the SEC and in particular our most recent reports of Form 10 ks and 10 Q. And now I will turn the call over to our CEO.

Speaker 1

Vinton?

Speaker 2

Thank you, Mary. Good afternoon, everyone, and welcome to our earnings call. As I reflect on the year, I'm proud of all that we have accomplished, and I'm excited about the tremendous long term opportunity in front of us. 3 years ago, we strategically set out and really focus on and redefine cyber safety for the billions of individuals connected to the digital world. We believe then, as we do now, that the complexity of our digital lives call out for someone to help protect people from the myriads of threats with innovative and easy to use technology that could seamlessly stitch together solutions across security, identity and privacy, and then reaching to adjacent trust based solutions.

Speaker 2

Well, that someone is us, Jen. We are confident that our reach, innovation capability and disciplined execution can deliver on that strategy and will sustainably deliver long term profitable growth and increasing shareholder value. Let me quickly recap our year. For fiscal year 2023, we delivered another year of organic growth, our 4th consecutive year of growth in Consumer Cyber Safety. We delivered mid single digit growth in Cyber Safety bookings and revenue and exited the year on a DKK3.7 billion revenue run rate, up from DKK2.4 billion 3 years ago.

Speaker 2

During that period, we considerably expanded our scope across our cyber safety pillars, security, identity and privacy, and became truly global with 60% of our customers now from outside the U. S. We also expanded our reach with our vast capabilities in freemium and free user base in the 100 of 1,000,000. Gen, with its trusted brands, omni channel expertise and rigorous execution is well positioned to expand the adoption of cyber safety across the globe. We have over 38,000,000 direct paid customers as we exit fiscal year 2023, up from $20,000,000 3 years ago.

Speaker 2

Despite the pressure on our direct customer count in a post COVID environment, which saw a sequential decline of 180,000 in Q4. Our direct business actually grew low single digit in Q4 and fiscal year 2020 3. Our direct customer retention rate ended the year at 76%, and our annual ARPU was nearly $87 as we exited fiscal year 2023. In 2 quarters since the close of the Avast acquisition, we have increased our overall annual ARPU by $3 and our overall retention rate by 1 point, a testament of the increased value we are providing our customers with our expanded product portfolio offerings, the membership adoption and the increased loyalty. Both metrics, ARPU and retention rates improved sequentially in this last quarter and are a confirmation of the value creation thesis at the core of our merger with Avast.

Speaker 2

In addition to 38,000,000 direct bid customers, We also protect over 26,000,000 indirect customers with solutions sold through partners. In fiscal year 2020, indirect customers grew over $1,500,000 with about $400,000 sequentially added in Q4. Our partner revenue delivered its 3rd consecutive year of double digit growth for fiscal year 2023, and we continue to see tremendous opportunities to reach more consumers via diversified channels in our partner business. Our employee benefits channel again grew double digits, accelerating in growth as employers recognize the growing demand from their employees. Identity Protection is becoming a staple offering in benefits packages just like health care and life insurance.

Speaker 2

We also continue to scale our telco relationships in key international markets, working closely with our partners to expand their offerings and provide comprehensive cyber safety protection to millions of customers. Our strategy to diversify the distribution channels and grow the value of the offering with these partners is actually working. On the innovation front, we maintain a strong pace Throughout fiscal year 2023, we introduced more than 10 new products and features, including international privacy monitoring assistance, Norton Anti Track, Norton Identity Advisor, Avast Email Guidance, Avast Identity Solution with Avast Secure Identity and Avast One Platinum, Northern Executive Benefit Program for the C Suite with reputation management features, utility account alerts for U. S. Lifelock and Northern 360 members.

Speaker 2

Each of these is a step forward in our strategic efforts to rapidly expand capabilities, protection and geographic reach in privacy and identity. We have accomplished a lot in the business this year, but I would be remiss to not mention the tremendous job The team has done in bringing together Avast and Northern LifeLock. Within 6 months of growth, our sales, G and A and overall infrastructure processes have been fully integrated. Our single ERP, integrated code cash processes, unified go to market structure and functional organizational structures are all in place. We've already realized 2 thirds of the cost synergies as we exited fiscal year 2023.

Speaker 2

This was no small feat given the size, scale and complexity of the two businesses. Overall, we have accelerated the integration process and we are on track to achieve the $300,000,000 plus annual cost savings exiting fiscal year 2024. Our integration efforts helped us deliver another point of sequential operating margin improvement in Q4 reaching 57%. In fiscal year 2020, we scaled operating profit to $1,800,000,000 up 24% year over year and more than doubled compared to 3 years ago. This profit margin and the resulting unlevered free cash flow gives us great confidence that we can navigate through the short term volatility and uncertainties of the global economy.

Speaker 2

Product integration, broadly defined, is what remains in front of us and is well underway. We see it as an opportunity to accelerate our march towards our vision of cyber safety that is digital life centered, tailored to your needs and easy to use. This requires a unified and simplified product architecture. Progress on this front will allow us to extend our reach to more people, giving them exactly what they need, while better enabling us to educate them on additional protection and value that we can offer. This is a key enabler of our revenue synergies in fiscal year 2024 2025.

Speaker 2

We still have work to do here, but with our comprehensive set of products, we believe these changes Unlock not only those midterm opportunities, but also position us perfectly for the long term in cyber safety and in trust based adjacencies. You've heard me talk time and time again about all of our opportunities, but let me sum it up briefly. Cyber Safety much more accessible, engaging and easy to use for everyone that will undoubtedly continue to grow our customer appeal and loyalty. To start, and in particular within the AVAS business, We can improve the customer experience and fully integrate our customer journey. AVAS retention improved 2 points in the last 6 months, and we believe the potential is at least 10 points improvement as we incorporate user focus changes.

Speaker 2

Secondly, Customers always focus on value, and we have a tremendous opportunity to show them the value of our cyber safety offering and to continually add to it as their needs evolve and the threats increase. The move towards protection of identity, privacy and the protection of your full digital footprint will continue. We have increased monthly ARPU 0 point 26 dollars or 4% in the last 6 months and our long term objective is to move above $8 where we were with Nooten LifeLock adjusted for our new geographical mix. Finally, we know that customer count is a critical metric for our long term success. In addition to continued growth in indirect customers, where a portion of the market is moving to.

Speaker 2

We know that in the long term, we will grow our customer maturely, and we believe that our initiatives in mobile, emerging markets and optimizing marketing spend amongst a few will help us stabilize the trends in direct customer count and ultimately return it to growth. And with that, let me pass the floor to Nathalie, who will talk about our detailed performance.

Speaker 3

Thank you, Vincent, and hello, everyone. For today's call, I will walk through our full year fiscal 2023 performance followed by our Q4 results and wrap up with our outlook for Q1 fiscal year 'twenty four. I will focus on non GAAP financials and year over year growth rates unless otherwise stated. Fiscal year 2023 was another year of progress towards achieving our long term $3 EPS target and was our 4th straight year of organic growth as a pure play consumer cyber safety company. As we successfully closed our merger with Avast and integrated as one gen company, we finished fiscal year 2023 with over $3,300,000,000 in total revenue, growth of 19% in USD and 23% growth in constant currency.

Speaker 3

When including the vast historical financials, Cyber Safety revenue grew 4% year over year in constant currency amidst the dynamic macro environment. We challenged ourselves to accelerate the execution of our committed cost synergies and remain disciplined in our investments, which enabled us to expand full year operating margin to 55%, up 2 20 basis points year over year. This growth and discipline led us to deliver $1.81 in EPS, up 4% from the prior year and up 10% in constant currency After incurring a significantly higher amount of debt cost than anticipated at the time of the deal announcement, Our customer base is resilient with over 38,000,000 direct cyber safety customers. Across our Gen business, we have strong and increasing customer retention rate of 76% and a growing direct monthly average revenue per user or ARPU of $7.24 as we scale our cross selling and up selling efforts, providing increased value to our direct customer base with new security, Identity and Privacy Offerings. Our business with partners continues to grow and we've expanded together to a total paid customer base of approximately We are enabling growth with the continued evolution of our product portfolio and introduced over 10 new products and features this year to provide best in class protection and unlock new capabilities for our customers.

Speaker 3

Turning to Q4 performance. Q4 was our 15th consecutive quarter of growth And our results reflect another quarter of consistent execution. We exceeded our revenue guidance and came in at the high end of our EPS guide. We also crossed $1,000,000,000 in bookings for the first time with Q4 bookings up 29% in USD and up 32% in constant currency. When including Avast historical financials, Cyber Safety bookings grew 2% year over year in constant currency.

Speaker 3

Q4 non GAAP revenue was $948,000,000 up 32% in USD and up 35% in constant currency. This also includes an unfavorable FX headwind of $21,000,000 year over year or 3 points of growth. When including Avast historical results, Cyber Safety revenue grew 3% year over year in constant currency.

Speaker 4

Direct revenue

Speaker 3

was $831,000,000 up 32% in USD and up 3% when including Avast historicals. We continue to drive higher value and loyalty with our existing customers as both ARPU and retention improve. As I referenced above, monthly direct ARPU is $7.24 an expansion of $0.15 quarter over quarter, driven by our cross sell and up sell efforts and as our identity and privacy offerings grew double digits in the quarter. Ending direct customer count was 38,200,000, a decline of 183,000 customers quarter over quarter, a trend we are working hard to reverse. Lower web traffic demand continues to impact the customer acquisition funnel despite improvements in conversion.

Speaker 3

We continue to invest in a diverse mix of marketing spend to reach new audiences, drive more traffic to our sites, We continue to focus on improving retention in our existing customer base. Our aggregate direct retention rate improved 1 point quarter over quarter to 76%, which is a strong indication that our efforts to increase customer engagement are working. Offering the best customer experience remains at the core of our values and we are Before I move off to Direct business, I want to give a quick update on revenue synergies. As I shared 6 months ago, we expect traction with revenue synergies to be measured directly through ARPU and retention improvements over the coming quarters to support our bookings and top line growth expectations. 2 quarters later, we have expanded monthly ARPU by over $0.25 Translating to $3 of increased annual ARPU.

Speaker 3

We have improved Avast retention making progress to narrow the prior 20 point retention differential between EnLoc and Avast observed at the time of close. You will continue to see us expand our ARPU and retention rate over the coming quarters. Moving on to partners. Partner revenue was $100,000,000 in Q4, delivering 35% growth year over year as reported in USD and 9% growth when including Avast historical results. This was our 3rd consecutive year of double digit revenue growth in our partner business as we continue to scale our identity offerings through key channels like employee benefits, telcos and breach protection.

Speaker 3

With our broad reach and Rounding out our revenue, our legacy business lines contributed $17,000,000 this quarter and now make up less than 2% of our revenue. We expect legacy to continue its decline at a similar pace as Q4. Turning to profitability, Q4 operating income was 5 quarter. We expanded operating margin to 57% as we continue to make strong inroads to the 60 plus margin framework we've outlined in our long term model. In Q4, we Our overall operating expense profile from 31% to 29% of revenue sequentially, while maintaining gross margins above 86%.

Speaker 3

Since the close of the merger, we've rightsized our organization structure to under 3,700 from approximately 4,500. Our hybrid workforce strategy has also enabled us to further rationalize our real estate and data center footprint, Driving Structural Reductions in Our Operating Model. Exiting Q4, we achieved approximately 2 thirds of the annual cost synergy target from a run rate perspective, with the remaining integration efforts focused on product and engineering. We remain well on track to achieve cost synergies of over $300,000,000 as we exit fiscal year 2024. Ultimately, our accelerated pace and track record of strong execution will unlock more operating leverage, enabling us to selectively reinvest back into growth and innovation in fiscal year 'twenty four and beyond.

Speaker 3

Q4 net income was $296,000,000 up 9% year over year. Diluted EPS was $0.46 for the quarter, stable year over year and up 4% in constant currency, including $0.02 of currency headwind. Interest expense related to our debt was approximately $160,000,000 in Q4, an EPS impact of $0.19 and a $0.16 headwind compared to last year. Our non GAAP tax rate remains at 23% And our ending share count was 644,000,000, down 7,000,000 quarter over quarter, reflecting the weighted impact of last quarter's share repurchases. Turning to our cash flow and balance sheet.

Speaker 3

Q4 operating cash flow was $324,000,000 and free cash flow was $323,000,000 which includes approximately $177,000,000 of cash interest payments this quarter. This brings our total fiscal year 2023 free cash flow to over $750,000,000 which includes $381,000,000 of interest paid Interest expense paid approximately $120,000,000 of costs related to the Avast merger and $43,000,000 of cash restructuring expenses. Our ending cash balance is $750,000,000 Turning to capital allocation. We remain intentional and balanced with our capital deployment. In fiscal year 2023, we returned over $1,200,000,000 of capital to shareholders with approximately $900,000,000 share buybacks and the rest in the form of our regular quarterly dividends.

Speaker 3

In Q4, we paid $80,000,000 to shareholders in the form of our regular quarterly dividend of 0.125 cents per common share. For the next quarter Q1 fiscal 'twenty four, the Board of Directors approved a regular quarterly quarter dividend of $0.125 per common share to be paid on June 14, 2023 for all shareholders of record as of the close of business on May 22, 2023. In addition, since we closed the Avast merger, We have deployed approximately $460,000,000 towards debt pay down when you include the April voluntary payment. We continue to be supported by strong total liquidity of over $2,200,000,000 and we have no near term maturities due in the next 2 years. With our strong cash flow generation and disciplined capital deployment, we will continue to utilize our capital to deliver EPS expansion With expected net leverage of approximately 3.9 times within 12 months post the VAST deal close and remain committed to the target of approximately 3 times over the long term.

Speaker 3

We will maintain a balanced approach, to commit to our regular dividends, pay down debt and deploy opportunistic share buyback. Now turning to our fiscal Q1 'twenty four outlook. For Q1, we expect non GAAP revenue in the range of $940,000,000 to $950,000,000 Translating to low single digit growth in cyber safety expressed in constant currency. We expect Q1 non GAAP EPS to be in the range of $0.47 per share as cost synergies are partially offset by near term increased interest expense based on current SOFR forward curves. For the full fiscal year 2024, we expect bookings growth in low to mid single digits, scaling through the year as we make progress on our key metrics.

Speaker 3

We remain focused on driving our long term objectives and are still targeting to exit fiscal year 2025 on a $3 annualized EPS with the following underlying key assumptions: Cyber Safety business to grow mid single digits post synergy structure of 60 plus percent operating margin, free cash flow deployed towards debt pay down and share buyback. So for curve trends indicate rates below 3% exiting fiscal year 2025. Diluted share count expected to be around pre Avast merger levels. In summary, we are closing out this fiscal year with a strong sense of accomplishment. We have successfully introduced Gen to the world and are quarter.

Speaker 3

Our financial model remains resilient powered by our best in class products Gen Technologies and a loyal customer base. As we look forward to fiscal year 2024 and an evolving macroeconomic environment, We will remain very disciplined in how we operate, focusing on executing our plan and will be strategic and intentional in where we invest to maximize long term shareholder value. As always, thank you for your time today. And I will now turn the call back to the operator to take your questions. Operator?

Operator

Thank you. We're preparing to ask your questions to ensure that your phone is unmuted locally. Our first question comes from Saket Kalia from Barclays. Saket, please go ahead.

Speaker 4

Okay, great. Hey, good afternoon, guys, and thanks for taking my questions here.

Speaker 2

Hey, Vincent.

Speaker 4

Vincent, maybe first for you. Great to see the improvement in retention. I think you said It was one point for the company overall quarter over quarter. Great to see that. Can you just maybe talk us through what's driving that In your view and maybe as part of that, just touch on what's happening within the Avast base from a retention perspective?

Speaker 2

Absolutely. And as you know, we don't like to share our operational know how with everyone in the world and like to nurture that as our on Process IP, if you want. But let me give everyone here a few examples of what we've been doing. So as you mentioned, overall company retention improvement, 76% plus One point is driven by 2 things. 1 is continued stable retention in Northern and LifeLock brands and then an improvement of 2 points of the Avast retention.

Speaker 2

I do mention the stabilization of our retention in the brands of Nolan and LifeLock, which as you know are industry leading retention rate because it's no small fees. It does not happen by itself. We're really working and developing all of our values for the customers there. So on the AVAS side, just as a reminder, I know you know, but for those on the call, AVAS retention rate was about 20 points lower than the Norton and LifeLock business, around 65%, which is 85% for Norton LifeLock. And we had already acquired before the acquisition of Havas experience in retention with freemium business models such as Avira, which was also driven slightly above 80%.

Speaker 2

And so we had a plan to identify the operational opportunities. We identified about half of the gap to be operationally driven, about 10 points, and the other half and the other ten points to be driven by more structural changes such as the geographical mix, the business models, the value of the products, etcetera. And so we decided to first tackle the 1st bucket of 10 points. We made a bunch of operational changes. I'll give you a few.

Speaker 2

We combined our renewal team for all of the brands as one team. We separated the renewal activities with the customer journey activities, customer journey focused on education and understanding the communication and touch points value adds to the customers versus The more transactional renewal activities, centralized marketing operations for renewal only across all of the brands, worked with our e commerce 3rd party partner to share our own e commerce experience. As you know, Roger and LifeLock has an in house engine, Havas was outsourced and so starting to share best practices and making sure we can apply the quick wins we have identified. Those are The operational work, if you want, in progress. It will take a few quarters as we continue to evolve.

Speaker 2

Overall, Once the operational buckets, if you want, is being tackled and fully digested, consciously increasing the value to the Moving them to high value full portfolio of cyber safety, moving them to the platform view, Using the customer journey team to drive the usage and engagement of the functionalities, making sure they understand The full potential of the protection that the customer has bought, all of those are activities that create value and we are cautiously optimistic that, that improvement will continue over the next few quarters.

Speaker 4

Quarter. Got it. Got it. That's super helpful. Natalie, maybe for my follow-up for you.

Speaker 4

I thought it was great to see the delevering in the quarter. I think it was about 300 And you correct me there if I'm wrong. But can you just maybe talk through how you're thinking about debt pay down this year and maybe related to that, how you're thinking about interest expense, even just broad brush?

Speaker 3

Yes, sure. Hi, Saket. Just for a reminder for everybody else on the phone, so we did since the funding of the deal, we did 4 $1,000,000 of debt repayments, dollars 400,000,000 of that, including the April voluntary payment, dollars 400,000,000 was voluntary. Yes. With $7,000,000,000 of debt at an increasing in volatile sulfur, with Q4 sulfur up to 5 It's a meaningful challenge for us to overcome.

Speaker 3

If you just extrapolate the Q4 interest That's $600,000,000 to $700,000,000 on an annualized basis of interest expense. That's $0.75 to $0.80 of EPS. So yes, it's a huge headwindchallenge to overcome. And if you looked at that in isolation, Combine that with our stated targets on leverage over the long term, the cost, the expense, that and the level of debt that we've got, that would point you to deploy as much capital as you possibly could to get that paid down. But we know we have multiple levers In our business, we know that we have expressed a balanced capital allocation.

Speaker 3

And if you look at the $17 stock price that we've got and you look at our strategy and vision on where we're going over the long term, I personally believe that we're massively undervalued, and so that makes the share buyback capital deployment Very, very important. And so when we talk to you guys about a balanced approach on our capital allocation, it's exactly that. Both of them are challengers of each other, But both of them are incredibly viable and critical to drive our business and to achieve our long term objectives. So what you'll see us do On a go forward basis, whether you specifically call it Q1, 2024 or over the long term, is strike that right balance looking at all of the dynamics that we've got in our business.

Speaker 4

Got it. Super helpful. I'll get back in queue. That was very helpful. Thanks, guys.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Angie Song from Morgan Stanley. Angie, please go ahead.

Speaker 5

Hi. Thank you guys so much for taking my question I'm speaking on behalf of Amso Fodderwala from Morgan Stanley. So just a quick question on net The last quarter you mentioned net adds for Norton and LifeLock lines a little bit more under pressure compared to Avast net adds. So could you just talk a little bit more about the dynamic of net adds for Norton LifeLock versus Avast for this quarter? And How should we think about this dynamic as we model out fiscal year 2024?

Speaker 5

Thank you.

Speaker 2

Yes. Hey, Angie. Thanks for your questions. So as you mentioned, right, so Q4 sequential decline in the direct customers is about 180,000, The lowest of the year, so we see the trend stabilizing and we're working very actively. Our plan 2, as we said, 1st stabilizing and then returning customer count direct customer count to growth.

Speaker 2

We continue to grow we grew continue to grow or indirect customer. So on the direct piece, last quarter, it was a little more pressure on the Northern LifeLock side. On a ratio basis, if you want the Navas, and I think it was 2 third, 1 third of the decline. The quarter before, it was the reversal. We also said a quarter in quarter, just be careful not to drive trends within the brands.

Speaker 2

We see the overall tensions to be about the same across The Globe, but being more focused on the security side versus the identity side, so slightly more focused on security. And then I would say Avast, because we improved retention two points, of course, continue to reduce the GAAP, if you want. And we're very confident that we'll return them to growth once we fully bridge the 10 point retention quarter of Havas versus Norton. So that should give you some color of the dynamic.

Speaker 5

Great. Thank you. And just one more, if I may. So on long term targets, I know that the Avast acquisition definitely brought some complexity into the equation and given the recent macro backdrop that caused Even more uncertainty, could you just remind us what your confidence level is now as we have a little bit more visibility into fiscal year 2024 in achieving your $3 EPS target exiting fiscal year 2025. Thank you so much.

Speaker 2

Yes, absolutely, Angie. I'll pass it to Nathalie on the confidence with us, so you'll hear directly from the CFO. But what I can tell you is that When you talk about Avaz being complexity, in one sense, it's right. It's merging multibillion dollar companies together. But it's a similar business model with very complementary strength.

Speaker 2

So we're very focused every day on the opportunities that Avast is bringing. And we talked about the complementary of the product portfolio. They're bringing more strength On the privacy side, combined with identity that now allow us to offer across 65,000,000 paid customers and 100 of millions of free users full cyber safety, and we've gave you some proof points of us being on track to that. We said we can continue to bolster technology with Havas, and you'll hear more about our pace of innovation now for the combined R and D. We said that now being more global, cyber safety has no quarter.

Speaker 2

Borders, as you know, and threat are across the globe and people are moving virtually in the world. Being truly global is a real asset for us. We also said that we have some revenue synergies and the advanced retention rates is the beginning of that. You'll see more of that in 2024 and 2025 as we return to growth using those revenue synergies and then the car synergies where we delivered only 2 third of the €300,000,000 plus promises. Now where is the complexity coming from that you may have mentioned?

Speaker 2

Yes, we did not anticipate the cost of the debt. Frankly, when the time we signed the deal, it was So far being a 0 and today is a 5%, Nathalie mentioned that. But we will deliver it quickly with our cash flow. And If I follow you guys, investors community predicting sulfur at 3% by exiting fiscal 2025, by then you will see the full realization of Those synergies. So our focus is really on the opportunities that this acquisition is bringing to us.

Speaker 2

And I'll pass it to Nathalie for

Speaker 3

quarter. Yes. I think you heard about the majority. I would just summarize it into from a growth perspective, we really look at it from a value, reach and loyalty perspective. Value is where the innovation is coming from, coming into play where we will constantly innovate, bring great products and services to market in a very competitive way.

Speaker 3

Reach is our intent and our priority to expand our reach globally, Really focusing on international and bringing different products and services, different vectors to new global markets. And then loyalty is about looking at how we can best service our customers, focus on NPS, but also increase the engagement of our existing user base through cross sell up sell and really focusing on our retention metrics. Combine that with The expressed discipline that we've got in our cost structure driving the company to a 60% plus margin structure, That is going to be incredibly strong, a strong feeder into the $3 EPS. We also said don't forget back when we came out with our Analyst Day, we said M and A could be also considered as an accelerator As we continue to generate very, very strong cash flow and as we look at other products and services, others as cyber safety protection continues to expand and evolve. And so all of that in really what you have to believe, we just laid out Some of the assumptions that we've got with the $3 EPS, when you laddered all that up, from a whiteboard perspective or just the back of the envelope, it's not hard to see how you get to the $3 EPS target over the timeframe we've provided.

Speaker 5

Thank you so much.

Operator

Our final question is a follow-up question from Saket Talia from Barclays. Please go ahead.

Speaker 4

Okay, great. Hey, guys. Me again. Sorry, I just had a couple more follow ups. Natalie, maybe for you, I thought it was great to see the ARPU expansion quarter over quarter.

Speaker 4

Maybe a question for you. Where do you think that can go over time? And sort of how do you think about that?

Speaker 3

Yeah. I think we're just getting started, honestly. I think with the expanded portfolio that we now have as Gen and with the Express desire and strategy and commitment to invest in more and more innovation. I'm confident that we're going to continue to bring great products and services to market that Honestly, I think we'll be easy sales to our customer base. And so where specifically ARPU will go, I'm not sure.

Speaker 3

It's going to be A balanced or a dynamic approach depending on markets, customer cohorts, the source of those customers, etcetera. But if you even look at the progress we've made already with the equivalent of a $3 ARPU expansion, just start applying that To more and more and more of our customer base, in my opinion, we're just getting started. We have a ton of space to increase our ARPU As we expand and really bring to market that innovation, but then also expand our reach across our existing 38,000,000 And as we bring in new customers as well, just be able to expand there as well.

Speaker 4

Got it. Got it. Maybe for my follow-up for you, Vincent. Listen, I mean, we're clearly trying to control what we can with margins and operational improvements in retention. Of course, the other part of the net add equation is new customer acquisition.

Speaker 4

And so maybe the question is quarter. For you, Vincent, what can you do on the new customer side to sort of continue the stabilization in net adds that we've seen, But then maybe turn that corner and reverse the trend.

Speaker 2

Yes. And if If you allow me to think slightly differently, while you compare margin and what we control versus customer acquisition, I would say, You can take as stable stake that the operational commitment of running lean and really redirecting every dollars to either innovation or sales is what we do, is what is in our DNA and in our culture, and we'll continue to do that very, very well. The value we drive and the price we're able to charge representing that value, coupled with operational discipline is what drives the margin. As you know, It's a very high margin business. When it comes to the growth and how we grow our business, we really, for us, have the 3 buckets.

Speaker 2

Nathalie mentioned the ARPU and supported with innovation. How much more do we add to the value of the portfolio? And Nathalie is right that in some way, it's not like The daily focus, I told you the first proof point we can go to is where we were with Northern LifeLock, above $8 adjusted for the mix between The geographies and the portfolio and over the next 8 quarters to this time frame we gave you, we believe we'll cross ADAS At the same cohort, so that's number 1. Can we later on get to a $10 per month or more? Absolutely.

Speaker 2

But it will come quarter. From added value new adjacent services, the ability for you to manage your digital reputations that are services above and beyond what your core cyber safety membership brings. The second one, of course, is the retention, right, as the second bucket for the growth. The more we retain, the more we satisfy you as a customer, the more value we'll be able to drive for the business. And there, You've seen some of the progress.

Speaker 2

I talked about the operational view. Our whole focus here is around the customer journey, giving them peace of mind in this hacking world that continue to evolve and is actually pretty scary. And then the third one is about bringing new people to cyber safety, which is the acquisition side. And it will be a real trade off between those three activities. Depending if you get faster progress on one of those three buckets, you may have pressure on the other metric.

Speaker 2

But overall, the value towards our long term mission will continue to progress. On the net adds, right, the first one is you retain more and then you try to quarter. We now have a full set of capabilities from freemium to product We're doubling down into mobile. Everything we do needs to be mobile. That's why the digital life is the first touch points today.

Speaker 2

Even though you still use your desktop and all of that, You may want to act and interact through mobile. Mobile is a big channel for us in terms of growth. We know that some customers will want their cyber safety to be part Other solutions, financial solutions, our employee benefit that they get. And so partnering with others to continue to get more customers touched to Cybersecurity is an important one. Once we have them, the cross between indirect customer and direct customers, which we're trying to do here, which really should be viewed as More direct interaction with our customers is another set of activities that we're driving.

Speaker 2

With a vast strong footprint in emerging markets and now bringing a full cyber Safety to Emerging Markets would be another one where we can add new customers. And back to my comment, would have a little bit more pressure on ARPU because the price per month in emerging market is lower than in the Western world, but it's a healthy balance that we're trying to achieve. And then another one I can mention, and we have a lot of activities, If the balance of our marketing spend activities across all channels, including accelerating the freemium installs, the freemium to the paid conversion and value All of that is in full swing. I'd rather not give you a precise quarter of customer count. We're confident we'll return that metrics to growth.

Speaker 2

We're working with you've seen a reduction of the gap. I would say in Q1, you plan with Similarly similar trend that you've seen in the last two quarters, but we continue to improve. And by the End of fiscal year 2025, when we give you that model, we're assuming that we will be returning in a balanced way on growth on all three of the buckets I've just mentioned.

Speaker 4

Very helpful, guys. Thank you.

Speaker 2

Super.

Operator

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

Speaker 2

Excellent. Thanks, Lauren. And I want to thank each Gen employee for their hard work and for embracing and directly managing through so much change. Our entire team is driven to protect and advocate for our customers, and we do not take for granted the millions of people around the world who trust us to help them safely navigate the complex digital world. We have a strong culture of innovation and execution.

Speaker 2

We have a winning strategy, and we will continue to execute to drive profitable growth and create long term value for all our stakeholders. So thank you for joining our call today, and I look forward to talking to you soon.

Operator

This concludes the conference call. Thank you.

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Earnings Conference Call
Gen Digital Q4 2023
00:00 / 00:00