Gen Digital Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2022

Key Takeaways

  • We delivered 13th consecutive quarter of growth with Q2 bookings up 11% and revenue up 12% in constant currency (5% ex-Avast), driven by strong customer loyalty and product innovation.
  • We closed the Avast acquisition on September 12 and now expect to achieve over $300 million in annual cost synergies by FY 2024 and $200 million in revenue synergies over the next two years.
  • We maintain a healthy balance sheet with $2.6 billion in liquidity, extended debt maturities through 2031, and a capital allocation plan balancing dividend, opportunistic buybacks, and targeted deleveraging.
  • Key customer metrics include a blended ARPU of $7, a combined retention rate of 75% (85% for Norton), and 14 million membership subscribers (35% of direct customers), with goals to exceed 50% membership penetration.
  • We face near-term headwinds from macroeconomic pressures and currency (~$30 million FX impact), leading to direct customer declines and anticipated Q3 revenue FX drag of ~$40 million in the guidance of $925–$940 million.
AI Generated. May Contain Errors.
Earnings Conference Call
Gen Digital Q2 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good afternoon, everyone. Thank you for standing by. My name is Matt, and I will be your conference operator today. I would like to welcome everyone to Jin's Q2 Fiscal 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 to Ms. Mary Lai, Head of Investor Relations. Conference. Ms.

Operator

You may begin.

Speaker 1

Thank you, Matt, and good afternoon, everyone. Welcome to Jen's first earnings call. Joining me today to review our Q2 fiscal year 2023 results are Vincent Pilette, CEO and Natalie Dursy, CFO. Call. As a reminder, there will be a replay of this call posted on the IR website along with our slides and press release.

Speaker 1

I'd like to remind everyone that during this call, call. All references to the financial measures are non GAAP and all growth rates are year over year unless otherwise stated. Call. A reconciliation of non GAAP to GAAP measures is included in our press release, which is available on the IR website at investor. Gendigital.com.

Speaker 1

Call. 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 with the SEC and in particular, our most recent reports on Form 10 ks and 10 Q. And now I will turn the call over to our CEO, Vincent.

Speaker 2

Thank you, Mary Anne. Welcome everyone to our first earnings call at Gen Digital. In many ways, we are a new company, better positioned as a leader in cyber safety and with an expanded purpose of powering digital freedom for everyone. Our mission is to create technology solutions for people to take full advantage of the digital world safely, Privately and confidently. Let me tell you a little bit about why we created Gen.

Speaker 2

Generations today are normally associated with age, such as Gen X, Gen Y or Gen Z. But all generations, no matter your age, are connected by one thing. We are all digital, generation digital. We shop, bank, learn, socialize online, and that is just today. We have reimagined what the future will bring and what we can bring to Generation D.

Speaker 2

Digital technology and innovation bring tremendous benefits to consumers in ways we could never have imagined, but they also make our world more complex, more demanding, more exposed. They have created new threats and challenges. Hacking has become a profession. The dark web is a black market used by bad actors and the challenges are not limited to hacking, scamming or phishing. Our personal data is exposed everywhere and algorithms are influencing our reasoning.

Speaker 2

Safety, of course, remains an absolute prerequisite for protecting our digital lives and fully benefiting from the digital world we live in. Protecting online security is how we got started 30 years ago and it's still at the heart of what we do today. But that's not enough anymore. At Jen, we are coming in to bring our credibility, our passion, our innovation To step up and boldly tackle new challenges, powering digital freedom for everyone. Jen is now the leader that consumers trust to deliver comprehensive digital protection and empowerment in the digital world.

Speaker 2

We are now united by our family of trusted brands, including Norton, Avast, LifeLock, Avira, AVG, Reputation Defender and CCleaner. These amazing brands have and will continue to spend generations with products and solutions that suit different lifestyles and life stages. We will also focus on trust based solutions that will do more than just help people around the world Live Fuller, Safer Digital Lives Today. We will help define what it means to live freely in the digital world of tomorrow. As you know, Jens is dual headquartered in both the U.

Speaker 2

S. And Czechia, giving us the benefit of a truly global talented team located across Americas, Europe and Asia. We have a purpose driven culture with an innovative mindset. We have products and solutions in over 150 countries with an omnichannel distribution strategy, and we are trusted by over 500,000,000 users Around the World. It is critically important to us to provide a seamless integrated cyber safety portfolio with best in class functionalities and products that are easy to use and consumer friendly.

Speaker 2

Before I share more about the quarter, let me talk a little bit about our integration. We closed the Havas acquisition on September 12, and we are off to a great start. We have announced our new organizational design and leadership teams to help drive the next chapter of this company. On November 1, we merged our back end systems and have detailed technology and integration roadmaps. As a result, we have increased our annual savings to over $300,000,000 and we believe we will be fully completed within the next 18 months.

Speaker 2

With the combined go to market, leveraging a powerful set of trusted brands, We are focused on the opportunity to deliver more value to our current customers across our brands. We know that higher engagement leads to growth in ARPU and growth in retention for our nearly 65,000,000 cyber safety customers, which includes both paid direct and partners. As of today, we have identified initiatives that are revenue synergy opportunities of about $200,000,000 in the next 2 years, giving us additional confidence in our ability to sustain a mid single digit growth rate in the midterm. While an integration is never easy for the team, we are collectively very motivated by the opportunity in front of us. Now let me move to our Q2 results.

Speaker 2

I will provide a high level summary and then mentally will spend more time walking you through our detailed results and the reporting structure post acquisition. Supported by our strong execution in a challenging environment, we delivered 13th consecutive quarter of growth with Q2 bookings up 11% and revenue up 12% in constant currency, Which includes 7 percentage points of contribution from Avast. Excluding Avast, our Cyber Safety bookings Revenue grew 5% in constant currency, in line with our mid single digit growth expectation. Earnings grew 5 percent or 12% excluding the impact of currency headwinds. Our market leaderships, our strong customer loyalty And the continued increase in value we delivered to our product innovation and membership adoption enable us in the current economic environment to really tackle the business from a position of strength.

Speaker 2

At the core, we are a technology and product company And one thing that will not change is our continued pursuit for a faster pace of innovation and build out of our product portfolio. Combining our offering with Avast gives us the most comprehensive product portfolio featuring a full coverage of cyber safety needs. We are the 1st to offer a fully integrated platform covering device security and performance, data and cloud security, identity protection, Personal Privacy and Reputation Management. Before the acquisition, over 60% of our customers had taken a membership or platform approach using Norton 360. Now with Avast, we approximately have 35% of our customers having adopting a platform, giving us the opportunity to offer another 15,000,000 customers the benefits of a feature rich platform.

Speaker 2

While we are making fast progress on the technology front and the product integration front, We remain focused on the pace of our product releases, whether they are new products, new functionalities or platform upgrades. We continue to make strong inroads with our privacy solutions. In Q2, and Pipedrive expanded its capabilities to additional browsers and countries, and we launched our privacy monitoring assistance or PMA solution into retail channel for the first time. In the identity pillar, We continued our international expansion and launched our ID Advisor Plus offering to more European countries, including Germany and France. We have also launched several new enhancements to the U.

Speaker 2

S. Lifelock experience, including guided child credit freeze. We also launched email Guardian with Avast, The new online safety score provides regular feedback on the users' digital habits and personalized tips to help them take charge of their online safety. Finally, we were also very pleased by the performance of the AVAS security engine, which scored top marks in leading independent tests. Overall, the Avast team brings a lot of technology know how and an innovation mindset around human centric cyber safety, which makes our combination even richer for consumers.

Speaker 2

Expanding our ability to reach customers is equally important. Jen is now a house of brands with diversified set of sales channels and a business model that spans from premium to premium. Direct to consumer business remains the main channel for us today. Despite macroeconomic pressure that showed in global e commerce traffic through the quarter, We're able to grow bookings 3% in our direct to consumer business. We strategically deployed our marketing spend focusing on higher ARPU versus customer count.

Speaker 2

We believe that this is the right way to deploy our marketing spend in this current environment and we will continue to adapt to deliver the most efficient and highest returns on our investment. On the partner side, we continue to expand geographically, delivering another double digit growth quarter, value proposition of complete cyber safety, including security, identity and privacy protection is taking root. As an example, we're excited to have launched our identity offering for a large British telco provider, expanding our effort of identity protection for the U. K. Market and replicating the success we have had in Canada.

Speaker 2

At Jen, we have expanded our customer universe, But that is a small step towards our mission to protect and empower every one of the 5,000,000,000 global Internet users. Today, we have over 500,000,000 total users, including paid and free customers. One layer down, we have a new classification of paid cyber safety totaling about 65,000,000 customers that is made up roughly of 39,000,000 PayDirect customers and over 25,000,000 PayCustomers from our partner business. And while our direct customers' comp declined by roughly 60,000 quarter over quarter on the Northern Lifelock side and 190,000 on the Ava side. Our short term focus and opportunity coming out of the acquisition Is to work on the increasing on increasing the value for millions of our customers and consequently their satisfaction and retention rate.

Speaker 2

While being direct customer count is an important metric, it is also important to highlight that we have multiple levers to drive booking growth in more diversified ways, Such as growing in ARPU with opportunity of cross selling new products, growing in memberships, offering a platform approach to cyber safety and growing in retention rates, especially on the Ava side, supported by our best in class support and services organization. Post acquisition, we have about 2 third of our customers that benefit mainly from a broadly defined security offering. As a result of the acquisition, our aggregated monthly ARPU is now $7 per customer. And we have as we have done before, We believe we have the opportunity to demonstrate the need for a comprehensive cyber safety approach, including cross selling identity and privacy solutions From a richer portfolio and increased ARPU over time. As I mentioned it, our platform strength continues to be a cornerstone of our strategy.

Speaker 2

We have over 14,000,000 members with a membership plan from Northern 360, Avast 1 or Avira Prime. This represents approximately 35% of our direct customers and believe we have the opportunity to bring that ratio to over 50% over time as we did it at Northern LifeLock over the last 2 years. We have observed higher utilization, higher satisfaction and better retention For our customers that have subscribed to a membership and now benefits from our broad portfolio. Customer satisfaction is a very important metric at Jen. It is supported by consumer centric approach to our innovation and the largest service organization in consumer cyber safety.

Speaker 2

As a result, our Northern Lightlock direct customer renewed their membership at the retention rate of 85% plus. When including our advanced customer base and mobile customers, our aggregate retention rate is now 75%. This is an opportunity to cross pollinate our operational know how and offer a rich portfolio supporting by a global service organization to all of our 65,000,000 customers with a direct or true partners. We see this as an opportunity to increase our 75% retention rate over the next 2 years. In addition to our integration work, we have clean line of sight and priorities growth and operational initiatives.

Speaker 2

Taking into consideration what I just mentioned, we have identified $200,000,000 of potential revenue synergies that should lead to growing ARPU and growing retention rates over the next 2 years. We have channel diversification initiatives focus on partnership and new segments such as the Avast platform for small businesses. And we will prioritize the effectiveness marketing spend on bookings growth over direct customer count. These revenue opportunities combined with over $300,000,000 of cost synergies should deliver tremendous value and create room to invest for the long term opportunity. So as we look to the future, The current and potentially a recessionary economy thus put downward pressure on some part of our business, but we also and see this as an opportunity and a catalyst for us.

Speaker 2

I am confident with our high recurring revenue model coupled with our operational discipline That our business will remain durable and flexible to navigate the short term challenging environment. At the end, we know that the need for comprehensive cyber safety and digital freedom is a secular growth trend and we are the leader. And now let me turn the call over to Nathalie to cover our results and new reporting details. Nathalie?

Speaker 3

Thank you, Vincent, and hello, everyone. It's a very exciting time for our company. We are thrilled to bring the Avast and Norton LifeLock businesses together and move forward as Jen. Our team is highly motivated to get started and bring our vast opportunities to market. For today's discussion, I will walk you through our Q2 results, outlook for Q3 and wrap up with details on our long term model.

Speaker 3

I will focus on non GAAP financials and year over year growth rates unless otherwise stated. A reminder that our reported results also include a partial quarter of Avast, which was acquired on September 12, 2022. Before we dive into the results, I would like to share how we evaluate and measure business performance as Jen. Jen is centered on cyber safety. Our product portfolio is split by consumer security, identity and information protection and our go to market omni channel business lines are split by direct and Partners.

Speaker 3

Direct makes up about 90% of our business with subscriptions sold directly through our e commerce sites or third party app stores. We have further harmonized our direct channel definitions and aligned to industry standards, now including Norton LifeLock mobile app store customers and revenue in this category. Although partners only account for approximately 10% of our combined business, this channel remains an investment area for us As we further diversify our distribution models to provide multiple entry points for the consumer, including employee benefits, retailers, OEMs, telcos, service providers and small businesses. With the combined focus on cyber safety and go forward portfolio identified Through the integration with Avast, we have also carved out a legacy category, which includes end of life products or exited markets. In total, this makes up less than 3% of our overall revenue base and we expect it to phase out over the next few quarters.

Speaker 3

Going forward, our discussions will be focused on cyber safety growth. For more details on our reporting structure, I'd like to point you to Slide 13 in our earnings presentation. Now on to our Q2 results. Q2 results reflect our consistent execution and focus on driving long term sustainable growth. Q2 is our 13th consecutive quarter of bookings growth supported by a healthy and robust customer base and strong unit economics.

Speaker 3

Q2 bookings grew 11% in constant currency and was in line with our expectations. Excluding Avast, Cyber Safety bookings grew 5% in constant currency as we drove increased value through cross sells in the Norton customer base And our key partner channels continue to scale, including identity driven partnerships with international telcos and employee benefit partners in the U. S. Q2 non GAAP reported revenue was $748,000,000 up 12% in constant currency and up 8% in USD. This includes a partial quarter of Avast, which contributed $48,000,000 or 7 points of growth in constant currency.

Speaker 3

Similar to prior quarters, our top line growth includes an unfavorable impact of 4 points as a result of increased foreign exchange headwinds of over $30,000,000 year over year. We expect this currency headwind to continue with both the euro and yen depreciating further against the U. S. Dollar in recent weeks. Call.

Speaker 3

Despite volatile macroeconomic impacts, our cyber safety revenue, excluding Avast, continues to grow mid single digits in constant currency, in line with expectations and again a reflection of our focused and consistent execution. Stepping through our other key operating metrics. Direct revenue of $660,000,000 grew 11% in constant currency and 7% in USD, supported by cross sell and other monetization initiatives with our existing customer base. Direct customer count went from 23 including approximately 15,000,000 cyber safety customers from Avast. Quarterly performance implied a combined decline of 252,000 quarter over quarter with 62,000 from Norton LifeLock and 190,000 from Avast.

Speaker 3

Both companies saw continued headwinds from lower global website traffic to our e commerce site impacting new online customer acquisition. But together with Avast, we now have an even larger opportunity to leverage our go to market efforts and further optimize our investment across brands and SEO to drive up traffic and conversion. Q2 direct monthly average revenue per user or ARPU was $6.98 in USD, which reflects a blended ARPU of Norton LifeLock and Avast combined with Avast ARPU of approximately $4.30 and mobile ARPU of approximately $2.50 Specifically for Norton LifeLock results, ARPU expanded over $0.30 year over year adjusted for FX. We are proud of the progress we've made in the last year, increasing the value provided to our existing customers through our cross sell and up sell efforts and are excited to drive similar improvements with the Avast customer base. Our customer base remains loyal With Norton LifeLock retention stable at 85% exiting Q2.

Speaker 3

As we merge with Avast, our overall customer retention rate moves from 85 percent to 75% blended. We believe the 20 point retention differential between Norton LifeLock and Avast presents a large synergy synergy to drive growth with our existing customer base. I will expand on this more as we discuss revenue synergies shortly. Call. For further details on our performance metrics, please refer to Slide 14 in the earnings deck.

Speaker 3

Moving on to partners. Partner revenue was $74,000,000 up 21% in constant currency and 16% in USD, impacted by 5 points of FX headwind. This is our 8th consecutive quarter of double digit revenue growth in partners. As we leverage this channel to extend our reach to consumers and broaden our product and geo expansion efforts. We will continue to invest in this omnichannel strategy, specifically in telco and retail partnerships that drive distribution of our expanded portfolio offerings, employee benefits where cyber safety and identity protection is essential to the employees' lives and through small businesses where entrepreneurs can scale their businesses with peace of mind knowing they are digitally protected.

Speaker 3

Partners will remain a key cornerstone of our investments going forward. Turning to profitability. Q2 operating income was $388,000,000 up 7% year over year with partial results from Avast. We continue to run G and A lean at roughly 4% of revenue, which provides the operating leverage to invest in sales and marketing and R and D. We remain disciplined in our cost structure with margin flat year over year.

Speaker 3

Looking ahead as Jen, we will strike the right balance on investments across our expanded portfolio and channels and will be intentional on how we spend in order to drive the highest returns across the markets, channels and customers we serve. Q2 net income was $269,000,000 up 5% compared to last year. Diluted EPS was $0.45 for the quarter, up 5% year over year or 12% in constant currency, including $0.03 of currency headwind. Please note that this reflects partial dilution from the $94,000,000 of Avast share issuance and higher cost of our debt. And our non GAAP tax rate estimate was 23%, which represents a blended rate before any tax restructuring effort.

Speaker 3

Turning to our cash flow and balance sheet. Q2 operating cash flow was a use of cash of $88,000,000 and CapEx was consistent at $2,000,000 in the quarter. Seasonally, Q2 operating cash flow is the lowest quarter of the year due to the concentration of tax payments. This quarter also includes approximately $110,000,000 of cash payments tied to the closing of the Avast deal and related financing transactions. Looking ahead, we have high confidence in our cash flow generation, which will continue to grow with profitability.

Speaker 3

Year to date, we have returned over $550,000,000 back to shareholders in the form of both buybacks and dividends. We deployed a total of $404,000,000 towards share repurchases or over 17,000,000 shares in the first half of this fiscal year and have approximately $1,400,000,000 remaining in our current buyback program. In Q2, we repurchased $104,000,000 or 5,000,000 shares. We also paid $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 approved a regular quarterly cash dividend of $0.125 per common share to be paid on December 14, 2022, For all shareholders of record as of the close of business on November 21, 2022.

Speaker 3

Moving to our capital structure, we had a lot of activity in Q2 related to the Avast acquisition and maturities that came due during the quarter. We now have a capital structure in place that we believe sets us up well for the long term. Our debt maturities have been extended and staggered through fiscal year 2031 with no near term maturities due until April of 2025. We remain well positioned with $2,600,000,000 in liquidity and our gross leverage is 4.4 times with net leverage just under 4 times. You can refer to Slide 31 in the earnings deck for more details on our go forward capital structure.

Speaker 3

Looking ahead, Jen as a combined business has predictable and highly ratable revenue, generate significant free cash flow on an annual basis and is backed by a strong liquidity position. We will drive a balanced and disciplined capital allocation approach between targeted deleveraging and opportunistic share buybacks. We feel good about where we are at and we will continue to evaluate and assess our overall debt needs and leverage profile in this ever changing environment. Now an update on the Avast integration and expected synergies. We're pleased to report that our pre integration planning and actions we've taken to date have successfully accelerated our integration timeline from 24 months to 18 months.

Speaker 3

This is a big undertaking and we are aggressively going after this. Pleased to share with you today that we are increasing our annual gross cost synergy estimate to over $300,000,000 In terms of phasing, we intend to exit fiscal year 2023 with 50% of the $300,000,000 annual run rate achieved and exit the first half of our next fiscal year with 70% achieved, 100% completion exiting fiscal year 2024. We expect a post synergy structure with gross margins of over 88% and OpEx reduced from approximately 35% of revenue today to 28% to 30%. This translates to an operating margin framework of approximately 60% And any leverage we drive above that creates flexibility to drive even more growth and portfolio diversification. With the addition of Avast, our complementary strengths provide increased levers to drive top line growth across the combined 500,000,000 existing user base.

Speaker 3

Call. We have identified approximately $200,000,000 in revenue synergies over the next 2 years. Opportunities include a vast retention improvement, increased cross sell and up sell, leveraging an expanded product portfolio and marketing spend optimization across brands, just to name a few. Achieving these synergies will help strengthen our mid single digit growth rate. We expect traction with revenue synergies to be measured directly through retention improvements over the coming quarters to support our bookings and top line growth expectations.

Speaker 3

Now turning to our Q3 outlook. Call. For Q3, we expect non GAAP revenue in the range of $925,000,000 to $940,000,000 which reflects the 1st full quarter of contribution from Avast And reflects Cyber Safety mid single digit bookings growth. This also includes approximately $40,000,000 of headwinds from FX. We expect Q3 non GAAP EPS to be in the range of $0.42 to $0.45 per share.

Speaker 3

This reflects the Q1 dilutive impact from Avast. But please note, we expect Avast to be accretive in the 1st 12 months. Based on the continued strengthening of the U. S. Dollar quarter to date, we anticipate the currency headwinds to persist and the interest rate conditions to remain volatile.

Speaker 3

Call. But I want to emphasize that the underlying health of the business remains strong and durable and given our high cash flow generation and strong liquidity, We are confident in our ability to navigate through the near term challenges. Q3 is just the first step post the VAC towards our long term objectives. Beyond Q3, we continue to remain focused on our long term $3 EPS objective that we communicated during our last Investor Day. Call.

Speaker 3

Given the meaningful macroeconomic changes since then and now that we have merged with the BaaS, we have looked at a revised path to achieve this. First, we recognize that the rising cost of debt and FX headwinds has created a $0.60 to $0.65 headwind. Beyond that, the building blocks and paths remain largely the same as we've laid out previously at Investor Day, as well as 15 months ago during the Avast deal announcement. The annual gross cost synergies of over $300,000,000 combined with the accretion from Avast profits will create more capacity for reinvestment in a faster timeline and will fund the diversification efforts and next horizon bets that help solidify our growth targets. We expect our business to grow at mid single digits supported by the revenue synergies I laid out above, complementary strengths and increased levers as a combined company and the long term secular importance of cyber safety.

Speaker 3

These growth drivers are centered on product innovation and new product introductions, expanding reach and distribution through our omni channel strategy

Speaker 4

and expansion

Speaker 3

of our trust based services. The focus remains on customer experience at the core. Finally, we intend to use our capital to deliver incremental EPS with a disciplined approach of debt pay down and opportunistic share buyback, $3 as we exit fiscal year 2025 and in line with the timeline we shared with you 18 months back. We are excited about these opportunities for growth and remain relentlessly focused on what we can control to achieve it. Call.

Speaker 3

For more details, please revert to the whiteboard bridge in Slide 27 of the earnings presentation. In summary, we remain committed to driving EPS expansion. We are focused on accelerated integration timeline, on execution against our business opportunities and driving towards our long term objectives. We have a very robust business model with a healthy customer base and we remain focused on expanding new customer acquisition through new channels and Chios, driving more value for our existing customers as well as increasing engagement with new products and services. We will provide updates and increments as we work through integration these next few quarters.

Speaker 3

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

Speakerphone. Please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Question. The first question is from the line of Saket Kalia with Barclays.

Operator

Your line is now open.

Speaker 4

Okay, great. Hey guys, thanks for taking my questions here. Congrats on closing Avast.

Speaker 2

Yes. Hey, Saket. Thank you.

Speaker 4

Yes. Hey, Vincent. Vincent, there's a lot to go through, particularly with Avast. But then maybe we can start just with the organic gen business, if you will, right? It was great to see the churn improve versus last quarter, the net churn, the 62,000 net churn metric.

Speaker 4

I think most of us were prepared For something worse even versus last quarter, just given the trend in PC shipments. Maybe the question for you is what do you think drove that improvement from last quarter's result despite that trend in PCs.

Speaker 2

Yes. So I mean, as you guys know, we're not directly related to I think the PC is a good indicator of the pressure on the overall consumer spend and a lot of PC were bought and were onetime purchased during the COVID We obviously are more of a subscription business post device. People still spend time online. As you know, that is a growing metric. People still are exposed to risks in the digital world, and that's also a growing scary metric.

Speaker 2

So the need for our product is still there. We said it for now 2 quarters that those macro level trends are impacting our global traffic and our ability to grow faster our new customers coming from our direct marketing investments, but we continue to really retention rates. Quarter in, quarter out, I don't think there is like something to conclude. We now have 39 direct million customers, 65,000,000 total customers. And the trend would be, although it's slightly negative, I would call them like Flat plus or minus a percentage point.

Speaker 2

I think you're going to continue to see that trend for probably a couple of quarters for as far as we can see, but we are really focusing on the opportunities we have within our current installed base and growing bookings through cross pollination of all of the best practices both companies bring together.

Speaker 4

Got it. Got it. That makes a lot of sense. Natalie, maybe for you, I mean, you said in your prepared remarks Just a really busy quarter for just the capital structure. I was wondering if you could just build on that and just talk about the delevering plan going forward.

Speaker 4

Obviously, a good amount of debt here to finance the acquisition. I think we said $0.40 to $0.45 just from the rising rate environment that eats into that Jen's into some of that EPS accretion. Maybe the question for you is, how do you think about your options here for delevering or maybe any other options to just generally control interest expense.

Speaker 3

Yes. Hi, Saket. Thanks for the question. So I would start with Our capital allocation tenants are largely the same pre and post the VAST deal. I think the first and a very critical component of that is for us to get on to our annual free cash flow target of generating $1,500,000,000 That's going to really Bring to light the execution of the internal leadership team, really executing on all of these opportunities, both revenue and cost synergy to really generate that free cash flow.

Speaker 3

Beyond that, as a reminder, what we've said is our key tenets are we want to get We're going to stay committed to our dividend, so take put that aside, and then we're going to find the right balance across leverage ratio and our opportunistic share buyback. Of course, with the Avast financing And with the dramatic shift in the rates and the debt environment, we're about a point higher on our net debt leverage than we expected. And we're obviously facing into that. It's not the only component of our capital And I don't think we can look at deleveraging in isolation. If you looked at it in isolation, I mean, obviously, the cost That is about 3 times what we thought it was going to be even, I don't know, call it 7, 9 months ago.

Speaker 3

But when you also take a look at The dilution that came with the deal, we've talked about the Avast share issuance, so we're facing into that. We're also facing into what the when you look at our share price and really think about opportunistic share buyback, The balance is incredibly key. And I think it's not only a balance of one lever or the next, there's also a timing component to that too. And so by no means is it easy to strike that right balance, but we are super clear eyed about it and we're trying to find and find how we actually balance across all these different factors, especially as the dynamics change so rapidly in the market.

Speaker 4

Yes, absolutely. Well said. If I can sneak in a last one and then I'll cede the floor. Vincent, maybe for you, the $200,000,000 in revenue synergies was great to see. I think you touched on it a little bit just in terms of retention rates in particular, but I was wondering if you could just go one level deeper just in terms of The building blocks of that $200,000,000 in synergies, any thoughts on time frame in terms of when you get there and kind of how you get comfortable with that $200,000,000 in revenue?

Speaker 2

Yes, absolutely. And so we have about 6 initiatives identified. It's important to note that they are not dependent call. On new product innovations, it's really about leveraging the strength of both organizations to offer more value to our customers. Retention rates supporting by our service organization coming into this deal will hugely benefit on the Ava side.

Speaker 2

You know that They have pressure on their retention rate about 65%, and we've identified a set of operational initiatives here to move that up. Cross selling identity and privacy, more complete comprehensive plan is an important one as well. Avast has a lot of focus technology and features and products on the privacy side. We bring our identity section expertise and I think the cross selling is the second one. The third one is really to move and up selling to the platform approach.

Speaker 2

I mentioned that about 60% of our customers had adopted before the acquisition that PlatformView, we see higher satisfaction, higher usage. Avast had just launched Avast 1, and I think now we're going to leverage that expertise to offer to the 15,000,000 customers coming from Avast the opportunity to benefit from it. And then you have a set of go to market efficiency improvements. 1 is the e commerce side and the operational capabilities we have developed. We know we can benefit from rebalancing very significant performance marketing budget across all lines and leveraging our premium to premium scope of business model will be the 5th initiative and the 6th one is expanding in a few various channels that we did not have, one of them being the very small and small businesses.

Speaker 2

So those are the 6 initiatives. We put them over 24 months. Make no mistakes, we are Treating that as the priority day 1 immediately, we know we'll integrate, we know we'll deliver the cost synergies. Obviously, driving value for our customers is our overall priority for us.

Speaker 4

Very helpful. I'll get back in queue. Thanks guys.

Speaker 2

Thank you.

Operator

Thank you for your question. The The next question is from the line of Matt Hedberg with RBC. Your line is now open.

Speaker 2

Hey, Matt.

Speaker 4

Great. Thanks for taking my questions. Hey, congrats from me as well on the deal. Vincent, for you, the 66% Avast retention, It certainly seems like an opportunity from the cost synergy or from the revenue synergy perspective that you talked about. I'm wondering how much of that is Just due to European exposure versus something maybe structurally with Avast, just sort of wondering like how quickly we can see That Avast retention look more like sort of let Northern LifeLock?

Speaker 2

Totally. Let me break it down. In timing, we can talk about it because I don't think timing is linked to the bucket, but different at a very high level. If you separate, I would call it, there's a bucket of structural differences that you will never change. And I told you and all of you that the acquisition of Avira was a great warm up for us to understand how to manage premium to premium business models, and it gave us the confidence to Merge with Avast and create this new foundation.

Speaker 2

We know it is definitely an enabler of our future growth. On that retention side. I would say there's a set of structural views such as a European business or premium business model or other things. And About, I would say, a third to half would be structural. Now some of the structural things we can tackle them, but back to timing, they would take longer.

Speaker 2

And then there is another set of operational differences and that we've known we've already brought to Avira and will bring to our improving retention, whether it's customer, help, service organizations, some of the feature inside our product. I won't go too much into the details, But we know that we have at least 10 points here that are linked to our own operational execution, and that's what we, in the short term are focused on. We said over 2 years because we'll do a lot of, obviously, testing and deployment. We'll be cautious on timing of revenue synergies. They always take longer, but we'll accelerate the cost synergies to support the accretion on the bottom line.

Speaker 2

That's at the high level what the retention means.

Speaker 4

That's super, super great. That's super helpful. And then Natalie, it looks like apples to apples versus your revenue guide, it looks like kind of Poor Norton LifeLock was about $700,000,000 which is a little below the low end of the range. I'm wondering how much of that was due to currency headwinds that transpired since your last guidance? In other words, What was the incremental currency headwind since you reported your Q1 results to revenue?

Speaker 3

Yes, it was about 4 points of growth. It's definitely a pretty significant headwind that we've been facing into the last few quarters with the volatility.

Speaker 2

I can complement to that answer. I would say Matt, one second. I would say that The grocery you broke it down pretty well, which is basically our core business is marching towards what we had said our guidance was and growing at mid single digit. And we see these trends to continue. The difference, of course, are the macro level currency being the number one factor hitting us.

Speaker 4

That's great. Maybe Natalie, I mean, I think you said 4 points of headwind. I don't know if that's a year on year perspective, but Do you know it was like a $5,000,000 headwind incrementally $10,000,000 since last guidance, just on kind of just I don't know if you have that figure or if we could certainly circle back on a callback?

Speaker 3

No, we have it. So we're facing into about $30,000,000 of currency headwind. From a quarter over quarter perspective, it was about $3,000,000 to $4,000,000

Operator

call. Thank you for your question. The next question is from the line of Fiona Hynes with Morgan Stanley. Your line is now open.

Speaker 5

Hello, everyone. Thank you for the question and congrats on closing Avast. You have and I'm covering for Hamzah.

Speaker 3

So Yes. I appreciate

Speaker 5

all of the color on the updated reporting structure that you walked through in the prepared remarks. I wanted to follow-up a little bit on the partner channel. It looks Like the sequential growth there was a little bit lighter this quarter, even including the $5,000,000 of contribution from Havas. So wanted to get any updated commentary on what drove that performance in the quarter and then kind of your view of the ability of the partner channel to contribute on a go forward basis. Where do you

Speaker 4

I'll take a first crack

Speaker 2

and Nathalie you can supplement. Definitely in our partner business, I would continue to See that as Nathalie mentioned, an investment area. There's 4 or 5 key buckets from employee benefits to Telco Channels to now adding with us the SMB area. Now we had in our partner business in the past. As you know also the mobile app direct customer, which we're moving to the direct business, so that may influence a little bit.

Speaker 2

Quarter in and quarter out, I think that I wouldn't call it deceleration. You'll see up and down in that business, all outgrowing the direct business based on our investment profile.

Speaker 3

Yes, I just would supplement that, right? So from a partner perspective, it's about 10% of our business. So we're going to continue to invest. We've seen strong quarters, very consistent double digit rate of growth. It continues to help.

Speaker 3

It's more important in the expansion in the different markets and different channels and different customer cohorts. That's the value that we really get out of it. Of course, double digit rate of growth in our in 10% of our revenue isn't bad. That's helpful as well. It's a diversification channel for us.

Speaker 5

Understood. Very helpful. Thank you for the question.

Operator

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

Speaker 2

Thank you. So Gens' opportunity ahead is massive. Even with the near term macro headwinds, we're still in early stages of long term secular needs. And as we start this new chapter as Jen, let me recap how I feel. Our purpose is broad, meaningful and inspirational.

Speaker 2

The market is vast and full of opportunities. We are a house of trusted consumer brands. We have scale and a diversified go to market And we have great products, technology and technologists. And above all, we have a passionate and skilled team that seems big and placed to win. Thank you for your support and I look forward to talking to you soon.

Operator

Call.

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