Gen Digital Inc. (GEN) Earnings Call Transcript & Summary

Hi, everyone. Hope people had a great, long weekend. My name is Nick Yako, Cowen's security analyst. Joining us today is Vincent Pilette, CEO at NortonLifeLock. Vincent, thanks for being with us this morning.

Sure. Good morning, everyone.

So yes, I guess we'll jump into Q&A and I'll try to reserve some time at the end. If anyone has any questions, feel free to e-mail me or just submit them in the Q&A text box. I guess to kick it off, Vincent, you've been working through a significant transition since the sale of the enterprise business. But as you start to emerge from this as a pure consumer subscription business, what are those top 2 to 3 strategic initiatives that you think people should be most aware of?

Yes. So before we talk about strategic initiatives, let's just talk about initiatives just simply. We had to build up a consumer division, Norton and LifeLock that now we rebranded NortonLifeLock, as a public company and building operational processes there that enable us to manage the company with the operational rigor that's necessary for a market leader was very important. We are rounding up the leadership team, a lot more consumer-focused. We just hired a new chief product officer on Wednesday we're very excited about. And we have a couple of more positions to fill, as you may know, including the CFO position, and then deploying all of the processes stand-alone. We finished the separation of the enterprise business. The stranded costs are all out. This is the last quarter. And so by August, we'll be fully operational as a pure-play consumer company. It's a very important one to set the company for the future. The second thing that we are working on as a key initiative for us was the rollout of Norton 360. Norton 360 is the integrated platform that take all of our products from the Norton security side, from the LifeLock identity side, and put it as one platform for consumers. Rolling that out to our installed base, we now have 25% penetration, is of strategic importance when you talk about future growth. With that launch, we've also reinvested into marketing. Marketing is basically our sales engine. 90% of our revenue is direct to consumer through our e-commerce platform, and creating the awareness and the demand gen out there was very important. The company sub-invested into that aspect over the last 2 years as they were focusing on restructuring the enterprise segment. And as everyone knows, we've raised the marketing envelope by about $100 million. And creating that awareness, creating that demand as we roll out Norton 360 is of strategic importance to us. And we've seen 2 quarters now of early positive signs out of those. And then the third one is really about accelerating the innovation cycle, if you want. We had an R&D and innovation process. It was a mix of enterprise and consumer. And the innovation process on the enterprise side is a lot different characteristic than it is on the consumer. On the consumer side, it's a lot more nimble. It's trial and error. And now that we have the Norton 360 platform, we can play and innovate in many different features, see what works and then accelerate or change course on some of those. Accelerating that innovation cycle, we just now are shifting into building fast prototyping a lot. And all these things is maybe the third, in my mind, a strategic importance and a strategic initiative that we are driving.

Right. Okay. No, that's a great overview and a lot to dive into, but maybe starting on the marketing side of things. And as you mentioned, you guys started to increase your marketing efforts in the back half of last year. But I guess before we discuss some of the changes underway, could you just talk to the level of marketing investments on the consumer side of the business prior to the deal and how that -- not only how that was trending up into the deal, but for the years prior?

Yes. So in 2017, the company bought LifeLock and merged it with the division Norton, so NortonLifeLock. And as they were doing that, they really worked on trying to integrate the product and developing the Norton 360 platform. As the company, Symantec, was challenged with many different areas, they reduced the marketing spend to a level that's around $200 million, a little bit less than 10% of the revenue, of the consumer revenue, for many reasons that I won't explain too much. But the company was really run for maximizing profit for consumers, meeting then the corporate profit commitment and at funding the enterprise turnaround. When we sold the enterprise business to Broadcom, we made the decision and communicated that to investors but made a decision to return to the marketing investment level that it was pre-2017. And so we increased marketing by about $100 million. And we spend 12% to 13% of our revenue on marketing and roughly 20% on overall sales and marketing. We obviously had a lot of needs, especially as we roll out Norton 360, international markets, new functionalities, many areas, if you want, that we did not take the time to educate our customer on or broadly communicating to the market what we're about and what we're offering.

Right. No, that's helpful. And I guess my next question was going to be around that. It's been a bit challenging to grasp the true level of marketing spend today with all the stranded costs and the transition. But you kind of just answered it, so it sounds about maybe $200 million. But anything you can provide or share around the mix between general marketing OpEx and more direct-to-customer acquisition costs?

Yes. So it was $200 million. We raised it by $100 million, so slightly over $300 million now. And that's a question I get very often from investors. Like, "Hey, with your stranded costs, what's exactly your level?" And I keep telling them the post-transition is very simple in this business. We have about 15% of our revenue in cost of goods sold, and we have 35% on OpEx. Out of that 35%, roughly 20% in sales and marketing; and out of that 20%, 12% to 13% is direct acquisition and marketing programs. We have various forms of that. We do very little in overall brand awareness. We actually have with Norton and NortonLifeLock a different perception internationally, but a very strong brand awareness. So the vast majority of our marketing spend is dedicated to acquiring new customers. We moved away from OEM channel. We don't have freemium. And our direct communications and our e-commerce platform is really the asset of this company. What we've done, as we raised the marketing spend, we also moved from all traditional form of marketing, long and short-form TV, radio, smail, and invested the incremental spend into social media, paid search, more international as kind of 3 main categories. And now as we move into the new fiscal year, fiscal '21, we see a lot of good returns into these new areas. We started to shift dollars from traditional form into newer form of marketing.

Right. Any sense of what that mix between traditional and, call it, newer digital looks like today?

Yes. To be clear, we -- as the company reduced their marketing spend on the consumer division, the team really kept the long and short-form TV, some radio. So let's call it traditional marketing. And then they spent incremental dollars in really integrating the products into a common platform, Norton 360. In April '19, we launched Norton 360. We raised the marketing spend through last year and investing the incremental dollars into new form of marketing. So I said paid search, social media and international. And so you should assume that about through the year, it was roughly 2/3 on traditional, 1/3 on new. As we move into the new fiscal year, we're now going to continue to operate that share and rebalance it. And my bet is by the end of the year, we'll be at least 50-50 on traditional versus more social.

Okay. That's helpful. And I guess as you move through this transition and start to look ahead, how should we think about the company's just overall willingness to lean into the marketing channels that are working for, say, preserving margins over the next 2 to 3 years?

So I get that question a lot. And I'll give you 2 answers, and it could be a little bit a conflict between the 2. The first one is, I do believe that any company needs to have a good operational environment to first learn how to work and can increase their investment as they see result versus giving upfront a big amount of money and trying to test and play. We did raise marketing through the year by about $100 million, as I mentioned. And we've seen early success of turning a declining customer count into now, I would call, a stabilizing customer count. Sequentially growing, yet not year-over-year, but definitely trending in the right direction. We've seen retention rate that continue to be very high at about 85%, and we've seen a very strong engagement and Net Promoter Scores. All of those metrics are actually very favorable to say, "Okay, should you accelerate in marketing?" And the answer is, as we continue to see a very strong renewal rate for those customers that come in the first year, I think we will continue to look at new investment, again, mainly around communicating for new functionalities, international and more new form of marketing that address a new cohort. It does not have to come yet at the expense of profit margin because we have lowered our profit margin to actually 50%. It was on trend of 53% to 55%. And we continue to optimize and operationalize all of our operations. And the savings we are generating from that, we reinvest that in marketing and R&D versus flowing it to the bottom line. Now I'll give you the other side of the equation. There is an equation between how much you can grow and how much profit margin you deliver. And I think we are in that zone for now of low single-digit to mid-single digit, yet not consistently delivered growth rate. We've shown that in billings. It will flow to revenue as revenue amortize from the balance sheet in a subscription business, but we see that performance and a 50% operating margin. And if we see a path to accelerate the growth rate, we may say, "Hey, maybe it will come at one point of margin, but we can grow a double-digit growth rate." I don't think we're there yet. But there will be a potential as we continue to innovate. I don't think we're there yet. At the same token, if we were not growing at a -- call it, a mid-single digit growth rate, we could raise our margin to 55%. And so there is definitely element of how you pilot your business to balance all of the dimensions.

Right, right. And I guess, if we kind of take all the things that you said together and maybe boil it up to say, what those customer acquisition costs look like or what a typical, I guess, CAC for new customer or sort of contribution margin by tenure or cohort group. Because, I think, those are a couple of the metrics that the investment community have been looking for, for you guys. So just anything around those areas would be helpful.

Yes. So as we communicated and shared, when we raised our level of marketing, we expected a deterioration of our CAC. We have a CAC of around $100. And we saw that deterioration. And the objective then is to really maintain a certain level of marketing and investment, a common noise level, if you want, in the market and then optimize your different campaigns, measure their success and just do investment and continue to dynamically manage your marketing spend. And we were expecting then a CAC to return to normal. We didn't know if it would return to exactly $100, but return to a good productivity output. We did see that benefit both in Q3 and Q4. In Q4, it was more pronounced because actually the marketing rates related to COVID-19 went down 5% to 15%. Then we saw a decline, double-digit decline in our CAC. We expect to continue to work on a CAC that gets productivity improvement, if I can use it that way, as we progress through fiscal year '21. Then you step back and say, "Okay. I understand your CAC. You have an ARPU of around $9 per customer, $108 per year." And we have a very high retention where you can see that the customer life value, if you want, is still way in excess of your CAC. And that's why I get always the question, "Would you want to invest more to get more?" And I think we need to balance the investment. Our goal is to build sustainable growth rate, investing into new functionality. And at the end of the day, we are a core product company. Continuing to build up on that Norton 360 platform to add more value to the customer is also part of our real-time trade-offs that we're making in the business.

Right. And this might be getting too much in the weeds, but any way to parse out the difference between LifeLock and Norton or Norton 360 in terms of that average CAC?

Yes. I won't do it, but let me tell you how we look at the company now. The vast majority of the new customer coming in are on the Norton 360 platform, right? And the Norton 360 platform has about 6 level of memberships. The first 3 would be broadly defined, what you still define as security or the market is defining that as security. We call it value customers. And they get the basic value of all of our product. And that goes into, of course, the antivirus, but password managers, VPN and a few others. So it's not only security. It could be a privacy element of different things. Then we move into what we call the premium value, the membership 4, 5 and 6. And the premium value has the element of identity, identity protection and then all the way to full identity restoration. And so we manage the company really now focusing on the installed base need to migrate to Norton 360. New customer in the vast majority comes on Norton 360 wants the value versus the premium. Obviously, the CAC on the value is a little bit lower than the CAC on the premium, but it's not dramatically different.

Okay. No, that's helpful. And I guess this might be more of a higher-level question. But now that you are a consumer-facing business, could you just discuss how the key metrics that you manage the business to have changed? Or I guess asked another way, how are you measuring success internally? And how should we and the investment community measure your success going forward?

100%. So let me first clarify something that came out of earnings. A quarter ago, coming out of earnings, we report our P&L. And investors tell me, "Hey, what could be leading indicators for us to understand you on the path of success and future growth?" And I told them, "Look, we're going to clarify the metrics." But the division, the way it is today, had been managing or maximizing their profit, focusing on the ARPU, which they did a fantastic job, right, the revenue per user and the retention, which they also did a fantastic job on. But they let the customer count decline, did not invest in marketing. And I told inside and, of course, investors, too, the #1 goal is to build a sustainable customer count growth, even though they may come at a lower ARPU because they only buy one functionality or one stand-alone product. The opportunity to have more customers then delight and then upsell and upgrade through the membership level is absolutely an external measure if you want to follow long-term success and potential or potential success. And so I did that. Out of the earnings last -- was it last week or the week before? In any case, out of last earnings, many customers say, "Oh, my god. Your customer count start to grow, but did you count the free customers that you have through the product you offered -- family product you offered in COVID-19? Or are you trying to grow artificially customer count with lower ARPU VPN, et cetera?" And we answered with, "Guys, we're not counting free customers in our customer count." And I'm going to give you operational metrics to understand the future of our business. I want investor. And myself as an investor, in NortonLifeLock and other companies, I will measure the success on the health of the P&L. So the P&L matter most. But if you move now operational, customer count, Net Promoter Score, which in some way measures the satisfaction of our customers into our views, is very, very important. Retention -- below retention because we communicate and aggregate retention is first year retention. We have very high retention when they pass 1 year. The first year retention has room for improvement. They're very important. The ARPU is a backward-looking, revenue-driven metric that comes from this customer for the last 12 months revenue. We measure inside the ASP. And the first year selling price versus the renewal selling price is also a very important metric. And the fifth one is Norton 360 adoption. So those are kind of the operational metrics we could or we might or depending on the competitive environment, we might not, but share with investors to understand the health of our future business and how we drive the business inside. But again, the P&L is the one that you should be measuring us on.

Right. No, that's helpful. And I guess if we think about sort of the -- your post-transition target growth rate of low to mid-single digits and then longer term getting back to more mid-single-digit growth, how important are those different factors, I guess, broken down between ARPU growth, net new customer growth and retention?

The most important word that investors should understand, I'm here for the long term. And the word, sustainable, is very important. I say sustainable customer count growth. I say sustainable revenue growth. I could add profitable growth because we're not going to acquire a negative view. Someone was asking me, "How do you make money on a VPN product that sells $2 per month?" And obviously, we manage our CAC for that specific product at a much lower level, and bringing customer into the VPN is the opportunity for us to upsell Norton 360. So sustainability and financial, we have 2 important metric. When we look at the future, really we said 3% to 5% going to low to mid-single-digit growth rate. We could achieve that tomorrow in a nonsustainable way. We can do a price increase. We can do a few different things. That's not what we're going to do. And so when we look at the opportunity to grow sustainably, the first one is getting back into the competitive environment. We basically focused on our current members, which is very good, but we never focused on reacquiring and competing. We left Europe to an Avast, for example. We left all of the OEM channels to a McAfee. And now that the company is back with a great offering, Norton 360, which is a competitive differentiator, expect us to be present in the market, number one. Number two is, we've been U.S.-centric very much. And we have 70% of our revenues there. And going international is a huge opportunity for us. You've seen the partnership with TELUS if we go into Canada. Last month, we were testing some new marketing form in France. We're rolling out dark web monitoring angle from a marketing perspective in Australia and New Zealand after Japan. So expect us to move internationally absolutely. The third one is, expect us to continue to build up new functionalities, for which we can attract a lower member into a higher membership or attract new customers or create a higher level of membership and expect them to continue to develop that. All of those dots, obviously, if you sum them up, gets to a higher growth rate than mid-single digit. And then we kind of say, "Okay. There is some overlap. There is some risk. There is this." And that's how we develop our 1- to 3-year plan.

Right. Okay. Maybe going back on the international front. Obviously, you guys completed the global rollout of Norton 360 last quarter. You launched LifeLock in Canada. But how do you think about the opportunity outside the U.S. over the next several years? And do you think that at a certain point in time, that could achieve the same size as the business in the U.S. today?

Absolutely. Anecdotal -- yesterday, I was talking to a CEO of a company in Sweden. And he was sharing how, in Sweden, in the Nordics, but now spreading in Europe, how much the digital identity angle was very important. And with one digital number, he can now look at his kid's school scorecard and then also have a similar identity, even though he may have 3 different banks, checking his banking accounts. And then with all of the world dynamic going on, the process of protecting that identity or that identity to be stolen or faked, like somebody try to get it generally and then resell it in others. So everything around identity or digital identity management is a huge opportunity. I think at one point in time, Europe actually might pass the U.S. I know for now it's difficult to perceive it because our social security angle is really well established, but other countries are investing into new formatic times, right? Who knows by when. But we have a huge role to play. We have the brands that give us the right to play in. And so I think for the short term, we'll see Asia and Europe growing faster than the U.S. for us. And notwithstanding like disruptive innovation that could come more in the U.S. But as is today, I think at one point in time, for sure, Europe or Asia would be equal or bigger than the U.S. today.

Okay. What percent of both revenue and the subscriber base are international today?

Yes. I think I mentioned about 70% is U.S.-centric, the rest being international, of course. Customers is a bit more, like more 60-40. So we get a higher ARPU or revenue per member in the U.S. And as we continue to grow, I think you're going to see that being better balanced.

Right. Obviously a very fragmented market internationally. How do you guys think about potential M&A to build out the portfolio?

Yes. If -- I'll answer your question. But if you step back, your fragmented comment made me think about something. If you think about NortonLifeLock kind of the potential brand of choice that you trust, the trusted partner to enable you to have your digital life, digital identity fully operationable without the boring, et cetera, the opportunities -- not just the market, the opportunities are vast and fragmented. Many undefined today, although you can see that as I was mentioning, I spent 1.5 hours with that CEO yesterday. And he was explaining all of the changes. I only see opportunities there, very, very fragmented, if you want. And so we'll continue to explore that, and I see that as a long-term huge growth or ambition, if you want, for us and our company. So when it comes to growth and investment, obviously, I always believe that you have to first demonstrate that your current offering, your current brand, your current leadership team can grow the business up organically. It can operate the business as is. I never believe in an M&A to solve a problem that you have inside because it only accelerates or bring other changes. And that's my personal opinion. And so we start to slowly earn the right to operate there. As I said, we're rounding up the leadership team. We now have a few quarters of delivering better-than-expected results. At least sequentially, we're returning to growth. Year-over-year bookings is returning to growth. Things still have to fall in place, but we're definitely seeing the end of the tunnel and kind of a bright future here. As we do that, we work with the Board on developing our strategic plan for the next 3 to 5 years. And we identify those growing markets that we can address, that we have the right to play, that will be complementary to our current portfolio and that would deliver growth, a growing market. Once we've identified those and we have a few, the first thing is we say, "Hey, what can we do organically? Do we have the skill set to play, the right to play and all of those things?" And then you look at, who are the players already in that market? Could be start-up that are just people. Could be start-up that has already derisked, prototyping or getting to a product. Or it could be a full-blown company that already has customers and a product that we like, but that needs scale or relevance to operate in those things. And we manage organic investments -- inorganic investment almost kind of as an opportunistic view and a financial decision. And so I think M&A is definitely part of our strategic framework and strategic thinking, but it's more kind of an output -- an opportunistic output of the whole process I just described.

Right. Okay. Maybe to wrap up, and probably your favorite question at this point, but could you just share with folks how the pandemic and COVID-19 are affecting your business today, whether it's on customer growth, marketing velocity? And then if it impacts your ability to sort of hit your post-transition targets over the next 6, 9, 12 months.

Yes. I don't know if it's my favorite. I was wondering which question you're going to bring up when you said my favorite question.

That's stranded costs.

No, no. It's okay. So look, first and foremost, hopefully everybody understand. This is not a 1 quarter investment. This is a long-term opportunity. The underlying growth drivers of your digital life, everyone's digital life will only grow moving forward. With that, your digital persona, your digital identity will only grow. If 2 years ago you had 10 digital identities, today or by 2025 -- today, you may have like 20; by 2025, you will have 50. And there is a need for someone of trust to help you operate in that digital environment, enable you to operate in that digital environment with full peace of mind with regard to your identity, to your every day data, information, et cetera. And I think we have the right to play there. That's a structural growth driver that will be there. COVID-19, in my mind, has accelerated that, has made that even more relevant, not only for you to work at home, but for your kids to learn at home, not only for you to maybe shop on Amazon, but now do all of your food delivery online. And maybe not just you, but your mother or your grandmother as well. And all of that has exploded through COVID-19. Can it come back to a low level? Maybe, depending on the peak you've seen. But a lot of those structural -- a lot of those changes, I think, have moved in structurally in a very different way. And people, who operated differently in the physical world, have moved a lot of their activities online, and we have the right to define what it is. So it validates, if you want, our long-term hypothesis in the short term now because, of course, investor, even though they're in the long term, they want to know what it means in the short term, which I understand. We've seen a lot of strong interest for our products and portfolio. As I mentioned on the earnings call, we've seen March being solid. We've seen April being even more solid. I mentioned on the earnings call that the direct acquisitions, if you want, customers were growing at a high single-digit. That has been very solid. Now of course, that's only the direct new customer being acquired, right? People need to understand that 85% of our business is a renewal installed base line. And so even high single-digit is kind of small. It's kind of the long-term trend. It's not going to be one move for 1 quarter, but it's definitely a good performance. And we've seen renewal rate being solid and holding steady, maybe slightly even up as we went through March and April. So this short-term point of strength, if you want, are here to validate our long-term hypothesis and investment case.

Okay. Great. And a lot more to talk about but unfortunately I think we're out of time. Vincent, thank you for joining us. And thank you, everyone, for tuning in.

Yes. Thank you, guys. Talk to you.