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

So, well, with that, everybody, good afternoon. Good evening. I'm, once again, Brad Zelnick, Credit Suisse software analyst. And for this session, we are extremely delighted to be joined by the team from NortonLifeLock. With us today, we have CEO, Vincent Pilette; CFO, Natalie Derse; and IR extraordinaire, Mary Li. Do I see you, Mary?

Yes. I'm here.

That is you. All right. You're all in a conference room. I'm a little closer to a camera. But the good news is we're all here. And just for housekeeping, the format of this presentation is actually a fireside chat. I have a bunch of questions I would like to ask our guests. And I will also keep my eyes on my e-mail. So if you all have a question for the team, let me know and I will try to work it into the conversation as I set that all up here. So maybe if we could, first off, thank you all for joining.

Yes, absolutely. Thanks for having us, and we're also extremely delighted to talk to you today.

Awesome. Well, it's always good to see you, Vincent, but even better to see you at the Crédit Suisse 24th Annual Tech Conference. Although if I had my choice, it would have been in Arizona this year. But I think everybody understands, given the circumstances.

Maybe just to -- as an introduction, we've been hearing quite a bit about increased malicious activity online as the pandemic has raged globally. How do you think about consumer cybersafety? How has it been impacted during these times? And what are the ways NortonLifeLock can help address these concerns for customers?

Yes. So our sales of the Enterprise business and our focus on consumer-only back 12 months ago has been at the perfect time to handle then this pandemic. Our vision and our mission is really to provide everyone with safety when he or she conducts his or her digital life. And more and more activities would move from the physical world into the virtual world. That was our hypothesis. We're going or embarked on the journey to build a portfolio, comprehensive portfolio, an integrated portfolio to deliver cybersafety to everyone. And the pandemic has raised the level of awareness towards this need for cybersafety. Obviously, it moved a lot of the activities online, whether it's the kids, the students studying online, and we've seen a lot of attacks on schools and ransomware for student grades and other confidential information. A lot of people are now moving their health monitored online, a lot of the activities, even the seniors now moving online. My mother is 80, has now opened an account with Amazon. And so, all of that has created more risk and awareness to be protected against that cyber criminalities. And I think that supports our long-term vision that at one point in time, everyone that's connected to the Internet will have a desire to be protected for all of the things that they value from simple data to reputations, if you want. And that's our mission. That's what we've embarked on.

Fantastic. When we think about the overall market opportunity and we think about the rate at which it's growing, investors like huge TAMs, a lot of growth. Obviously, the problem that you're solving is critical. And if we just think about all the multiplier and network effects, there's so much for NortonLifeLock to do. But if I were myopic, and I thought about the history of just consumer endpoint security, clearly, that would be a much less interesting opportunity than the one that you're pursuing today. Can you just help maybe to bridge investors from the past to the present and perhaps to the future in terms of how you think about the market, is there enough to go after? And how do you continue to help drive expansion of the opportunity?

Yes. Let me deal on 2 fronts. On the first one, you're right. The Norton division come from protecting your device, then you move to multiple devices, multiple OS, and then there was a discussion on desktop versus mobile. And then 3 to 4 years ago, under the leadership of Greg Clark, Symantec bought Norton -- Norton Division bought LifeLock and became NortonLifeLock, first inside Symantec and now as a stand-alone company. And the vision was that, that need for security would move from device-centric to user-centric. And you as a user will have more and more of your lives being lived online. And the increase of use case, if you want, that you value would continue to increase. And so, they built that vision towards cybersafety, combining software and services to protect against criminality in the virtual world. And so when we look today at how many people are connected to the Internet, we're doing about billions. And when we look at how many people are really paying for a third-party cybersafety, I can come up with 100 million. And so, it's definitely underpenetrated view. If I make a parallelism to the physical world, in the physical world, when you value something, whether you have your car, you buy an insurance, you buy a home, you buy an alarm systems, you don't have yet the same awareness and the same reflex than in the cyber world. Yet we believe that awareness will continue to grow. And so our potential is basically that the vast majority of the people connected to the Internet have something that they value in the cyber world, and they will pay for protection against any potential criminality in that world. That's one aspect. So, for us, that's our mission, and it's a long journey, a multiyear, multi-decade journey to get there. Now in today's world, we have the old pillar of security for which the top 3 players have about 60% of the market. You still have 40% that's fragmented. And so, consolidating more market share in that area is part of our game. The second pillar is around building up from security to adjacent opportunities. So, that's identity, identity protection and restoration for us, penetrating the privacy angle, extending to connected home and families are all adjacent opportunities to security to build cybersafety. And in the third pillar, there are adjacent digital services that go with cybersafety that are potential play for us. And so that's how we really look at our overall set of opportunities.

Very helpful context. Maybe if we could get into the actual numbers, you talked about a mid-single-digit growth opportunity. In the last couple of quarters, you put up 5% constant currency billings growth. The quarter before, 7%. And there were a lot of skeptics and a lot of shareholders that are obviously very pleased that you've been able to deliver that kind of growth. You're now delivering more consistently or we hope. Is there potential to even accelerate from here? What would need to happen to get there? And how much of this should we really think of as being durable?

Yes. So, clearly, I talked about the potential, with billion of people connected to the Internet, 100 million or so paying for cybersafety, broadly defined. And we can continue to expand that portfolio. So, we believe the opportunity -- and more and more of your life will move online. You will have multiple identities and lives online, which can explode the number of use case we can apply our portfolio to. You're right that a year ago, nobody believed we could deliver this transition, which was really rebuild the credibility, delivering on what we said, returning to the profitability that division was at 50%, remaining the stranded cost, as you know, and building up a leadership team with the ambition to return the company to growth. When we put the mid-single-digit growth rate out there, there were a lot of questions. And we knew we didn't have the credibility to put a higher growth rate, so we put it out there and connected all the dots. We made it really essentially on the back of launching Norton 360 and increasing our marketing spend, which is really our sales force, if you want, driving the awareness for the need for cybersafety. We still have a lot more ambition than that, of course. And now we're penetrating into the next phase, which is more of a transformation phase, transforming each function of our company to accelerate the growth. At the core, it's product innovation, of course, to build up the portfolio, but it's also better structuring our brand framework. It's expanding on our distribution environment. It's really about pushing internationally versus the U.S. where we're really underpenetrated. And so when we look at all of our growth vector, we see a lot of optionalities, if you want, to both sustain the current gross level and over time accelerate it.

That makes sense. By the way, I'm seeing a couple of questions that came in over email. I'm going to get to those in a moment. But maybe, Vincent, since you touched on Norton 360. It was only back in 2019, you launched this integrated platform offering consumer security from core endpoint -- antivirus to password managers and full identity protection. And you've had so much success selling into the base, I think it's now more than 50% that are already on the product, much better than I think most would have anticipated. Can you just talk us through how this has become such -- how -- why has it been received so well? And as you look out over the next 3 or 5 years, how do you see Norton 360 evolving from here? And is there eventually going to be a Norton 720? How do we think about this?

Yes. So, to be clear, I'm always hungry. So, I'm always looking at what else I'm going to do next as opposed to what we've done so far. But you're right that if we look back, the vision of cybersafety came from the purchase of LifeLock, combining with Norton, expanding from core device security into the user case and providing full protection for your digital life. So, that was the vision. It took 2-plus years to integrate all of the platform. And the vision there of that common platform of Norton 360 was that for simple membership fee, you would get protection the same way that you go and pay for an insurance fee or an insurance umbrella, and you get protection of all of your assets in the physical world, you would have the same in the virtual world. And so, they came up with that vision and then common architecture, enabling many advantages like moving functionality as they commoditized kind of lowering them to the lower level of Norton 360 and bringing innovation at top of the funnel and then moving down as they become commoditized and constantly evolving that portfolio. The team had the time to prepare this launch of Norton 360 and raised different steps in our installed base, like price on single product, ending life for stand-alone certain products or certain SKUs. And by the time we launched Norton 360, we also added $100 million of marketing, as you know, to create the awareness. And that led 15 months later or now 18 months later to slightly over 50% of our installed base on Norton 360. And for the new customer coming in each quarter for the last 2 quarters, about 3/4 of the customer, choosing Norton 360 as the primary option. So, that's where we are. How far will we go in terms of penetration? Frankly, we we'll let the consumer choose. As I mentioned, the new customer coming in roughly at 3/4 on Norton 360, 1/4 not on Norton 360 for the installed base, they'll decide. And they will always have the option for certain functionality or certain product to buy those products stand alone.

That makes sense. And with such a compelling value proposition, we look forward to seeing it becoming even larger and larger portion of the total base. I've had several questions come in, and as well, I planned on asking you about attrition or renewal rates. You've had benefits of this calendar year, as many businesses have, from the pandemic, greater online activity. And just as we think about renewal rates, what's the risk of renewal rates trending down? Are you -- are you already becoming -- beginning to see it just because newer cohorts are more likely to churn away? Is that the wrong way to think about things?

So, let's first step back on how we look at the business. Obviously, our objective #1 is to grow our top line at the current profit level that we have. And then through the leverage of the new customers, grow our bottom line at or faster than revenue. There are multiple growth drivers. It could be new customer, it could be up-sell, cross-sell, increasing the ARPU. It could be improving the engagement and improving the retention and/or it could be growing our indirect business by partnering with other key players to go distribute into either different segment or different market internationally. So, we'll play on all of our levers. Obviously, when we grow our customer count, which is one of our multiple objectives, the first-year new customer actuate at a higher rate than the multiyear customers. And we know that and it's building to our overall model. And I do not expect for the customer that we have grown as we return from declining customer count to growing customer account to attrite at a higher rate than the normal average first-year attrition rate we've had so far. I think once you embark on that cybersafety journey, I think we have a fair chance as we continue to evolve our portfolio to retain you. And I don't think that the pandemic has created different behavior, at least for what we can see at this point in time.

Got it. No, that all makes sense. Vincent, a question that was asked -- and just going back to the opportunity and competitive environment, it was framed this way, which I think is fair. Is there any reason why NortonLifeLock should be growing slower than peers, McAfee and Avast, for example, in the future? And just in terms of any competitive share losses, how to think about the share shifts within the market?

Yes. And I think we've discussed our plans over the last 12 months that for a while, the consumer division inside Symantec was more focused on maximizing the bottom line versus acquiring new customers. And they were focused on fixing the Enterprise and turning around the Enterprise. Once we sold the Enterprise business to Broadcom and focused on the consumer market, our hypothesis and, of course, validated by the growth of many of our competitors, was that the market is growing. And with our vision, with the assets we had, with the brand we have, with the resources we had, we thought we could return the company to growth. Obviously, if -- when we 12 months ago came out, I would have said we'll grow high single-digit or low double digit, nobody would have believed it since even mid-single-digit was not believed by investors. We now here today -- and I think the first step of accelerating the growth is about sustaining the growth. And as we sustain, we transform the company to accelerate the growth, obviously. Outside of the fact that we are basically a 12-month-old company in terms of the focus that we have and how we're building up, we still have some catch-up to do. The big difference between competitors in my opinion today is the distribution model. As you know, we -- 90% of our business is direct to consumer. We market our message, and they come on our e-commerce platform to download the product. Some have built stronger partnership, mainly with hardware manufacturers, you know that. And that was a field that Symantec left 5, 6 years ago. And as PC stabilize, of course, and even grow now to the pandemic, that's a huge benefit. And then on the bottom of the spectrum, there is another competitor that took advantage of a freemium approach and tried to get a huge funnel to freemium and then up-selling or cross-selling from that at the lower CAC. I think when we look at distribution, I see no reason why we couldn't play across the entire spectrum. And where it makes sense, both strategically, operationally and financially, we'll continue to expand our distribution environment.

That's helpful perspective. So, maybe if we could -- it seems that you've been leaning in towards into digital channels to try to better position the brand with a younger demographic. And I think you've already made some considerable progress there. I think even my kids, I've seen advertisements, whether it's been through YouTube or other social channels. But can you maybe share how much of your total marketing spend right now is being put through digital channels and some of these newer channels? And how are you measuring efficiency of that marketing spend? And maybe just give a comment on the unit economics of the customers acquired through some of these newer channels that you're focusing on.

Yes, Brad. This is Natalie. So, I'll take that one. So, just as a reminder...