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

Thank you for joining us at the NASDAQ Conference. My name is Keith Weiss. I lead the U.S. software equity research effort here at Morgan Stanley. And very pleased to have it with us this afternoon, our time, this morning over on the West Coast for our friends from NortonLifeLock. I've been very pleased to have with us both Vincent Pilette, CEO; and Natalie Derse, CFO, from NortonLifeLock. So thank you for joining us. We also have Mary Lai, Head of IR on the line. From my end of the equation, for important research disclosures, please see the Morgan Stanley website at www.morganstanley.com\researchdisclosures. And I think Mary has a brief safe harbor we're going to go through before we kick off with the questions.

Thank you, Keith, and thank you, everyone, for joining. We may be making forward-looking statement comments. Please refer to our website for additional information. Our website is investor.nortonlifelock.com. Thank you.

Outstanding. Vincent, Natalie, thank you for joining us this morning. Vincent, I wanted to start with you with a kind of a big picture question. Maybe for some that aren't as familiar with kind of what's been done at NortonLifeLock and how the story has evolved over the past year, can you give us a quick overview of what you guys have accomplished in the past a little over a year since splitting out with Symantec? And then just to set the stage for the conversation, what's the key priorities? What are we looking to accomplish over the next year as we head into calendar '21?

Sure. And thanks for having us with this conference, and good afternoon, everyone. I was actually dreaming last night about being in London in a restaurant. I think we'll have to wait 1 more year before having that. So let's go back to what we have done here at NortonLifeLock over the last year. As you know, November 4 a year ago, we sold the security enterprise assets to Broadcom for $11 billion. At that point in time, we look at the division that we had the Norton brand, the LifeLock product and coming together the first integrated platform, Norton 360, just being launched in a division that was really managed for profit maximization for a few years as part of Symantec. Yet, we were recognizing that we were facing a growing market, a need for consumers to have total cybersafety, and we thought that we're really well positioned to try to grab that opportunity. So as we embark on the transition, we first reestablished credibility, as I mentioned for a few years. The division was very much internally focused, are trying to, of course, maximize the value to the current customers for letting the customer count decline and naturally evolve while they were maximizing the profit for Symantec, the company. So as we embark on that transition, launching Norton 360, the first integrated platform from first in the U.S. to now 43 countries; returning to profitability because Broadcom bought, as you know, just some assets of the Enterprise business and really crafting a business that was 100% being to consumer at the right profitability level was an important one; establishing a vision, basically providing cybersafety for everyone; and building up a leadership team to return this business to its growth potential, where all of the challenges we had last year, we've accomplished. And I would say on all of those metrics, I would say, it's a really great accomplishment from the team. We also had, our last objective, which was as we launched Norton 360, to reinvest into our marketing engine to basically tell the consumer, the value of total cybersafety, create that awareness and change and bringing customer going into a growing business. And we have set a long-term objective or a mixed long-term objective to grow mid-single digit. We changed. We've had 5 course of customer count growth. And now as we reinvest in marketing and launch Norton 360, we are in that mid-single-digit growth rate, I would say. So from there too, you could say, well, that's also mission accomplished. But actually, what we've discovered is it's a market that has the potential to grow a lot more. And so when we look at comparing to the potential, now we are 100% focused on building this company for growth, and so growth is now the agenda moving forward.

Got it. Got it. I would say from my perspective, the challenge and the opportunity from an investor perspective is to sort of educate and help people understand what's -- how consumer security has evolved over the past 5 years, over the past 10 years, right? I think a lot of investors are still stuck in the mindset of consumer security is AV and AV alone, right, and that the market opportunity is only tied to PC growth. And if you're not attaching to PC, there's nothing to be done. But you guys really expanded the purview, and so I was wondering if you could help us understand sort of what the differentiation is both in terms of the solution portfolio that you bring to market with kind of total digital protection versus what we were doing 5 years ago, 10 years ago with AV. And then maybe, how does that change the market opportunity? How should we think about the expansion and the potential market that comes with that?

Yes, and I think you're right. It was surprising to me to -- when I started the first roadshow a year ago and talked about this consumer division, how underlooked that division was externally, if you want, even internally, to be honest with you. And I think that happened not only in our company, as from a market dynamic perspective. And how many investors were still asking me how many customers are buying an AV engine. Is your AV engine going to disappear if Microsoft improve their operating system? Or what's the attachment to a desktop versus a laptop versus a cellphone? And all of that showed that it was still very much consumer security or consumer cybersafety meant protection of your device and protection from a weakness caused by the operating system, which was reversed at that market as we know. But over the time, see, it evolved. It became not only increased the functionality of different adjacent products or on password managers and other on the machine, whether it's firewall, it's VPN, et cetera. And it evolved from a desktop to a multi-device to a multi-operating systems. But still, up to a few years ago, very much what you call in the enterprise endpoint, very much device-centric. And I think with the purchase of LifeLock, which was really user-centric company, marketing company, providing technology and a service to consumers, the things that evolved towards a vision around use case, user-centric. And as you rely to move more and more online, many seeing that true value is moving online, providing a total protection of everything you value online, whether it's on the desktop or in the cloud, whether you access it through your cellphone or to a dumb screen is what we're trying to do. And I think the market is moving towards that, whether it's called total protection, cybersafety or another name, it doesn't matter. Basically, it means that a lot of the things that are in the cyber world, you value a lot. More and more information, data, reputations and other things will be sitting in that cloud. As a consumer, you want to have total peace of mind, the same way that when you have a car, you buy an insurance just to have peace of mind or when you have a house, you have a fire insurance or an alarm system. While in the cyber world isn't the same thing. And the aspects of your life that you value that is online, if you want, will continue to evolve and grow, and that gives us this growth opportunity in the market, a structural growth opportunity for this market.

Got it. Got it. And then in terms of the market opportunity, I mean we used to measure the market opportunity based on PCs, penetration within those PCs and what the price point that you guys could achieve on those PCs. How should we be defined in the market today? Is it household and sort of the penetration in households on a go-forward basis? What's the right way that we should be sketching out the opportunity?

And that's one of the changes, obviously. Devices is still one of multiple drivers. But then with that, you start to have more information online. So your digital identity is in the cloud. Well, today, the digital identity you have may actually be multiples for you as a consumer. You may have an identity when you do e-gaming. And there, your identity is certain profile. It acquires some virtual assets, and you want to protect them because now what we see in the dark web is an economy building up by hacking e-gamer's account and selling those virtual assets across the web. But that profile of that digital life you had online is now different than maybe the digital life you may have as a worker or as a social person interacting on Facebook and others or maybe even different than what you would want to show to you after that now it's all conducted online. And so I think the explosion of digital lives or identities per consumer, the same way that you've had the explosion of devices, if you want, 10, 15 or 20 years ago is what the opportunity is being created. Now I'm not saying that each digital life is absolutely a value to be protected, but there are definitely valuable elements in that to be protected. So the simple ways we're looking at it is we have billion of people connected to the Internet. They're not all aware of everything that's at risk, but they all value something out there. And today, you may have less than 100 million people paying for a third-party cybersafety plan, if you want. And the time to awareness of full penetration is not really predictable, but the size of the opportunity is pretty big.

Got it. Shifting gears a little bit. I want to talk also about the changes in kind of go-to-market strategy that we've seen over the past couple of years and how should we think about that evolving on a go-forward basis. So you used to be -- consumer security was all about the OEM relationships, and that made a ton of sense when it was all just about securing a single PC. Now it's more a broader value proposition. And you shifted your distribution to be more direct distribution, more through partners and partnerships. So can you talk to us about kind of where the focal points of distribution are today and how that evolves over the next year, over the next 3 years, how you further expand that distribution capability?

Let me explain that because, obviously, product and distribution are the 2 big vector of growth for us. So I talked about a billion of people being on the Internet, that's the potential. For us, you can see a way to make sure we create the awareness. And normally, everybody should have a protection somewhat there in the cyber world, and criminality will come to exist and evolve. So the first core before I get into distribution will be product. And obviously, we're all competing in this space, but building up a comprehensive portfolio for you to be able for an easy membership fee or fee per month or whatever you design to our pricing to have peace of mind to protect those variables in cyber is a very important one. So building up functionalities, building a product, increasing the scope of that cybersafety portfolio will be very important. Now how you connect that portfolio to those consumers, if you want, will be the distribution strategy. And you mentioned it, Symantec, at the time, 5, 10 years ago, had all of the PC OEM relationship. It was mainly during the AV time, if you want, where you attach anti-virus to your PC to protect against the weakness of the operating system. And then 5, 6, 7 years ago, Symantec moved away from those relationships. And as you know, McAfee, at the time, part of Intel, signed up many of those and today has most of those relationship. The company here really decided to get a direct relationship with the consumers building the e-commerce platform, so premium cybersafety directly in touch with the consumer where you can download the product. We still have some strategic alliances but not with the PC manufacturers, but through others like AARP, TELUS, et cetera, to penetrate in a joint way certain part of the market. And then on the other side of that spectrum, you have a company of us that developed kind of a freemium way to go and touch. And there, the strategy was to give you a first date -- taste, sorry, of that cybersafety, if you want, for free or for low ASP. And then over time, as you discover the need for that more cybersafety, upselling and cross-selling. So those were the kind of -- in terms of competition and distribution. A year ago, I said it and we continue to develop it. I have no [ secret ] caps. I think we'll continue to develop very important strategic relationship. Last year, we announced with TELUS, with Aon, with AARP trying to reach new cohorts, whether it's with our product directly to those cohorts or a new joint product offering like this does. And so those are important, and we continue to invest in that. And then on the other side of the spectrum, going into a lower price point, maybe all the way to a premium to be able to give you a first taste of what cybersafety means, I think, is another way to go and reach a maximum number of consumers. And then as we live them and improve our product, we have a chance then to sell more, and I think we'll definitely continue to invest on the entire side of the spectrum from a distribution standpoint.

Got it. Got it. In terms of sort of areas of potential expansion, sort of how you guys could better grow on a go-forward basis, we're talking about sort of expanding distribution channels. I think international expansion is another area that you guys have been talking about. NortonLifeLock continues to be very U.S.-focused. I think it's 72%, you could correct me if I'm wrong, Natalie, of revenues in the U.S. today. What's the potential for expanding out that focus more broadly into international markets? Obviously, there's more households internationally than in the U.S. And can we do it economically? Can you get into those markets without putting significant pressure on margins? So maybe that'd bring Natalie to the discussion a little bit.

Yes. So we're talking about margin made. So first of all, you're totally right that international for us as a company is a big important view because we only are 30% penetrated outside of this from a revenue standpoint, a little more from a unit perspective. And going internationally is important. But as we have now reported 2 or 3 quarters, a pretty broad-based performance. So while we grow internationally, a little faster than the U.S., we're still grow in the U.S., and that's coming from improvement of our execution and the improvement of the portfolio and the product offering, of course. When we go internationally, it's easy for a company to say, "Oh, look at my distribution. I'm 70% in the U.S., 30% international. The niche are global. The market is global. So therefore, I have all of that international opportunity." And then you put those spreadsheet out there, and then nothing really changes. And why? Because you really have to tailor your execution to the local market. And as you know, I was part of the leadership team at Logitech for 7 years there. The founders kept -- always saying, "Hey, you need to be global and local." And there's always a balance to find between global approach with your product, with your offering and then go and locally executing. And it could be a few tweaks of your product because the consumer aspect is different. What you value from an identity perspective or field or even in dark web could be different in Japan than it is in Germany, than it is the U.S. And then you have to tailor your message too because the way you value it and the way you want to protect it could be a little bit different. So the local execution of the plan is very important. In some countries, as you know, you're right that the ASP is lower, and that's why I said on the whole side of the spectrum, you can either go and partner with others, you can go direct. If it's a robust market like a German market from a purchasing power, it's the same than the U.S. market, but the India market will be different. And so either you go with a partner or you can always go into the ASP spectrum and go with a simpler -- simplified product that gets at a lower price, maybe all the way to a premium to go and get -- create the awareness on which you're going to upsell. And so this is why it takes time building those local operational plan. I don't see an impact on our margin per se because, of course, everything is in line -- new investment's in line to the market opportunity. But definitely, it takes time to go and develop and attack some of those countries and markets.

I would just add on to that. Look, I think with the 70-30 split U.S.-international, we just have a lot of opportunity from an organic growth perspective. Yes, the growth has been broad-based. But when you think about a direct-to-consumer business model, when you think about all the markets that we can go into and really bring our competitive landscape to those users, you can really feel very confident in the incrementality of any dollar spent in your go-to-market efforts. And so from -- as you think about the growth and that growth coming through the P&L, it absolutely is fruitful business, it is absolutely business we're interested in that we want to accelerate. And you've seen us do that. Over the last 4 quarters or so, we're actually in our fifth quarter of elevated marketing spend. And within that marketing spend, it wasn't just a lift in the dollar spent, it was a significant shift in how we allocate those resources. So we're spending a lot more money in the international markets, both Europe as well as APJ. And the growth that we see coming through that, I have a very, very high confidence in the incrementality of the dollars we get in exchange for those go-to-market efforts, and so I'll take it all day long.

Got it. That's great to hear. The next dimension in terms of sort of potential growth opportunities is pricing, right? And you guys have seen really good ARPU dynamics and consistent improvement in those ARPU dynamics over the past couple of years, actually, with the upgrade motion towards Norton 360 and sort of the fuller package that includes the identity protection that LifeLock brought to the equation, along with Norton. So one, how far into that cycle are we? How far penetrated are we with Norton 360? How much more room is left in that motion? And two, are there any additional kind of product motions that can help with that ARPU side of the equation that we should be cognitive of on a going-forward basis?

Do you want to take it, Natalie?

Yes. Sure. Sorry, it's a little bit more difficult on Zoom on who's going to field the question. So look, we -- in our fiscal Q1, we said we were about 40%, a little bit over 40%. That accelerated to over 50% on the Norton 360 integrated platform, which is great, and that's -- we want to see that number growing. And the consumers that are choosing -- and we want to reemphasize, it is a choice on the consumer side, which is why we don't necessarily maneuver that number to an exact goal. We want to provide enough variability, consideration and enough value proposition that our consumers have choice. But for the folks that have chosen to join via the Norton 360 integrated platform, look, the green shoots metrics that we see are really, really strong. So in terms of the stickiness of those customers, in terms of the retention, in terms of just the engagement that we see, all things are positive. In terms of just the overall price and the ARPU, I would zoom out of Norton 360 and just look at our ever-growing value proposition, and it really circles back to the product innovation that Vincent talked about earlier. We are constantly looking at how we can innovate in our product offering. We have a handful of examples that we could talk about -- that we talked about on the earnings call. For example, Privacy Monitoring Assistant, what we labeled as PMA, is just a very, very clear way or a clear offering, excuse me, on what we're trying to do to continuously reinvigorate our installed base and making sure that we're providing innovative solutions, not only for our new customers, but for our existing customers. Our gaming product is another one. That's not only just a new acquisition or a new audience product, that's obviously to fuel our installed base as well. And all of these features, all of these services solutions are ways for us to further and further enhance our value proposition, especially in areas that are incredibly top of mind when you think about cybersecurity and cyber threats out there.

If I can add a little bit because you mentioned retention and ARPU, and I think it's not always clear in the investors' minds, at least the one who I talk to, exactly what our priorities. And it's very clear for us, our vision is that we will be the leader, the trusted and leading brand, and we provide cybersafety for everyone, right? And with that goal, we want to grow our revenue. At this point in time, we said mid-single-digit growth target. Obviously, we'll try to accelerate that, but that's the goal. And we want to do it at a reasonable profit margin that we set at 50%, and that's our goal, right? And if that means that we're trading off, for example, retention because we go into a market maybe where the retention rate is 60%, which is 85% we have. As a matter of the mix of now growing customer and growing our top line faster, we have compression or retention. Or if we go into a country that's a lower ARPU, and that's okay. Or if we distribute to the Apple store and that grows faster, so we touch more people and we grow our revenue faster. But unfortunately, business cloud is a direct customer account. It's an indirect customer because it's -- the bidding relationship is from the Apple store, that is okay. And so I want to make sure we understand our primary metrics, which is providing cybersafety to everyone, how many people do we touch and do we grow our top line and bottom line in the way we've committed to. The customer count, the ARPU, the retention are all part of trade up and decision we made to achieve those primary objectives.

Got it. Got it. That makes sense. We have about 5 minutes left in our allotted time slot. I want to remind any of the viewers and any of the investors on the webcast, you can submit questions. There's a little box on the bottom right. It will pop up on my screen, and then I'll pass it on to Vincent or Natalie. While we wait for that to roll in, 2 other topics that I want to make sure we get to. One is competitive environment, right? So we've had the recent IPO of McAfee that came out of Intel again. And so now we have kind of more data points on kind of like new users coming on. And investors looking at sort of the net customer adds from McAfee versus the net customer adds from NortonLifeLock. They see McAfee ahead. I think it was like 1.7 versus you guys had about 600,000 net new subscribers over the past year. Is -- I mean on the numbers, they're garnering more customers than you are. Is it a position that NortonLifeLock has to work harder to sort of get back that market share? Or do you look at it as a market share loss? And sort of how can you help to kind of reverse that?

So obviously, the IPO of McAfee may be new to investors. McAfee is not new to us, right? And I think I mentioned to you and many that when I became CEO, I went and talk to every CEO of every company in the broad field, whether it was Experian or McAfee, Avira and Avast or Experian, Equifax. I talk to all and try to understand. And it's not new to investors that Symantec created the market, had 60% market share in the year 2000-plus. And today, it has 28% market share. As I mentioned, it was focused internally, maximizing profit. And then frankly, under the leadership of Greg Clark, which was a brilliant move, he brought LifeLock to change that dynamic and say, "Let's focus on the use case. The world will become a cybersafety from a user perspective, not from a cash perspective." And then because of operational changes, he took time to make -- to go and implement that. The way I look at it is we have this need, cybersafety for every 1 billion of people connected to the Internet, underserved needs. Then it goes back to how do you serve it, and that's all about product portfolio, innovation. We have great engineering. We came up with the first Norton 360. Plenty of room for improvement, to be clear, but we have that new applications we can add and a great brand we have Norton and NortonLifeLock inspire, trust and very high brand qualities across the globe, by the way. So what's the difference now? We have become a stand-alone company, and we're going to be solely dedicated to that notion. It was first moving from declining and losing market share to stabilizing the business. Mid-single digit was our objective. Nobody believed it. We achieved here. As you can see, the great news with McAfee IPO. It's another confirmation point that the market itself when you come everything together is actually a growing market. And we'll continue to improve our operation, improve our portfolio, and frankly as I mentioned, compete on the entire spectrum of distribution because I believe that distribution is the only difference between us and some of our competitors.

Got it. I believe in Vincent. I knew you would get it back to mid-single-digit growth. So we actually did get a question in from investors. I want to make sure we hit this. So the question is, can you elaborate how much of a tailwind was COVID to the growth rate in calendar 2020? And how should we think about that being a headwind or a tailwind into 2021?

Natalie, do you want to take it?

Sure. So look, we definitely -- as with most companies out there have been impacted by COVID, but I would say what I look to is more so, as Vincent and the team really had the company up back in November and really reinvested in marketing, we really were on a rate of growth, right in line with the expectations that he and the team set out. And so when I look at it, especially -- the first metric that comes to mind when you think about COVID, in my opinion, is the customer acquisition, just the market and how we -- how the users were reacting to that. Of course, we've looked at the pre/post and tried to put a number on the COVID impact in our fiscal Q1. What I'd point to is more so we were on an accelerating up and to the right trend, multiple quarters before COVID hit. Yes, of course, when that global event was surfaced in the calendar Q1 time frame, globally, we saw users, whether you're a professional, whether you're a student or whether you're thinking about just living your life more so on social, online social and in the digital world, of course, we saw an influx of device usage and just more and more and more time spent online. So as that happened, yes, we saw a surge of folks now having a bigger and broader awareness of the need for cybersafety products and solutions. But really, when I look at the trend, largely speaking, there was a couple of point impact in terms of customer acquisition in our fiscal Q1. But really, when you look at our Q2 results, especially on the customer acquisition, we think we're more so on steady state, and it's much more in line with the pre-COVID levels of adds and accelerating growth.

I would say then on that end, what COVID has done, at least it has structurally improved the awareness that more and more of your life will be lived online. And with that, you have insurance within. I think we are on that structural growth. And pulling for a knob, maybe there was a peak here and there, but none of us have here for 1 quarter anyway.

Got it. Got it. Unfortunately, that takes us to the end of our allotted time slot. But Vincent and Natalie, thank you for the time. I think it's a very interesting conversation. NortonLifeLock remains an asset that I think has a lot more potential than investors are letting on to, and you guys do a very good job of explaining how the trajectory is kind of up and to the right. And I think that remains a little bit underappreciated, a lot bit underappreciated by investors, so something that should definitely be digging into. If any of the clients on the line want to dig in further, definitely feel free to reach out to myself or you could contact Mary Lai at NortonLifeLock, and I'm sure she can answer a lot of your questions or get you in touch with people who can. So Vincent and Natalie, thank you very much for taking the time to talk with us, and I hope to speak with you again soon.

Thank you.

Thank you.

Thank you.

Bye.