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

Excellent. Welcome to the NASDAQ Conference in association with Morgan Stanley. My name is Keith Weiss. I run the U.S. software equity research efforts here at Morgan Stanley. And very pleased to have with us this afternoon, my time, morning over in the NortonLifeLock time and afternoon -- late afternoon in London, but to have both Vincent Pilette and Natalie Derse, CEO and CFO, from NortonLifeLock. Natalie and Vincent, thank you so much for joining us. Before we get started, we do have to read a brief disclosure. I think Mary has a safe harbor she wanted to read, and then I just have one brief disclosure from our side of the equation.

Thank you, Keith, and hello, everyone. Thank you for joining. This fireside chat may contain forward-looking statements, which are based on current expectations, assumptions that are subject to risks and uncertainties. And actual results may differ materially. For a full safe harbor statement, please refer to our website at IR -- investor.nortonLifeLock.com. Thank you.

Excellent. And to add on to that, for full Morgan Stanley disclosures, please see our website at www.morganstanley.com/researchdisclosures. Excellent. So with that out of the way, again, welcome to Vincent and Natalie. Thank you for joining us.

Vincent, I wanted to start high level, right? I think Norton is an underappreciated asset within the overall software space. And I think it's -- the market opportunity is under appreciated. And I think it surprises a lot of people when you tell them that this is a company that's been driving solid high single-digit organic growth with recent acquisitions. You've been putting up low double-digit growth in the most recent quarter. And people just don't understand the market opportunity, what's been driving that. They think of the old consumer [ IV ]. Can you talk to us how the landscape has evolved over the past couple of years? Why is NortonLifeLock still relevant? Why is NortonLifeLock still growing in this market opportunity today?

Yes. And thank you for the question. And of course, good morning, good afternoon, everyone, on the phone. I think underappreciated asset is an understatement. I was looking at the share price. This morning, it started with $24. Yet, we confirm a $3 EPS. We have never missed the target we put out there. That would be trading at like 8x at EPS, just make like 0 cents, which for those who make investment decision, it's a great opportunity. Now let's go back to the market and the way we see it. And maybe we'll go back a little bit of where we start and where we're coming from. As you know, I've been a CEO now for over 2 years driving this business, rejuvenating this cybersafety vision, if you want, which is really about providing protection and empowerment for everyone to live their digital life safely. And that mission is important because it shows you the breadth and the scope of how we're thinking about. As I came in, I study a lot about where the company is coming from. I think in understanding the past, it's very important to apply learnings as we go in the future. The opportunity initially, as you know, was an antivirus for a device. The device security was not optimal. There was malware, and you need to protect that device. And over time, it moved into a multidevice environment, a consumer that had one device moved to 5, maybe now with an average of 8 connected devices per person or per household if you include the IoT that's in your house or even be more than 8, maybe even 10 on average. And so protecting a multidevice multi-OS environment became very important. And that's the core of that market. Obviously, every vendor whether in software or hardware or solution vendors have their own component of security in that, and that continued to improve. So the need for just an independent security for those became less and less. But at the same time, your digital environment, if you want, move from being device-centric to being user-centric. In the past, a PC was there. You need to protect the PC irrespective of who's typing on the keyboard and then evolved around the device plus the users, and that's why we started with the concept of cybersafety. It's now a multidevice, multi-user environment. That was the third step. As you know, we then bought LifeLock moving from protecting not only just your device, your security, but adding identity protections, the sum of data information creating your identities. Now on the identity side, it's moving like in the device from initially maybe one identity that was mainly physical that moves into the digital world. As the digital world expanded, now suddenly your identities, digital identities expanding a lot. And you move from one identity to 10 identities. Today, we are maybe 20 or 25 digital identities per person or per user, per digital life, if you want. And we move to safety digital. It's exponential there. And each one of those digital identities create an opportunity for cybercriminal to use it in a way that could cause harm to you. And therefore, you need to be protected. And above the identity comes down the privacy and I now have all of those identity out there, and I as a consumer want to decide, I want to be in control of what is being representing out there. And so we have this parameter view where the foundation is device security, moving to digital identity protection, moving to privacy. That is our cybersafety platform that today we are driving on those 3 pillars, security, identity and privacy. And then the second prong of our strategy is to build services on top of that cybersafety platform like digital reputations that you want to manage, not only in control of your reputation and your privacy, but you want to control it, project what you want to do with those digital identities. So we're going to build adjacent services, trust-based services that have more value because they sit on top of your cybersafety platform. When we look at the penetration of that broad opportunity, we believe that there is less than 5% of the Internet users, 5 billion users that consciously have this kind of full control cybersafety protection. And so that's the opportunity we see we can go for. 5 billion is the Internet users. As you know, there's maybe 50 billion devices. And if you take 20 identity digital analysts per user, it's 100 billion digital identities out there with a penetration rate that's still relevant. So that's why when we sold our Enterprise business and decided to focus entirely on that consumer, we saw this huge structural opportunity to develop and evolve our portfolio, providing that protection. That's how we think about our market.

Got it. So when we think about security opportunities, we oftentimes think about it in terms of surface area, what's to be protected. And what you're describing is a massive expansion of the service area, both in terms of the devices, in terms of users, in terms of identities, all expanding. And the expectation or sort of the consumer protection hasn't kept up. There's a very low penetration of people who have that what you guys call comprehensive protection. Can you help us match up that market opportunity to the solution portfolio? So if we think about that security platform, what's the actual products that align to the expanded surface area to expand the sort of market opportunity that you're describing?

And so again, we're driven by this mission of providing comprehensive protection and empowerment to lead the digital life safely. Today, I believe most of -- when I take the investor side, but also some of the consumer side, identify that cybersafety to the first layer in the [ sky ] which is device security. And from that perspective, it's true that the growth may be more a GDP plus kind of growth. And you're like, well, everyone does it, and so why is that? You move them to identity and digital identity, and that's still a very fragmented market. It was initially was kind of your credit score and some of the digital information being out there that you can protect against. Then we bought LifeLock, as you know, and added a full restoration services with it. So it's not only protection, protecting your data and your device, but then also helping you into restorations and supporting the consumer from that perspective. Then identity started to expand. You move into social media. You post personal data. You have many other things. And the definition of digital identities as in all of different shapes or form, as you know. So it's still very fragmented what that identity protection is or could be. And so in identity itself, I think there's a lot of growth, constant evolution of technologies or services you can offer. The European Union, as you know, started to bought the framework of how digital identity will be represented in that union for all services. With that, the potential not only to help on the technological side, but on the support and services side to help restore and protect will be very important. It's a long-term opportunity for us that will develop. And so that's being both global technology, but local from a service perspective and scale matters. That's why we are also combining our strength with Avast trends to create really that player that's relevant in that space. The privacy then -- so when you have all those identities, how do you control those identity? Again you as a consumer decide what to do. It's still very fragmented. Some features might be just embedded into functions. Other may be a full my privacy from Norton's [indiscernible], for example, offering that enables you to have the full score. And so that has to continue to evolve both the awareness as the market continues, the technology, and then the most important thing for us, the user experience. We're the first to come with an integrated platform, taking our antivirus, other services and integrating into one architecture, if you want. And then through a membership fee, you can have access to that protection that will evolve as the threats and the maturity of the different markets will continue to evolve.

Got it. Got it. So in enlarging solution portfolio to better sort of address this broader market opportunity, can you talk about some of the kind of near-term demand impacts? I think a question on a lot of people's minds is what happened through the past basically 18 months with the pandemic. All of us went to work-from-home environment. So the hygiene of our PCs became more important to us and as well as to the companies that we work for. You saw really strong growth in the PC market. And I know Norton, it doesn't correlate well with overall PC shipments, but there's an expanded base of PCs for you guys to -- can you talk about what demand impacts you saw during -- over the past 18 months, let's say? And does that pull forward demand out of future periods? Is there a tough comp issue that we should be thinking about as we head into calendar '22?

Yes. So let's broadly talk about that demand, and then I can go into a few specific items you mentioned. When we decide to focus just on consumer, I -- our hypothesis was that, that digital life will continue to become a bigger and bigger and bigger portion of your entire life. We knew at one point in time, there would be almost like no separation between your physical life and your digital life, and there would be embedded into a hybrid kind of environment. By when, I don't know. Maybe I'll be dead by then. Who knows? But it doesn't matter. We see that long-term structural evolutions, and we continue to evolve, along with, unfortunately, cybercriminal that becomes also more and more digital, as you know. And so that was hypothesis. We know that there is not like a cursor that move growth rate from a mid- or high single digit to a 20% or 30% growth rate. We didn't plan for that. And many investors say, well, if you sold open and trade, and if the demand is really real, what you're describing, why you're not growing 30%. And I think it's because of that awareness that you still need to move from that digital device protection versus a digital life protection. And people need to understand that many of their behaviors, data information, identities creates some sort of value to them as an asset that we can help protect later on when they would either be hacked or ransomed or -- that things will be used against them when a recruiter will check what the digital life is -- before hiring them. And so we know there is that need that will evolve over time. What happened with the pandemic, as you know, and I'm going to state the obvious, is every one of us saw a major step into that digital lives. And the data is almost no day-to-day processes that doesn't impact the digital aspects of it. Even when I go to the doctor, as I mentioned in the last conference with investors, my last doctor appointment started with actually a Zoom meeting, and I had to explain a few things. The doctor had submitted some paper. And then I'll needed to decide whether or not, I could come to the office. My kids are all online, of course, schooling, even socializing, frankly, right? Many of us went to those virtual coffee to stay connected despite the fact that we didn't see each other. We did many of the socializing with the Avast management team through video during our due diligence, which frankly, 2 years ago, would have been unimaginable. We would have all flown out there to go and meet them. And so that has become totally digital. And then with that, you saw our growth rate accelerating from being flat to being mid-single digit to being high single digit, and we put the objective out there in the long term to return this company into that double-digit growth rate that both the opportunity and our assets, I think, deserve or can deliver. The pandemic has given us the opportunity to deliver closer to a double-digit growth rate. We've confirmed the annual growth rate for the year in the 9% to 10% range. And we've had a couple of orders booking growth rate that were in the double-digit growth rate. We're not structurally there yet. And so we, as always with this management team, when we give a number, you can count on that number. Therefore, my comment on the $3 EPS, but you can comment on that number. And we said it. Yes, the pandemic gave us a little of a boost, but we know that structurally, the behavior of being online, of having value online that's being targeted by hackers is there and has had a major step function. And I think it's on that, that we're going to continue to build and improve our portfolio.

Got it. Got it. I want to bring the pending Avast merger into the conversation. An important strategic initiative for you guys, still not closed yet, but that DOJ approval is still waiting for some others. But can you talk to us broadly why is this important for NortonLifeLock? Why create this consolidating kind of acquisition? What do they bring to the table that you guys couldn't do organically?

Yes. And so you have to really go back to a strategic for a moment that we highlighted that -- our last and our first Analyst Day last May. So our strategy at a very high level is two-pronged. And the first one is about scaling the cybersafety platform, as I described, 3 pillars, security, identity and privacy. Scaling means more users, means more international or global. And then it means more features in each one of those pillars and then wrapping all around it, improving the user experience and the integration of that portfolio. That's the first one. We have plenty of growth driver. We've highlighted at the Analyst Day 5 or 6 of them. We're driving full force on those. We believe we can deliver the long-term target that we put out there. And obviously the second prong is to start building and developing, if you want, trust-based adjacent services. I mentioned managing your reputation on top and building that service. We launched a note on crypto. We believe that in that safety environment, having transactions -- financial transaction could be of better value than it wasn't in a cybersafety platform. And we have 5 or 6 market identified here in which we have kind of seeds development, and we're thinking about how does that feed in for the overall performance. Come back to the first prong, scaling up the platform, getting global, getting more international in many countries, adding new features, you can take 3 to 5 years to do it, or as we had the opportunistic view to combine our forces with Ondrej and Avast, Ondrej being CEO of Avast, could accelerate that transformation. When I met Ondrej, frankly, we had very similar vision. I was the first time CEO, just became CEO, so I didn't know anything. I would ask him everything he comes from that security space for 20 years, is a brilliant tech guy, and so I was going to absorb all of this knowledge. Very interestingly, I thought like we had the same vision on that cybersafety platform where it go. And more from a consumer standpoint, like me as a consumer, what would I want to have? So we're like so similar, different companies, so similar. Then we kind of talked about values and culture of the company and realize we actually have very similar values. We still had to build ours as a new company, but being really scrappy, operationally-driven, customer-centric, trying to take risk to evolve, all of those, like, wow, we have the same kind of value drivers. And so we start talking about, hey, do we -- if we combine our forces, what it would look like? And then at one point in time, these things lead to, wow, let's do it, and then we jumped and started real discussions back in June of -- I was going to say last year, but we still in this year, so of this year, and the rest, hopefully, will become history. As you mentioned, we got the DOJ approval, which was great. We were always confident that when we would be able to explain that strategy and how we consolidate forces is not a consolidation move. It's not a merger. It's not acquisition, but it is a foundational deal to better serve the consumers and achieve our mission and our vision that everyone connected to the Internet should have a minimum of cybersafety services. We would be convinced that the authorities would find this pro-consumer move, if you want, and that's the path that we are on.

Got it. Maybe to bring Natalie into the conversation. Vincent's talked to us a lot about the big market opportunity, and he's given us kind of the pot of gold at the end of the rainbow with the $3 in earnings that you guys expect to be able to drive out of the company. Can you give us the equation that kind of matches the 2 up? What are the key components that we should be looking for that's going to drive that $3 in EPS?

Yes. We recently reaffirmed our $3 EPS objective. And I would say with how the Avast merger is going, we're more positive about achieving that today than we were even back in May. We said back in May, M&A would be an accelerator. And we believe with -- post close with the Avast merger that we will -- we set up to achieve it and -- with increased confidence levels even sooner than we even talked about. I think it's important to go back to the building blocks. You heard a lot from Vincent this morning that is very, very consistent. Our message is incredibly consistent, and it is -- we have so many different levers to drive that acceleration. Yes, now with a high single digit, but on a path to sustainable double digits, and it's really through all the components that he talked about, right? Accelerated product innovation, bringing great competitive market solutions to the market even faster, expanding our overall portfolio and the pillars he described. It's expanding from a go-to-market channel perspective and a reach and a presence perspective. We're very, very complementary, NortonLifeLock versus the Avast in terms of physical countries where we're present and have penetration, and we're going to leverage that as much as possible. It's going to be about really driving the value. I get a lot of questions about inflation. I get a lot of questions about pricing. The way we look at it is we're going to price our market. We're going to price our solutions with what the market demand looks like and the value that we can provide, our members through our solutions and services. And we're going to leverage that as much as possible because we are creating and expanding new demand in new markets, right, in new functionalities and really asking our users and our customers to really rethink what cyber protection looks like and needs to be for them. And as we do that, we're going to cross-sell and upsell so that we can cut through and make sure our customers do all the different diverse solutions that we have to offer. Combine all of that with the underlying component of we strive to be the absolute best in customer service and user experience. And so again, those are the building blocks we talked about in May. The Avast merger just amplifies the potential for all of those just being now a much, much bigger foundational base and then bring it back to the other components that we talked to you about in May. We're going to continue to be a growth-focused capital deployer. Yes, we're staying and consistent with our existing dividend, but we told you guys back in May, we are always going to be looking for -- through a growth-focused M&A lens. And we'll continue to do that even during and post the Avast merger deal. So just if I step back and I think about what we need to make the $3 EPS happen, of course, it's going to be accelerating rate of growth. It's going to be a disciplined approach, which we've proven many, many quarters in a row that we are capable of or committed to. And then it's making sure that we deploy our capital in the most efficient way.

Natalie, that's impressive that you answered 4 out of my 5 questions I had directed to you in that one answer. You took care of business with that one answer. That was great. I wanted to dive a little bit into distribution strategy because NortonLifeLock is really geared towards a direct-to-consumer distribution model and trying to do sort of a lot of the business through your website. I know Avast has a much different distribution model, meaning a lot more on a freemium model and free to pay with a huge free user base. Does the combined entity have both on a go-forward basis? Is there one that we were leaning towards versus the other? Or the combination is more powerful than either ones on a stand-alone basis?

Yes. I'm going to try to take this distribution angle. So as you mentioned, right, so Symantec, in the past, Norton division inside Symantec has a lot of OEM relationships and once a balanced view. And at one point in time, when they move from this, hey, device-centric to the user-centric and then really customer digital life-centric, they really shifted and became like 90% premium direct-to-consumer. That's the way it go. And of course, the business model improved from products -- on product sales to platform membership views, and they've done an excellent job at that. Looking back, as I said, I look at the entire environment. I wish, of course, rather than moving the full spectrum from one side to the other, we would have been more balanced. And so we tasked the team say let's look at all different ways to reach the consumer to achieve our mission. And our mission is that, again, every 5 billion Internet users connected to the Internet would have a minimum of cybersafety protection. And so to do that, we look at scale. Let's rebalance all of the distribution -- direct-to-consumer, very important we continue to be a majority of the focus and the revenue. We have about 10% of our business coming through a different angle, and I think we can grow that at a faster pace, as we've seen in the prior quarters, and we'll continue to develop that more. So that includes from physical retail to online retail. We still have more work to do. It includes building our employee benefits, so go through employers to offer our solutions to customers. It includes the telco environment, broadly defined. It includes also the device manufacturer. We still kept a few device -- relationship with a few device manufacturers. And I think as we said, we continue to look at an entire set of distribution channels. And where it makes financial sense for us, we will go and try to develop and tackle that. I haven't mentioned the B2B2C, which is really combining our solutions with another offering to make a combined offering to our customers, which includes that combined value. Think about banking or insurance or other providers with a cybersafety membership or service, if you want. And so that also is being worked out. That's from the distribution, expect the portion of our distribution, indirect distribution, the way we qualify it to continue to be a bigger part of the overall, even so the overall will also growth of B2C will come in to grow. When Avast comes in, it offers us 2 new things. From a distribution perspective, you also know that they are a little more into the VSB, the SOHO or the SMB. So not the individual per se, but businesses that behave as an individual in their decision-making or their needs for protection. We are 0 in that environment. We intend to continue to develop solutions, leveraging both portfolio to be more around the gig workers and other kind of areas to deliver that. So that's one new add from that perspective. The second one is internationally. While Avast is more international with more U.S. and vice versa, we're very complementary. Even international, we are stronger in kind of Western world or Midwestern world. Like if you take Europe, you would have U.K., France, Germany at a very high level, of course, Belgium. And then Avast would be more like Northern and South. And then same with America would be more U.S., and it would be more Latin America and there would be Southeast Asia, would be Japan. And so even there, there's a lot of complementary -- it's not just U.S. versus international, international versus U.S. It's also by area. So complementary, we expect to drive that. So that's another way of expanding that distribution. And then the final point that you mentioned, which is the freemium model. First, it's important to note that freemium for me, yes, it could be viewed as a distribution, but I don't see it as -- view it as a distribution. I see it more as a business model and a way to achieve our mission. So we decided that freemium was important that as some of that security components become more and more commoditized and embedded in other services, we need to have the equivalent of that, which is a free offering. And so we acquired actually Avira back earlier this year or December last year and the head of freemium model. And there was a lot of questions from investors. How will freemium model cannibalize premium model? How would you manage that? Inside the company, we know that, that's why I put in the business model, there's different views on how you behave inside the applications for a premium model versus a freemium and freemium interact a lot more. And so we rearchitect our overall portfolio to be able to address that freemium angle. The lessons learned from the Avira -- so to apply the marketing capabilities from Norton on the Avira freemium views, we can continue to grow and expand actually both lines, premium and freemium in similar countries. We still have a few tests running on brands and beside the brand aspect. But like that's a great model, and that gives us the confidence to pull the trigger on the Avast and say, wow, let's do that at Power 10. And that's where we're going to use freemium as a way for us to reach the 5 billion people connect to the Internet to, say, experience our cyber safety, if you want, not just only the commoditized view that could be offered for free in other independent service buildup as a stack, but experience that as a total cybersafety freemium. And then we would -- with our additional innovations, additional value, additional services, we would convert freemium users into premium users. So that's the overall strategy and how we think about reaching out to every consumer.

Got it. Got it. That makes a ton of sense. We're running short on time, a minute over. I want to sneak in one last question just on competitive environment. I think the competitive environment on the device side of the equation, I think, is clear, and there's been a pretty stable competitive environment there for some time. I think the more interesting side of the equation is identity and how you see that landscape. Like who are you competing with to get those identity dollars? And sort of who are the vendors we should be keeping an eye on who also was trying to address this market perhaps in a similar way to what NortonLifeLock is trying to do?

Yes. And maybe if competition was a bit more stable in the way that market was defined 3, 4, 5 years ago, like this antivirus of device security protection, actually, the evolution of the consumer habits and this penetration of the digitalized, along with the strong evolution of the hacking environment, higher technology, more applications, dark web as the marketplace to change their -- the benefit of their bad actions, all of that has created kind of, if you want, an overall need for that digital life protection. And so if in device security, as defined, you say, that's a little bit more stable, maybe it is, maybe actually it is not, and I'll come back on that in 1 second. Of course, the need to move into identity. Identity is still very fragmented. What does it means protecting an identity? What is a digital identity? How many digital identities do you have? And how many do you want to protect? All of that is in evolution, which creates a lot of room for innovation, startups, different offerings. Some will succeed, some will not. Scale and overall value is very important. But I said, why not in security? Because with so many of those players that started to get scale to say, oh, wait a minute, if I'm protecting your identity, I need to have a minimum of security because, one, provide a value for the other. And if I have identity, can I go into the privacy angle? And if I'm in the privacy, can I offer you more to manage other things that you value in that environment? And I think from that perspective, we actually see some access management of VPN players moving back into security or identity what they call digital wellness protection like a startup like [ Aura ] also embedded some security. And so we see actually the whole field, if you want, not only expanding, but also getting more towards like that vision we, as a company, had 4, 5 years ago, but building one membership fee to have that total life protection. And as we explained our view of that market to the DOJ, we believe that it was a very strong argument. That's why we're confident to say, well, this is not a consolidation move in one segment. It is really a whole different way -- the way the market is being defined and seeing a lot of innovation and opportunity to go and change that future.

Got it. Fascinating. Well, that takes us 4 minutes over. So unfortunately, we're going to have to wrap it up there. A lot of really exciting stuff happening within the NortonLifeLock story. Thank you both for joining us. Very much appreciate the time.

For sure. Thank you, Keith.

Take care. Thank you.

Excellent.