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

Okay. Well, hey, good afternoon, everyone. Welcome to day 2 of the Barclays TMT Conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have with us the team from NortonLifeLock. We've got Chief Executive Officer, Vincent Pilette; also have Chief Financial Officer, Natalie Derse; as well as Head of Investor Relations, Mary Lai. Just to frame this a little bit. We've got about 30 minutes together. Maybe we could take the first 15 or 20 minutes with just some fireside chat with the team. And then for folks on the webcast, would love to make this interactive. This is a fun team. So definitely feel free to e-mail the questions over to me at [email protected], and I'd love to incorporate them here as well in the time that we have. So 2 things, first and foremost, Vincent, Natalie, thank you so much for being with us here today. We really appreciate it. The second thing is, I believe Mary is going to read a quick safe harbor for us just before we get started.

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

Excellent. Thanks a lot, Mary. Vincent and Natalie, thanks again for being with us here today. Really appreciate it. Vincent, maybe I'll start with you. I think to say that it's been a big couple of years for NLock is a little bit of an understatement. But let's start with that. It's been a big couple of years for the company. For those of us on the line that maybe aren't as familiar, can you just give us a quick recap of some of these major changes that NLock has seen in the last 2 years, just to get us all on the same page. And maybe as part of that Natalie, maybe you could just add a little bit of financial color as well to this sort of show us the transformational from a financial perspective as well.

Very great. And thanks, Saket, for having us and for everybody who has dialed in. Thanks for listening and supporting and paying attention to what we're driving. So 2 years ago, Symantec company, the leader in cybersecurity split into 2. We sold its Enterprise division to Broadcom and decided to focus entirely on protecting individuals, consumers against cybercriminality. So last November, last month actually, we just marked our second-year anniversary as a NortonLifeLock, with that dedicated mission. We have 3 big buckets for the first 1.5 years, 2 years. The first one was to gain credibility as that stand-alone consumer cybersafety leader, part of the credibility was returning to the right cost structure, right after the split, our operating margin with all the strenth, thus was about 26%. We brought the business back to a 50-plus percent operating margin. It was about rightsizing the employee structure, if you want, to the mission, building up a leadership team with credibility. And we've delivered for the last 8 quarters at or above our commitments. Returning to $1.50 EPS, it was $0.90 right before the split or at the split. And we had put a $50 Objective, which I think many investors were doubting we could get, and we got to get there ahead of time. We don't put and Natalie will talk about it, new long-term objectives. So that was bucket number one, basically building credibility as a very strong operator. The second one was really returning the company to growth. Many investors, as you know, Saket will talk about it a little bit later, still view this consumer area is maybe a cash flow, cash cow type of business. And from an overall consumer perspective, maybe an antivirus on the device. And we recognize that the evolution of the consumer lifestyle, moving into digital, the evolution of cybercriminality, needed a much broader response, and we tackled that problem. We were the first at launching an integrated-cybersafety platform that for a membership you subscribe, that's known 360. We launched that 2 years ago in April '19. And within the first 12 months, we reached 60% of our installed base having adopted that platform. And [indiscernible]. We will go as high as the consumer needs us, but I believe the whole industry will move into that area. And the third element was to continue to expand internationally in that overall going back to both internationally and accelerated the pace of innovation. If in the past, this NortonLifeLock was launched in 1 or 2 new products per year with the cadence of 4 or 5, really constantly improving features and products inside that cybersafety platform. So the second objective returning to growth saw us moving from no growth to low growth to mid-single-digit growth to high single-digit growth. And again, we set up a long-term objective, which Natalie will share. And then the third -- so the first one was credibility. The second one is returning the company into a sustainable growth mode. And the third one was established a long-term vision. And we constantly refine that vision about now protecting and empowering every individual to live their digital life safely. And with that vision, it enabled us to really look more broadly. We have a two-pronged strategy. The first one is to build the best cybersafety platform for consumer, full stop, which is the best, which includes scaling it up, improving features and we're working on it. And the second one is adding adjacent services that have more value sitting on a cybersafety platform than not, and that's the long-term growth agenda. So when I look at 2 years back, we've achieved a lot. This setting up the framework if you want getting credibility, returning to growth and having a clear strategy, enabled us to also use our balance sheet to accelerate the growth, not only organically but we've acquired in January, Avira, a small international cybersafety company and signed here in August, as you know, the acquisition of Avast to really create the foundation of what the new company will be moving forward, being that leader for enabling and protecting customers. And Natalie, I'll pass it to you for the long-term objective, we're now able to set.

Yes. And before we even get to the revised long-term, just to put some numbers to everything that Vincent said, the team really put out at the time of divestiture and split through Broadcom, really returning customer count to growth, the trend had been negative for such -- for so many years in history, really putting the marketing assets to work and getting that customer count to a positive growth territory for fiscal year '21. Did it early. -- revenue accelerating from about 0% in fiscal year '20 to -- we landed at a 5% growth for fiscal year '21. Along with that, we said we would operate at or above 50% operating margin, did that as well. Within EPS on an annualized basis for fiscal year '21 of $1.50. And so just all of these long term at the time they were stated long-term objectives, the teams were able to execute earlier than planned and honestly achieved all of those long-term objectives within the first year of operating as NortonLifeLock. Then fast forward from there to our Analyst Day or rewind us back to our May Analyst Day, and we said, okay, what are our long-term objectives now. If you guys recall it, we called it the triple double. Double customers, accelerate our rate of growth and revenue, and double our EPS to $3. And so that's what we're going after. Fiscal year '22 now, we're about halfway in. We're into Q3 for us. And we're really tracking to our plan. And that being the first year deposit in that overall long-term objective and our path to $3 EPS objective. You heard us in the last earnings, just a reiterate guide for the full year and narrow that range in on revenue to a 9% to 10%.

Absolutely. So much stuff to talk about there. And definitely, I want to touch on the triple double. That was a really fun Analyst Day. But maybe, Natalie, we can start with you. I mean, so much of the success after the split from Broadcom and all the cleanup that happen afterwards has been around really turning around the machine on new subscriber adds, right? So I'd love to dig into new subs a little bit. It's been great to see the consistent growth in net adds each quarter. I guess the question is, how is the customer acquisition engine here grown in the last couple of years? And where are you finding the most success for new customers? Does that make sense?

Yes, for sure. So we have to step back in history to really understand it. The machine was largely -- I don't think I'm being too bullish, largely ignored when it was combined under the Symantec umbrella. When Vincent became CEO, he made the decision to really reinvest and turn that thing around. In order to do that, you've got to put resources behind it and make it a priority both not only operationally but financially and he did that. Infused another $100 million in marketing. That obviously is going to drive growth. It's just now we're in the stage of -- we continue to operate at or above that level of marketing growth or marketing investment. And now it's a case of what are we doing with those funds. And so right out of the gate, yes, we saw growth. We've talked about it a few times in the past that, that first quarter of COVID definitely helped accelerate the awareness and the need for that as folks mobilize to home for work and school. We saw that, but we've continued to grow beyond that. We now are working on our seventh consecutive growth quarter of net adds quarter-over-quarter, and we're proud of that. But it's honestly not easy. I mean that first year of infused marketing, yes, you're going to see pretty strong growth rates in exchange for that spend. If you didn't, there would be -- you'd probably be concerned. And now we're into that second year of that. Now we've got to not only lap that and do it again, but now we're looking to expand and diversify even more. And I mean that in pillars, security identity privacy. I mean that geographically from the U.S. to international and then even with international, really picking the places we want to go big and go win. And really making sure that as we diversify across the channels that we get it right, that balance is critically important. You've got to continue to foster and invest in your brand and your brand awareness, your brand strength and do that in different ways, first globally, but also getting it right locally at different stages of awareness, but then all of the digital channels as well. So we've got to really strike that right balance, understanding where the competition is spending, how we're showing up in Google, organic paid, that whole balance is very, very difficult, but we spend a ton of time trying to get that right. And what we've seen is continued growth there.

Absolutely. Vincent, maybe just to expand on that a little bit. I think international has been just a really interesting area given the sheer size of the opportunity. And so maybe the question for you is, what are the biggest countries outside of the U.S.? And how have you been able to use -- sorry, from a subscriber perspective where you participate? -- sorry, just to extend that question. But how have you been able to use different channels and/or different products to reach consumers in those markets?

Yes. And I think you're right, right, there's about $5 billion internet users in the world, and only a portion of them is in the U.S., yet we are very U.S.-centric, NortonLifeLock about 70% U.S. revenue based and 30% international. We [indiscernible] to achieve really our vision, which is that everyone has a basic level of cybersafety and then can benefit based on the high level of protection. We had to be more aggressive, expanding internationally. Frankly, cybercriminals and end consumers, as you know, they know no borders and so forth, it was an opportunity, and so we focused on that. We internationally have outgrown the U.S., yet we've seen a broad-based performance and growth of cost. We still had a higher performance internationally. And I think the opportunity for us is to become truly global. If you look at us outside of the U.S., to answer your question, we're more focused on the Western type of countries. So in Europe, it would be U.K., Germany, France and the next big 3. In Asia, we're very strong in Japan and Australia. We're very excited because Avast is truly the reverse of us. I don't want to see that international because from their perspective, the U.S. is international, but they are the reverse of that [indiscernible] 70% and the rest is international. Yet when we compare our footprint, and rather than being in those western countries, they're more into to [indiscernible] countries or northern countries, if you take the Americas combined, if you want, will be very strong in U.S. and Canada, they're very strong in Latin America. Europe [indiscernible] they have Spain and Italy, and we are the countries I've mentioned, and then they move into North like Sweden and Finland, et cetera. And then in Asia, the Southeast Asia and we are in Japan. And so even the bringing Avast will enable that to be truly global, but it's complementary compared to our international footprint, which is super exciting. So that's one element is global majority. Now internationally, our challenges are twofold. One, is the behavior of buying is very different. And as you know, in some countries, the basic of cybersafety is much more of a premium model. That's why we started to penetrate and include that model in our 2 fits, if you want. And it will be a great tool to achieve our vision, again, that all 5 billion internet users have a minimum [indiscernible] independent protection for their data. Then we need to improve that portfolio. If we are the most refined in the U.S. where you include security, you combine that with identity, with now some element of privacy and continue to develop the privacy. And Europe still has to take more in emerging countries, even more and move up the value chain, building Norton identity life of brand is more a U.S. brand, the Northern identity outside, developing that standing with the web monitoring, IT navigators, restoration services and building up the value to grow ARPU to a level of the U.S., which is -- in the U.S. is about 2x the ARPU of international and continue to grow that up will be the next wave of growth opportunity as we go international.

Absolutely. [indiscernible] about there as well as Avast but maybe, Natalie, back to you, just to sort of put a bow on the subscriber part of the equation. One of the questions that I got was just around sort of the seasonality of net subscriber adds kind of going forward. I mean, obviously, I mean, I don't think the team necessarily manages to a net adds number in the quarter and quarter-out basis, right? But I think just since the pandemic was maybe a little disruptive to so many parts of the economy last year, including right, sort of subscriber adds. Are there any frameworks that you can help us think about in terms of the seasonality of net adds here in the business on an organic basis?

Yes. Sure, we have a bit of a seasonality component. I think it more so instead of the customer metrics, I would talk about it from a business perspective. We bounce around quarter-to-quarter from security and identity, right, with the -- with the calendar Q1 being much, much more identity because we're so heavily in identity penetrated in the U.S. and it is attached to the U.S. tax and so security numbers cycle. And then, of course, I guess, swing the pendulum the other way when you think about retail Q4 -- calendar Q4 being much, much heavier in holiday. And when you're gifting, you're talking about security. So we see that. We also see a little bit of seasonality when you go from the spring to the summer, right? People are getting out, especially as we were starting to open up this year post-COVID or as we open up beyond COVID, we did see that swing where most people were really hold up in their homes and spending much, much more time on the internet and connecting with their devices and then being able to get out there and travel and shop and spend in other verticals. We saw that. That's not what I really spend a ton of time operating the business, worried about. And that's what I would want you and the folks here on the phone to think about. We absolutely -- it's a stated objective that we will continue to focus on adding as many net new customers on a quarter-over-quarter, year-over-year basis. It's absolutely critically important. But that's an output metric for us, and we're focused much more on bringing the most relevant, most competitive products to market and not only increasing demand, but in some verticals, creating demand and in some geographic areas, creating demand for our products. And you've heard from Vincent, that we're expanding well beyond the antivirus vertical or service and solution into a much, much broader portfolio. You've got to get out there. You've got to talk to your customers, you've got to make them aware and you've got to really create that demand for them to really make that purchase decision with us. And then we've got to differentiate from our competitive -- our competition out there. And we -- that's what we really are focused on in terms of delivering on the value that we have committed and sold to our existing customers and then how do we expand that in the most productive way possible and really expect that our consumers will choose us and in exchange for that value that we bring to them, we will be able to increase and grow our business. Customer now or bookings or whatever other metrics we're looking at. Sorry, Vincent.

No, absolutely. I do want to [indiscernible] here because when we became NortonLifeLock 2 years ago, we said we're going to return to mid-single-digit booking revenue growth we said at the time. And investors say, well, how do I know you right? And I say, "Well, look at bookings, that's 12 months looking ahead of where the revenue growth will be. So then we reported -- we started to report bookings and say what would be the most important view. And I said, look, we had 7 years of direct customer count decline. And I believe that was because the team was really focused on profit maximize division versus growth. I would say, measure us on sequential growth for direct customer countries is the number of report. So you can see that we are on track. And frankly, we've had eighth quarter of sequential growth when sometimes you have strong quarter, the tax quarter for us is a strong quarter. Then it could be a June quarter normally is a lower quarter. So you could have a sequential decline there, but we've been growing every quarter. I do feel now that investors are a little too single focused and it's on us to continue to share how we drive the business, too focused on simply just a direct customer plan. Just in customer, our reach is 5 billion internet users, we have a big partnership business that either is a distribution business or it's a true partnership like joining with another solution to reach out to those consumers with a cybersafety add-on. And we're going to continue to grow that pretty aggressively. Then you look at our growth needs to be balanced when we have a customer, we need to retain it, and we have plenty of areas we're working on, on retention, first our retention, international retention and all behind is the user experience to create more engagement, which then bring us to the third bucket of value, which is the ARPU. I mentioned U.S. versus international. Still the majority of our consumers are in the lower level of the membership and you move them up to the high level so they can benefit from the whole thing and where we drive the everyday business. We have a very long-term view on where we want to go and a very balanced view. Now it did not help that one of our competitors was solely attached to [indiscernible] 50%, of course, they have more customer consent. There is all this complete on those customer. We are focused with our business on building every one of our capabilities to have a long-term growth path.

Absolutely. It's the dollars that matter, right? I think if I just summarize that, right? And I think...

As an operator, I would say, every levels I mentioned matter. The dollar we get out with [indiscernible].

Yes. What I was going to say is it's the balance that matters. We can run a metric down like a dog with a bone. It's the balance to make sure that it's profitable, sustainable growth holistically. I could drop money in the market, get users like that. That doesn't mean that I'm going to be able to sustain and grow our retention rate, right? It doesn't mean that I could do a multiyear SKU and drive bookings this quarter, that doesn't mean I'm going to continue to accelerate double-digit revenue. So it's just -- it's balanced for us. And I think that that's what -- that's -- that's what we spend so much time every day. We obviously are focused on executing and continuing our high execution rate on what we -- we're going to do what we say and what we've committed to from a financial commitment perspective, but we're in this for the long haul, and we want that to be sustainable growth.

And doing measure us on the commitment we made in our long-term 3 to 5 years. And then every quarter, we reported progress. And so far, as you've seen, we have delivered out of both those companies.

Yes, absolutely. Vincent, maybe just understanding this is part of the subs and ARPU equation. But I mean you touched on ARPU there, and I think it's a really interesting part of the equation. Because it's been a nice grower despite growth in subscriber adds for a lot of my other subscriber-based model that doesn't always happen. And so maybe the question is, can you talk about some of the drivers here, like Norton 360? And anything else that we should be thinking about as you think about higher value, right, from your customers?

Yes. And we just try to make it simple. But when you look at ARPU, you did the initial steps in more the core security, do you have basic security in every one of your operational devices and there you have an ARPU and you can quantify it, I think, officially Avast, which is more security-centric at like $4.5 or $5. ARPU, we see the same in Avira and same for Norton. And then you say, okay, as a consumer is now worry that all of your information is out there and even to build -- you have a digital identity and how do you protect them? And then you have multiple identities and how do you protect them and have LifeLock in the building of Norton identity. There we see the ARPU growing to an aggregated level for our portfolio to be around $9 a month, which, frankly, for $110 per year, you have full protection from digital protection to restoration to insurance in [indiscernible], it's actually very low cost for that provided. And then above that, you say, okay, those multiple identities. How do I get into my privacy, manage it, manage my reputation online and those things and then you can add an incremental service and we're pushing forward. As we see this ARPU growing, we also see, as you move up the pyramids needs of digital safety or cybersafety, you also see retention increasing and more engagement with the consumers. So when you look at about our strategy, it's all about that, building the best cybersafety platform and continue to add functionally each one of the makers and move our customers, which still the majority of our customers today are in the lower tier of the pyramid I just described. And move them up to the value as the awareness continue to create as cybercriminality continues to evolve and delivers the value up. And I think we have an opportunity as we do that internationally as we expand across more use case to continue that ARPU.

Got it. Got it. Very helpful. In the time that we've got left, I'd love to talk about Avast because I just think it's such a -- I think it's such a transformative potential acquisition. Maybe I'll use that word, right? So Vincent, maybe just understanding that you are limited in what you can say, can you just give us a little bit of an update on where the process is? And just mechanically and Natalie, feel free to chime in here as well. Just mechanically talk to us about steps from here before NortonLifeLock [indiscernible]?

Yes. So quickly just go back to why do we acquire Avast. And I still have new investors or regulators that talk about the consolidation and acquisition. We used there were sometimes merger. And for me, it's none of those 3. It's really a foundational steps that supports our strategy of building the best cybersafety platform. With Avast, we're going to add about 435 end-users touching that cybersafety. And we're going to build up the value because we have very strong capabilities and identity, which we're going to cross-sell into the Avast install base to provide a full cybersafety. And then Avast has continued to develop more on the privacy with BreachGuard and the private browsers, and we're going to build up towards the privacy in and of that pyramid. We expand internationally, as I mentioned, it's highly synergistic. That's why people think it's a contemplation. But we can reinvest a portion to really create then the second leg of the strategy, which is building adjacent trust-based solutions that live or have more value on top of the platform. And of course, we confirm our $3 EPS. Basically, we had said in May, acquisition is an accelerator of our transformation. And so it's a foundation of steps when you go to it. The great news is we were very cautious. We know some people would look at the AV market still in the old way was defined, and we could have long run for regulatory reviews. When we met with [indiscernible], we were able to explain how the market is dynamically transforming itself that it is a structural growth with many different players, some small, some big or trying to innovate and change how cybersafety is delivered to consumers. And I think their early approval compared to our time line a couple of weeks ago was a testimony that hypothesis is shared and understood. So that was great. In our view, that was the longest run. Now we still have left in our regulatory approval process about 3 countries, U.K., Germany and Spain, with who we are actively engaged in the same way that [indiscernible] and myself and CEO of NortonLifeLock, have explained the market to the U.S. authorities. And we are constructively and collaboratively engaged with those to get to a close as soon as we can officially we have not changed our time line because we don't have data of visibility on when they will approve that. But I think once we have the regulatory approval, I do not see any road block in between or between now and that approval. We still have a little of debt to raise with the support of our bankers, which I see as absolutely no challenge. And then the second one is [indiscernible], which also I do not seem to be in the way of our first closing. So that's where we stand. In the meantime, after [indiscernible] approval, we have started to actively engage in integration planning at this point in time in the clean team concept, but we are discussing day 1 of growth, how we're going to hit the road and how we're going to integrate. As you know, on our side, our operating credibility is not to be made. And Avast also has been a very strong set of operators inside the company and under [indiscernible] leadership. So I'm very, very optimistic, and I'm just eager to be honest to get started post course.

We're eager to see it post close so as well and certainly wish the team the best of luck with them. Maybe this time next year at the tech conference, we're going to be talking about a very different NLock. So again, look forward to it. Natalie, maybe just for -- maybe just to kind of round out that point, I think a point that's important for investors to know. Organically, the Avast process also impacts NortonLifeLock's ability to deploy capital, at least in the short term, can you just maybe remind us how the process is impacting your ability to buyback stock? And maybe anything that you've said about on capital allocation as we go through this process?

Yes, sure. But let me start with just reiterating what we said back in May that capital allocation, those tenants and that strategy remains consistent once we get through the deal. And that is basically we're going to -- we've committed to stay committed to our dollar dividend. And then the rest of our capital allocation will be a balance between opportunistic share buyback and growth focused M&A with the whole goal of returning a 100% free cash flow, excluding M&A, back to our shareholders. And so that was our strategy back in May. That will continue to be our strategy in the long term post deal. Of course, it works restricted as we navigate through the deal with the buyback we're locked out. And so that's really difficult for us, especially as we look at how our stock has been performing, but we've been clear on the debt raise that we've got to go through, and we're going to try and navigate through the regulatory period as we can. And I would just reiterate what Vincent as soon as we can get through this. Man, we are definitely hungry. We're very, very hungry to just get back to our -- get back to being in the market and executing towards that $3 EPS objective.

Absolutely, absolutely. Well, folks, as you can imagine, so many more questions that we could dig into, a lot happening in the business right now, but also want to be respectful of everybody's time. Vincent, Natalie, Mary, thank you so much for the time. Again, I really do hope that this time next year, when we're sitting down together, there's just going to be so much more to talk about, and I think it will be a really fun ride. So thank you again for taking the time.

Always a pleasure. Thank you, Saket.

Thank you again here.

Have a good one, folks. Bye now.