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

Well, hey, good morning, everyone. Welcome to day 1 of the Barclays Tech Conference. My name is Saket Kalia. I cover software here. And I'm honored to have with us the team from Gen Digital. Of course, we have Vincent Pilette, Chief Executive Officer; as well as Natalie Derse, Chief Financial Officer. And also, we've got Jason Starr in IR somewhere back there. I thought he was here. He was just here, Jason Starr.

He's there.

So just to frame today, we've got about 30 minutes together. Let's take the first 20 or 25 minutes to go through some fireside chat. There's Jason. Hey, man. We've got about -- let's take the first 20 or 25 minutes to kind of go through some fireside chat with Vincent and Natalie, which I know is going to be fun. And then we'd love to make this interactive. So if you've got any questions, just pop up your hand, we'll get a mic over to you to make sure we get it out. So with that, Vincent, Natalie, thank you so much for being with here today.

Thank you.

Thanks for the invitation, and good morning. Thanks for paying attention to Gen.

It wouldn't be a Barclays Tech Conference without you.

Thank you.

So I mean, no. So maybe a good starting point for those in the room that might be less familiar with Gen Digital because it's changed so much over the years. Vincent, can you just give us a brief overview of the business and your brands that some of us may not have heard of. Natalie, related for you, maybe you can just give us an overview of some of the main financial highlights that you were most proud of coming out of last quarter. There's a lot to be proud of, right? So I'm sure that will be a fun thing but maybe Vincent, you can start us off.

Yes, absolutely. So again, thanks for coming. I used to say that Gen is probably the least known tech company on S&P 500. Yet, we are the leader in cyber safety dedicated to the individuals or consumers. So we're helping people be safe online and be protected from a very dynamic threat landscape that's evolving at rapid pace, especially now with the use of AI and data to personalize that threat. We have about 77 million paid customers, 200 million active users on our cyber safety platform, 500 million endpoints. And we acquired those customers through products that are sold to 4 key brands: Norton, Avast, LifeLock as the cyber safety brand and now the MoneyLion as a financial wellness brand. As we acquired that leadership position in cyber safety for consumers, we decided to move to the next part of our strategy, which really is tackling the next pain point for our customers. And most of our customers are coming to cyber safety because they want to protect their financial position, their financial wellness or want to improve it. And the second part of that strategy is about that. It's about fixing their financial wellness, helping them both manage and grow their financial position. We recognize that about 2/3 of people in the U.S. live paycheck to paycheck, that about half of the financial products sold in the marketplace to consumers is actually done outside of the primary bank of that consumer. And when they shop, they shop in trusted platform at moment of their journey, financial [ journey ], where they have the need. And it's that trust and that moment of truth that they look for as they shop for financial product. And so we felt that tackling that new category that I would call embedded financial wellness, we call it secure financial wellness is really mixing that security, that trust with the next pain point for you, which is managing the financial wellness. We acquired MoneyLion about 6 -- sorry, 2 quarters ago, about 6 months to really accelerate our transformation and bringing it all together. And then Natalie will tell you everything we're proud about and we've delivered over the last 6 months.

Yes.

Funny side. Sorry, I have to interrupt you for a second. I think MoneyLion was announced near to the day today. Very good, so it's been year.

Yes. Exactly. Exactly.

I'm so sorry to interrupt, Natalie, please.

No problem. So Q2 was a really strong quarter for us. And I would say the summary is it was really strong growth in a very, very profitable manner with strong free cash flow. And the details around that in the quarter, we grew 25%, 27%, whether you're talking about bookings or revenue. We delivered from a profitability perspective, very strong margins. And it's our eighth consecutive quarter of double-digit EPS growth alongside very strong KPI performance, whether it's the customers, whether it's the core calisthenic metrics that we've got in the core business. And we did that all through closing now the second quarter with MoneyLion in the family. MoneyLion growing almost 50% in the first half, the first 2 quarters that we have had them in the family, so to speak. And the core business just continues to be consistently growing in line with what we set as our expectation a couple of years ago at our last Analyst Day. We've now had 4 consecutive quarters of 4% to 5% growth in the core business, MoneyLion aside. So we're really, really proud of that. And the EPS growing faster than revenue, in line with our expectation is just a sign and the commitment that we are committed to returning free cash flow -- all the free cash flow back to shareholders.

Yes, absolutely. Great EPS compounding story for sure. Vincent, maybe on MoneyLion. Again, about a year since we announced the deal. If I remember correctly, about 2/3 of that business was consumer-related, right, where customers were buying personal financial management tools or PFM tools, while about 1/3 of it was kind of enterprise marketplace. And the key there with that latter point was this matching engine for financial products on that engine. So maybe for you, Vincent, can we just dig one level deeper into each of those segments? And most importantly, why was that a strategic fit with Gen's consumer cyber safety business?

All right. Let me start by -- and then do a little bit of working back to how we got into financial wellness. We moved historically from a device security-based environment where the threat landscape was mainly malware attacking device to really being user-centric, protecting your digital footprint from all various sorts of attacks that exist out there, and that's an evolving framework. We moved from being protecting your digital form to protecting your digital identity, protecting your entire digital footprint. As we were doing that, more and more customers started to say it's not just, okay, to just protect my passwords, my identity in the web. It's also can you protect my financials. And so we introduced in LifeLock have the opportunity to plug your bank account and for us to monitor all of the transaction, unusual transaction, or potential financial fraud, merged with our anti-scam and all of the scamming threats that exist out there. As more and more of our customers were moving into that direction, they were asking more and more financial insights. Hey, what can I do? What are the memberships that I could eliminate? How do I rationalize my credit cards? What do I do? Different things. And as we move into that insight, we're feeling like we are limiting our capacity. And so we said we're going to move to extend to the next product features or product set, which was a personal financial management app or set of features that naturally you can move into. So that's the first anchor coming from a very strong consumer-centric product set, extending that into what is a set of PFM tools. And that range from managing just visibility, managing cash flow, managing savings all the way to managing investments. And then we still had the comments about the insight. I mentioned that half of the financial products are consumed outside of the primary bank into trusted platforms. And so we're also looking at bringing some of those offers and opportunities to the consumers inside the experience. So as we were building that, naturally, our first organic set towards adding the feature in LifeLock, then coming up with Norton Money, we're looking what is the best architecture out there. That's when we met MoneyLion team. First for a partnership. They're the first team in financial technology or in financial wellness that started about 12, 15 years ago with a platform ID in mind. Now everybody today says, I come from a specific feature, it could be a very great savings anchor or different things, and then they'll expand into platform. MoneyLion started with a full set of features. Even though they may have concentrated on a customer segment that is earlier in their financial journey and needs cash flow management, they really had a set of features. And then they had bought a small asset that they developed called Engine, which is an embedded marketplace. So it's technology driven. It's not just traffic web marketing, it's technology-oriented, but you can embed it into many different experiences to then bring a catalog to consumers that are shopping for different options to improve their financial wellness position. So we like that a lot. The partnership discussions led into an acquisition because we felt bringing the 2 assets together was the best for us. And since then, we've had the opportunity to bring all of our consumers, prime consumers. I mentioned over 70 million paid customers, 200 million free users to improve the richness of that catalog with more and more financial institutions coming in and looking at that opportunity to go and serve more consumers. So since then, since we acquired them, we've had very strong organic growth in that category. The marketplace itself, the Engine has been growing over 50% now for 3 quarters in a row. And we see tremendous opportunity in that not only to embed it into our own applications and user experience in Norton or in LifeLock or in Avast, but also to offer to third party like a CNBC or a Forbes to embed it into their own offering with their own brand to match their consumers with other financial products enriched and then we have the full visibility on the entire committee. That gives us tremendous visibility from a data perspective on consumer behaviors, what they want and through AI and machine learning environment, really matching the consumer needs at the moment of truth through LifeLock and other applications. You know we have an asset. We know you're protecting your home, you have an insurance on that, you need to renew it. We can also bring the marketplace and offer you the best rate. And so since then, the marketplace has outgrown a little bit, our PFM tool both have grown. So it's a ratio more of 60-40 versus 1/3, 2/3, but they stay in that position. Our next big thing, of course, is to bring that financial wellness to all of our 77 million paid customers and then expanding that to our 200 million active free users, which we've barely scratched the surface on.

That was super helpful. And I think I see the strategy behind sort of marrying cyber safety with financial wellness. Maybe just for those investors that aren't as familiar with the space in which MoneyLion competes in, maybe the follow-up question for you, Vincent, is why was this the leading asset in the space, right? And presumably, there were other options. The Engine seems very differentiated, right? But maybe on the PFM side, why was this the leading asset when certainly speaking for myself, I probably use, I think, my bank app. I imagine a lot of people are similar. Why was this the best asset as you thought about the space?

Yes. So I first want to start with your initial comment, which is scaling, it's interesting, people may not fully understand. When we bought MoneyLion, people were surprised how does cyber safety fit with financial wellness. And for those who were following our company for a long time, I want to bring you back to 2018. The Norton division that was still very much device-centric from a security perspective at the time, bought LifeLock, which was initially credit monitoring. And every investor said like, "Oh, I don't understand this purchase. What is this about?" And as you remember.

I remember, yes.

We got plenty of pushback that did not fully understood. 2019, we merged the 2 assets and came up with the cyber safety platform, which was, hey, I'm going to protect your digital footprint, you as users forget your devices. You have your devices protected, but there's a lot more to it. And then we're going to evolve credit monitoring as one of the dimension of your identity, and we're going to provide you both identity and privacy services and solutions in that membership. When we launched Norton 360, which was the full spectrum of our portfolio, within a few months or a couple of quarters, we got like a 60% adoption rate and very strong. And then, of course, competition followed. And today, if you look at assets that are focused on consumer cyber safety, nobody is thinking just device. They're all thinking about the broad view in cyber safety, including identity, including credit monitoring. I think even Microsoft including their credit monitoring in the application, which I don't think it really fits there. And because they understand that's how consumers look at it today. I predict that within the next 5 years, financial wellness will be symbiotic with cyber safety. It will be about protecting your digital footprint and giving you as a consumer, the ability to use that privacy, that protection to get to services or solutions that require you to use that PI environment to get a better service or a better value. And so while today, to some investors and maybe even to some of our customers, they don't totally understand yet how it fits together as we continue to merge the platform, as we continue to communicate the value, you're going to see a very fast adoption rate. And I can tell you, within the next couple of years, maybe 5 years, everybody that's looking at cyber safety will have some element of financial wellness into their offering. Now why was MoneyLion a great asset? I think we like a lot of things. But the #1 thing we like is that they were a tech company that really, as I mentioned, developed that platform view. And as you know, at Gen, we have a white label modular architecture strategy that we rewrote when we acquired Avast to be able to serve all of the customers and the brand being mainly around the user experience and the user journey, not around the tech stack. That's solely standardized and then we have the data platform supporting it. And MoneyLion had a similar approach, if you want, not the best from a technology perspective. We love the marketplace. Many of the fintech assets are more on the PFM side with single product view than extending to a platform, but don't have a marketplace. That is a richness for us. And so a tech company that has a platform idea with the marketplace felt was the right view. And then just you know we got it to a very good price, too.

Yes, absolutely. It's a great reminder that LifeLock was a very forward-thinking acquisition. I can certainly tag to that.

At the time.

Yes, for sure. Natalie, I want to stay on MoneyLion with you as well because I think what we said on the last quarter is that this would be exiting this year at 30% growth, which I think was another raise in the guidance for that business. I think one question that I get to be completely honest is, Saket, I don't know anything about MoneyLion's market with PFM or Engine. Is this 30% growth sustainable? And so maybe the question for you, Natalie, is how do you think about market growth, maybe MoneyLion's ability to take share and ultimately, what that normalized growth rate is? Does that make sense?

Yes. So before we acquired them, MoneyLion was growing on average 30%. And when we look at, albeit MoneyLion is a beautiful unicorn business for all the reasons that Vincent just walked you through. But in summary, it would be they not only have great first-party products, but they have the marketplace, they have the Engine. They have a fantastic app experience. Their customer experience and engagement is really, really high and very, very fresh. And so we believe that they are going to outpace the market, but there's many, many ways that they can do that. And so yes, the last couple of quarters, we've been in the 45% to 50% mark. That didn't come for free. They had launches. They had programs. They had -- they really drove that growth. But as we look at the overall market and we look at how fast competition is coming in and the competitive landscape as well as we integrate the business and really come up with those use cases of where we can really leverage the 77 million paid customers on the Gen side, how that's all coming together. That's where the 30% exit rate is coming from. Is there opportunity to go faster, stronger? Absolutely. But in terms of where the market is, it's around 30%.

Well, that's really impressive.

And I think, Saket, if I can add, I don't think investors have fully understood how to move with financial wellness, MoneyLion, both PFM and the marketplace has opened up the door for opportunities. We moved from originally 10 years ago, that's very product-centric. I have an antivirus, I downloaded on the machine. Since then, of course, it moved to a membership. I have a very strong platform on protecting all of your digital platform. We're extending that now to protect and empower you in the digital life. And not only we get the best PFM for financial wellness, which is the MoneyLion features, but we get this marketplace. That marketplace today is offering consumers the best visibility of everything they can do from a financial wellness perspective, best credit card, best loan, best insurance, et cetera. And it's really targeted inside the app through an AI-powered, call it, a matching view, so match.com inside our marketplace and taking your data that you already want to protect, you want to protect your home, you have this, you have a mortgage. We can say it's time to renew your insurance and you have the best insurance. And it's all of that as an experience, including the card and exit inside the app without getting out. That is a fantastic experience. We are extending that marketplace to nonfinancial products. And so suddenly, I'll give you a small example, like a lot of our customers inside LifeLock that have a certain number of assets are asking about, hey, what about will and trust? What do I do with that asset? Yes. And so in the past, we were thinking about we don't have the expertise. How do we go and develop that? Do we want to do an acquisition? How do we want to approach it? Today, the marketplace offer us the opportunity to have the consumer in the app to go and consume the next need, the logical need in this digital journey without having us to go and build it first and sell it to a third party. Based on that consumption, we have even more data to understand the need and can pick and choose where we invest and what we develop as first-party product versus leave as third-party product. And now it's a full ecosystem with the underlying data across our brand, across our app that enables to give you personalized, contextualized digital experience based on your needs, you're going to have different features into the app and the Engine creates this full ecosystem of first-party and third-party offering. That is entirely changing the game the way we think about innovation and what we can do versus just selling one product to a customer.

So that's a great segue into one of the follow-ups Natalie that I had for you just on the engine piece. When we were together at NASDAQ a couple of months ago, we were kind of talking about sort of this 30, 60, 90 framework, right, for that business. Can you just walk through an example of each and why it's important now that Gen has so many more customers under the umbrella?

Yes, sure. The easiest one is the first-party product, and it's just a very high-margin business. It's -- we are going direct to the customers either in the app or the Engine. but it's just a normal sale, so to speak. That's the easiest one. And then the other one would be the Engine where we bring -- it's almost like the marketplace where you bring the buyers and sellers together. So we've got inventory there. We have to pay a rev share to the seller and then we obviously have the buyer transaction. And you just share the margin in terms of that transaction. And then the other one would be -- the 90% would be when you think about the 77 million paid customers, they're in our ecosystem already. There is no CAC, right? So there is -- all you've got is just mostly the revenue. And so you're going to have very, very little cost of goods sold on that transaction, and that's where that 90% comes from. And that's where all of the synergistic opportunity that we're talking about in terms of bringing the existing highly valued, highly tenured customers in the Gen portfolio over to the MoneyLion side and vice versa, that's where that 90% ecosystem comes from.

Yes, absolutely. So basically, you've got this kind of captive customer base that through the engine, you can kind of cross-sell them financial products as they mature in their sort of own financial journey, if that makes sense, right?

Absolutely. And then on the other side, someone like probably 3 of us sitting on the stage, right, in terms of you want to make more money on your money, right? And so now we're also going to be in that ecosystem and in that marketplace with high-quality inventory. We believe that the MoneyLion inventory in that third-party marketplace is already high valued. And imagine now with the brand recognition that we've got with LifeLock and Norton and the conversations that we can have, now you're in the JPMorgan Chase, you're in the Chase Sapphire, that type of inventory increase in quality more targeted to a highly valued LifeLock customer is going to appear in the marketplace as well.

Understood. Understood.

There was a simple flywheel of, as you know, in the past, ARPU retention times the number of customers equal your revenue becomes suddenly a multidimensional set of flywheels. And we still are playing with all those dimensions to really follow the customer in their journeys, but the number of opportunities is exploding. With that, of course, you have different margin profiles, but we really manage the business on the total growth of total profit dollars or EPS dollars. And then we manage each business segment or each flywheel within its own ecosystem.

Absolutely. There's -- we spent so much time on MoneyLion. I want to zoom out a little bit and try to put all this together. And Natalie, when we think about this from the revenue side, definitely when it comes to the profitability and EPS side. But I think what we said in the last call was that total revenue grew 10% year-over-year this quarter pro forma for MoneyLion. So assuming MoneyLion were part of the business last year. We can all take estimates for how to think about growth next year, right? But what are some of the puts and takes that we should think about as we think about revenue growth in fiscal '27 when you lap MoneyLion, we've got some timing stuff with like an extra week. Maybe some of those puts and takes. I understand you can't guide yet, but what are some of the puts and takes that we should be thinking about?

Sure, let's start with where we are now. We've delivered the first half really, really strong, $200 million of additional revenue, a couple of beaten raises. So we're in a great position as we enter into the second half. We believe that we will continue to drive and achieve the revenue synergistic opportunities that Vincent has laid out here. The core business, like I said, has been now 4 quarters in a row at a 4% to 5% growth. We expect that to continue as we really have the majority of the team still focused on driving the core fundamentals of our Norton and LifeLock and Avast businesses. The metrics are strong and trending in the right direction. And let's not forget that we just continuously drive a high amount of free cash flow, EPS growing double digit now for 8 consecutive quarters, and we stay committed to that guide point that we laid out even 2 years ago, we said 12% to 15% growth in EPS over the long term. And now we've done that for 8 quarters in a row that will continue. And then just from a capital allocation perspective, we have a lot of free cash flow generation, whether you talk about levered or unlevered. And so now that we are fully through the MoneyLion close and integration and as we enter into the second half, we've got a lot of opportunistic share buyback opportunity as well as accelerated debt paydown opportunity, and we're going to do a balanced approach for that.

Yes, absolutely. I want to move to margins here in a second. But any questions here from the audience before I move there?

And maybe if I can add on.

Sure, Vincent.

When I became CEO, they told me to get out of the guidance and let Natalie speak. And she did a fabulous job. We never missed a quarter since we've been together. But the way I'm visualizing our overall environment and supported by the view is we have different entry doors to our portfolio. You can come from a need for security. You can come for a need for privacy. You can come for a need for identity management or you can come from financial wellness. Each one of our doors are growing and are outgrowing their respective market, whether it's MoneyLion, the highest growth, identity and privacy or security, all are growing in the current category, all of our competitors and we're going to grow. They have different growth profile, but all customers are good. And then our role, as we continue to use the personalized -- or we continue to personalize the environment for them to contextualize our offering is to move more and more customers to that full membership. A security customers will quickly come into security and privacy. We barely scratch the surface to move to financial wellness. Somebody comes on financial wellness is already begging for an anti-scam to SKUs that we have from our overall portfolio or SKUs around credit monitoring, which we had into LifeLock. And so quickly, we're going to come into those bundles of those memberships. That surface of cross revenue synergies expanding is at the early journey in an overall journey we see. And that, for me, is the biggest opportunity we have. Now I don't know about next year guidance, but every day, in each category, we beat the market, and then we try to bring more value to our customers. That's how we're thinking about our portfolio.

Yes, absolutely. Now I want to touch on margins a little bit. I think we're at about 51% operating margins currently, which digested even a little bit of the MoneyLion dilution, which makes sense given the faster growth that, that business brings. Vincent, you touched on revenue synergies and maybe there's a membership opportunity there. By the way, I'm a very happy member of LifeLock and Norton for what it's worth.

Thank you for that.

Yes, absolutely. But from -- where are we sort of on the journey around expense synergies around MoneyLion, understanding that wasn't really the main purpose of the acquisition, but where are we on that journey?

I'm good. It's been a long time since you asked me about cost synergies, which in MoneyLion, we have a very strong record. We acquire assets. We immediately integrate it into our overall architecture strategy and then all operations are integrated. We move Avast to a very, very strong margin very first. I think we generated over $300 million of cost synergies every one of the assets. We are a serial acquirer, but we've only done 5 acquisitions, many of small size in 5 years. So it's not like we're doing all the time. But we have a good strong operating cadence. So MoneyLion got integrated immediately. We put into the business, functionalized the back end and then enabled that financial wellness entry door to operate and be in its own market. When we bought it, operating margin was at around 14%, 15%. In the last 2 quarters, it went between 20% and 22%, and we'll continue to improve that. So from a cost synergy, if you want, that is a done deal. At this point in time, it's about really driving the mix. And as Natalie mentioned, cross-selling, coming to membership because today, MoneyLion is mainly transaction fee-based revenue or lead-gen revenue, moving to membership. If you come to us to monitor your credit, you also have a kit that needs to be building up their credit, which is a feature for MoneyLion and you want to have a full credit journey. So we'll have a membership credit journey view. You may want to have a fully embedded view between a LifeLock and a financial wellness that will be another offering. And so we're testing at this point in time all of that, which will continue to improve both the reliability, reliance, predictability of our overall revenue model and as you know, improve the margin as we continue to create that...

Yes, absolutely. Natalie, I want to go back to a mechanical question of it. I just want to make sure we touch on it. Remind me, this fiscal year, we had like an extra week. It was something weird, right, with an extra week. Can you remind us what -- how much revenue that added just as we think about what adjustments we need to be thinking about for next year around forecasting revenue?

Yes. I think it happens every 7 years is what I believe, and it was about $85 million. And so that won't obviously repeat. So yes, please definitely take that into account as you look at next year. But the exciting part of next year, and we can't wait to talk to you about it, just we're really working through all of the great stuff, all the great ideas, all the green shoots as we get into the back half. And then we really look to next year, kicking it off in May when we do earnings. We'll have the privilege to give you the full year guidance for next year, and then we'll be in a much better position to really, really give you meat on the bone, so to speak, as it pertains to how we're going to drive all of the revenue synergies and the growth expansion that Vincent has out laid here.

Boy, excited about giving guidance for next year. I can't think of a better way to end. Vincent and Natalie, thank you so much for the time. A lot of exciting things to talk about here.

Thank you very much.