Gen Digital : Q1 FY24 Transcript

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EDITED TRANSCRIPT

GEN.OQ - Q1 2024 Gen Digital Inc Earnings Call

EVENT DATE/TIME: AUGUST 03, 2023 / 9:00PM GMT

OVERVIEW:

Company Summary

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AUGUST 03, 2023 / 9:00PM, GEN.OQ - Q1 2024 Gen Digital Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Mary Lai Gen Digital Inc. - Head of IR

Natalie Marie Derse Gen Digital Inc. - EVP, CFO & Principal Accounting Officer

Vincent Pilette Gen Digital Inc. - CEO & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Eunji Song Morgan Stanley, Research Division - Research Associate

Peter Marc Levine Evercore ISI Institutional Equities, Research Division - Analyst

Saket Kalia Barclays Bank PLC, Research Division - Senior Analyst

P R E S E N T A T I O N

Operator

Good afternoon, everyone, and thank you for standing by. My name is Hannah, and I will be your conference operator today. I would like to welcome everyone to Gen Fiscal Year 2024 First Quarter Earnings Call. Today's call is being recorded (Operator Instructions) At this time, for opening remarks, I would like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Miss, you may begin.

Mary Lai - Gen Digital Inc. - Head of IR

Thank you, Hannah, and good afternoon, everyone. Welcome to the Gen First Quarter Fiscal Year 2024 Earnings Call. Joining me today to review our Q1 results are Vincent Pilette, CEO; and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the IR website, along with our slides and press release. I'd like to remind everyone that during this call, all references to the financial metrics are non-GAAP and all growth rates are year-over-year unless otherwise stated. A recon of non-GAAP to GAAP measures is included in our press release, which is available on our IR website at investor.gendigital.com.

Today's call contains statements regarding our business, financial performance and operations, including the impact of our business and industry that may be considered forward-looking statements, and such statements involve risks and uncertainties that may cause actual results to differ materially from our expectations. Those statements are based on current beliefs, assumptions and expectations and speak only as of the current date. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings and the SEC and in particular, our most recent reports on Form 10-K and Form 10-Q.

And now I will turn the call over to our CEO. Vincent?

Vincent Pilette - Gen Digital Inc. - CEO & Director

Thank you, Mary. Good afternoon, everyone, and welcome to our earnings call. Our fiscal year is off to a great start. This quarter is what many of you have come to expect from us; strong execution, consistent operating discipline and solid results. This quarter marks our 16th consecutive quarter of growth, with Q1 cybersafety bookings and revenue, both up low single digits in constant currency when including Avast historical results in the base. We continue to make progress with our direct customer count, reducing our gap between acquisition and churn in the post-COVID environment and on our way to breakeven.

With operational integration essentially complete, we expanded our operating margin by another 50 basis points sequentially and 6 points since the Avast merger, which only started 9 months ago. We expanded our earnings power, growing EPS, 5% in U.S. dollars and 9% in constant currency. Our consistency can be easily taken for granted. But make no mistakes, these sustained results speak to the talent and commitment the Gen team shows every day. Our team is second to none. As you can tell, I'm proud of what we have accomplished, but what really excites me is when I look

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AUGUST 03, 2023 / 9:00PM, GEN.OQ - Q1 2024 Gen Digital Inc Earnings Call

ahead, we are well positioned to drive innovation and leadership in cybersafety, protecting people against the growing threats facing our expanding digital lives. And we really have only just gotten started.

As the footprint of our digital lives continues to expand, people everywhere need easy-to-use solutions that help protect them and enable all the digital world has to offer. When Andre and I first talked about bringing NortonLifeLock and Avast together 2 years ago, delivering this type of protection to more people in more geographies with a comprehensive product portfolio was the fundamental vision for bringing the companies together. And if you go back and look at the road map we shared with our stakeholders, you can not only see our progress on each dimension, but more importantly, I believe you can clearly see that Gen is delivering on our mission to empower and protect people everywhere.

One of the key elements for Andre and I was that our combination would create unmatched reach and scale. Today, Gen touches hundreds of millions of people with our free services and 65 million subscribers, direct and indirect with our premium offerings. We serve consumers in over 150 countries. And at the end of Q1, 60% of the people we serve were outside the U.S versus 40% 2 years ago. While we continue to believe in growth in all countries, we have tremendous opportunities internationally to serve more people and over time, grow the value we deliver to them. In fact, our customer acquisition success in Latin America is a showcase of this global expansion.

In Q1, we reached new customers through new channels, new countries and new products, all 3 dimensions in that region. Our Q1 international growth was supported by positive customer count and expanding ARPU for longer tenure customers, which we view as a strong proxy for those customers adding value over time. With our global reach, we bring to market the broadest and most comprehensive portfolio in consumer cybersafety. Norton and LifeLock's leadership in security and identity, coupled with Avast strength in security technology and privacy are also unmatched. Not only do we have the breadth of offerings. We have many trusted industry-leading brands. Our portfolio of brands allows us to best serve the different needs of our diverse customers, whether that be from regional or local needs, different life stages or levels of tech awareness with Norton, Avast, LifeLock, Avira, AVG, amongst others, we can meet consumers where they are and with what they need.

With Avast and Avira, we can reach less mature markets with freemium offerings. With Norton, we can offer comprehensive suite that delivered tremendous all-in-one value with higher entry price points. And with LifeLock, we offer unmatched identity theft protection plans, including award-winning restoration services. The portfolio and our family of trusted brands are great enablers for us to deliver the right value to consumers in the U.S. and abroad and grow that as they need to evolve. This quarter, we delivered our third quarter of sequential improvement in ARPU and retention, driven by double-digit growth in cross-sell and adoption of our comprehensive integrated suite. Today, almost 40% of our direct paid customer base have adopted Norton 360 or Avast One.

Most importantly, Gen's investment in technology and innovation are really the engines that power our current and future success. In this first year as Gen, we launched several new products and features, expanding the portfolio offering to provide our customers more protection and control in the digital world. Products like Avast Identity AntiTrack on Android, Norton Secure Browser and Executive Protection in Employee Benefits, all come from the combination of our complementary portfolios and expand the protection and digital empowerment we offer to consumers. We promised accelerated innovation when we brought Avast and NortonLifeLock together. And now with the integration essentially complete and the strong progress we've made in our next-generation modular cyber safety platform, we are beginning to double down on our innovation efforts and revenue synergies.

It is still early days, but just last week, we introduced early access program to our latest innovation called Norton Genie. Norton Genie is an AI-powered tool that is designed to help consumers quickly identify whether a text, an e-mail, social media message or web link is a scam or fraud. With a few clicks or taps, Genie will provide real-time guidance and advice on what to do next. Because it's built on AI technology, it learns as it goes and will constantly get better. It is an exciting innovation that's built on our decades of experiencing data and advanced technology in consumer cybersafety. But just as important as the tech is Genie takes our customer-centric approach to another level. We created Genie for everyone. It's free, it's interactive, engaging and is right at your fingertips so you can be sure that your daily digitalized is not being compromised by sophisticated and creative scammers.

Genie is just a glimpse of how we plan to innovate and reimagine how people can stay cybersafe and there is so much more we can and will do with Genie platform. Now innovation is hard and it's hardly free, so we remain committed to investing in it. We are on a mission to make cybersafety something people won't want to live without. That's why we focused on delivering and frankly, exceeding on our promised synergies while

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AUGUST 03, 2023 / 9:00PM, GEN.OQ - Q1 2024 Gen Digital Inc Earnings Call

reinvesting a portion for innovation and future growth. We originally promised $280 million in cost synergies, which we later raised to over $300 million. In record time, we fully integrated our sales, marketing and overall infrastructure processes. The day we operate out of a unified go-to-market structure, a single ERP system and code to cash framework and with a committed workforce of under 3,500 down from over 4,500.

Halfway through our 18 months timeline, we've already achieved 80% of the cost synergies, enabling us to reach almost 58% operating margin in Q1. The remainder will come from our phased product integration work, which we are careful with so as to not disrupt the service and experience of our subscribers. Rest assured, of course, that these are all planned out and will roll out our progress in the coming quarters.

As part of the combination, we also see revenue synergies, which we size at around $200 million. A big portion of this revenue opportunity is largely dependent on our next-generation platform, which will enable us to offer more value in a more personalized and targeted way across our brands. While the teams are hard at work bringing that to life, we are already leveraging one of our centers of excellence to increase the Avast customer retention rate, another pillar of revenue synergies. In Q1, Avast retention was up over 2 points since the close of the merger.

We believe that investing in innovation and growth is a must, but we are already disciplined about funding those investments responsibly through efficient and streamlined operations. We've made tremendous progress in the integration and our overall operations which we know will directly support our long-term growth. The 16th quarter of growth and the capabilities we have built coming together with Avast demonstrate that our strategy is working. Two years ago at our last Investor Day, we showcased our strategic playbook and transformation. Today, no one is better positioned than Gen to bring cybersafety to everyone. And the big aspiration goals we set then are more relevant than ever to achieve our vision.

As a reminder, we committed to consistently delight our customers, doubling our NPS score to above [70]. We're committed to protect and empower people with cybersafety, doubling our user base, and we committed to accelerate our growth while maintaining our operating discipline, doubling our EPS to $3. We've made solid progress as we executed on the merger plan and created Gen, providing customers with a great experience is our #1 metric. We will continue to make our solutions easy to use and bring added value to their digital lives.

In Q1, LifeLock reached an all-time high NPS of [60], giving us the blueprint to leverage the operational learnings across our entire portfolio. Our user base moved from about 80 million as NortonLifeLock to hundreds of millions of users as Gen and our direct customer moved from 23 million to over 38 million. And also we have been managing through a challenging post-COVID environment, including our cost of debt, that is much higher than 2 years ago, costing us over an incremental $0.50 in EPS. We remain fully committed to accelerating our long-term growth and delivering our $3 EPS commitment.

With our first full year as Gen almost behind us, we look forward to sharing more about our vision and our growth opportunities at our next Investor Day planned for the fall. So stay tuned for the exact date. Natalie will now review our quarterly performance and with the merger and integration essentially behind us, she will also share our full year guidance. On the low end, our guidance is based on the current trends, growing low single digits. On the high end, growth accelerates to a mid-single-digit rate towards the end of the year, supported by initiatives and investments in key strategic areas such as international expansion, partnership above and beyond security, and our product innovation road map. On direct customer account, we expect to continue to drive improvement over time and exit the fiscal year '24 on a very positive trend.

And with that, let me pass it to you, Natalie.

Natalie Marie Derse - Gen Digital Inc. - EVP, CFO & Principal Accounting Officer

Thank you, Vincent, and hello, everyone. For today's call, I will walk through our first quarter fiscal 2024 results followed by our outlook for Q2 and full year fiscal 2024. I will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated. Q1 was our 16th consecutive quarter of growth, reflecting another quarter of solid execution. We came in above the midpoint of revenue and at the high end of EPS guidance. Q1 non-GAAP revenue was $946 million, up 34% in USD and 35% in constant currency. When including Avast historical results, cybersafety revenue and bookings both grew 2% year-over-year in constant currency with broad-based growth across brands and across regions. We continue to execute on our committed cost synergies in an accelerated fashion, which helped expand our operating margin to 58%, up 50 basis points sequentially and up 6 points since the merger.

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AUGUST 03, 2023 / 9:00PM, GEN.OQ - Q1 2024 Gen Digital Inc Earnings Call

Direct revenue was $832 million, up 33% in USD and up 2% when including Avast historical results. We continue to make progress across our key performance metrics, with consistent retention rate improvement and ARPU expansion, which represents our customers' resiliency and loyalty and the strong demand that our product innovation drives.

Our quarter-over-quarter direct customer count growth is approaching breakeven. Ending Q1 direct customer count was $38.2 million, a decline of only 29,000 customers quarter-over-quarter, a trend we have worked hard to improve. During the COVID period, customer acquisition was at an all-time high as the step function change in our digital lives pushed people to find solutions to protect themselves and their families as we were forced to live more of our lives at home and online.

And over the last year, as the world mobilized back to a normal life with more employees back in office and students back in school, we've seen the levels of customer acquisition normalize in line with that shift. Throughout this period, as the elevated number of customers cycled through the life cycle, even though our retention rate remained strong, the units of churn were not in line with our current state of customer acquisition and therefore, resulted in 5 quarters of net quarter-over-quarter customer count decline.

It's worth noting, however, that when you normalize for the COVID periods of acquisition, in Q1 this year, our gross adds grew high single digits when comparing to pre-COVID periods, representing a low to mid-single-digit CAGR over a 3-year period.

We are proud of that level of acquisition driven by our high innovation rate and marketing efficiency, especially given the current market conditions. With our newly expanded Gen product offerings and broader geographic expansion efforts, we see growing demand in mobile and higher acquisition in international markets. Always operating with speed and intent, we have deployed marketing spend to capture growth as we evaluate the long-term sustainability of these green shoots.

In our more mature channels, we remain focused on improving the conversion of our direct-to-consumer traffic, leveraging our strong brand presence and engaging our customers with our additional product offerings to ensure they are fully protected against the ever-changing cyber threats. Customer count remains a priority for us, and we are making continued progress. We expect to return to sequential customer count growth in this fiscal year as we stay steadfast in our go-to-market expansion, our marketing investments continue to offer the broadest and strongest product portfolio and drive growth in our green shoots.

Turning to retention rate. Since we became a stand-alone consumer company in fiscal year 2020, our total direct customer base of 20 million grew to over 23 million by fiscal year 2023, a 5% CAGR over 3 years. Over that period of time, we had stable retention of 85% and even improved it slightly above 85%. Fast forward to now, post-merger, our combined customer retention rate continues to increase sequentially, now over 76% with 150 basis points of improvement since the merger.

When we unpack this further, we have improved Avast retention rate by over 2 points in line with our revenue synergy plans and the industry-leading Norton and LifeLock retention rates remain stable with more tenured identity cohorts at 90% plus retention rate. We know we still have opportunities to improve churn across cohorts. We see a strong correlation between retention rate and increased adoption of our cybersafety membership suites, now closer to 40% of our direct customer base after the merger. We are focused on driving higher retention through higher engagement, continuously bringing new products to market and demonstrated value to the customer with comprehensive protection and world-class service.

On the monetization front, monthly direct ARPU was USD 7.26 , an increase of $0.28 since the merger. The growth in our revenue per user is primarily driven by engaging our customers and demonstrating increased value through additional products and services we provide. When we closed the deal, one of the exciting opportunities we shared was the cross-pollination of our operational know-how between both companies. Avast had built a $900 million-plus top line from free-to-paid conversions and cross-sells, forging a strong operational expertise in driving high first purchase and conversions with the right moments of truth messaging and product offerings. Meanwhile, Norton and LifeLock had industry-leading retention rates of 85% plus with a strong emphasis on elevating membership value and customer service.

As we've leveraged the strength of both companies, we are now driving higher conversion and penetration across multiple customer cohorts, product lines, and geographies as well as improving retention on cross-sell products. As we progress through the fiscal year, we are excited to continue scaling this arm of the business with future product introductions.

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