Gen Digital : Q4 FY23 Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

GEN.OQ - Q4 2023 Gen Digital Inc Earnings Call

EVENT DATE/TIME: MAY 11, 2023 / 9:00PM GMT

OVERVIEW:

Co. reported 4Q23 non-GAAP revenue of $948m, net income of $296m and non-GAAP diluted EPS of $0.46. Expects 1Q24 non-GAAP revenue to be $940-950m and non-GAAP EPS to be $0.45-0.47.

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MAY 11, 2023 / 9:00PM, GEN.OQ - Q4 2023 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

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. Thank you for standing by. My name is Lauren, and I will be your conference operator today. I would like to welcome everyone to Gen's Fourth Quarter and Full Year 2023 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. Ms. Lai, you may begin.

Mary Lai - Gen Digital Inc. - Head of IR

Thank you, Lauren, and good afternoon, everyone. Welcome to Gen's Fourth Quarter Fiscal 2023 Earnings Call. Joining me today to review our Q4 and full year 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 the IR website.

Today's call contains statements regarding our business, financial performance and operations, including the impact of our business 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 current 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 in the SEC and, in particular, our most recent reports on Form 10-K and 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. As I reflect on the year, I'm proud of all that we have accomplished, and I'm excited about the tremendous long-term opportunity in front of us.

Three years ago, we strategically set out, singularly focused on and redefine cyber safety for the billions of individuals connected to the digital world. We believe then, as we do now, that the complexity of our digital lives call out for someone to help protect people from the myriads of threats with innovative and easy-to-use technology that could seamlessly stitch together solutions across security, identity and privacy and then reaching to adjacent trust-based solutions.

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MAY 11, 2023 / 9:00PM, GEN.OQ - Q4 2023 Gen Digital Inc Earnings Call

Well, that someone is us, Gen. We are confident that our reach, innovation capability and disciplined execution can deliver on that strategy and will sustainably deliver long-term profitable growth and increasing shareholder value.

Let me quickly recap our year. For fiscal year '23, we delivered another year of organic growth, our fourth consecutive year of growth in consumer cyber safety. We delivered mid-single-digit growth in cyber safety bookings and revenue and exited the year on a $3.7 billion revenue run rate, up from $2.4 billion 3 years ago. During that period, we considerably expanded our scope across our cyber safety pillars, security identity and privacy and became truly global with 60% of our customers now from outside the U.S.

We also expanded our reach with our vast capabilities in premium and free user base in the hundreds of millions. Gen, with its trusted brands, omnichannel expertise and rigorous execution, is well positioned to expand the adoption of cyber safety across the globe.

We have over 38 million direct paid customers as we exit fiscal year '23, up from 20 million 3 years ago. Despite the pressure on our direct customer count in a post-COVID environment, which saw a sequential decline of 180,000 in Q4, our direct business actually grew low single digit in Q4 and fiscal year '23. Our direct customer retention rate ended the year at 76%, and our annual ARPU was nearly $87 as we exited fiscal year '23.

In 2 quarters since the close of the Avast acquisition, we have increased our overall annual ARPU by $3 and our overall retention rate by 1 point, a testament of the increased value we are providing our customers with our expanded product portfolio offerings, the membership adoption and the increased loyalty. Both metrics, ARPU and retention rates, improved sequentially in this last quarter and our confirmation of the value creation thesis at the core of our merger with Avast.

In addition to 38 million direct paid customers, we also protect over 26 million indirect customers with solutions sold through partners. In fiscal year '23, indirect customers grew over 1.5 million with about 400,000 sequentially added in Q4. Our partner revenue delivered its third consecutive year of double-digit growth for fiscal year '23, and we continue to see tremendous opportunities to reach more consumers via diversified channels in our partner business.

Our employee benefits channel again grew double digits, accelerating in growth as employers recognize the growing demand from the employees. Identity protection is becoming a stable offering in benefits packages, just like health care and life insurance.

We also continue to scale our telco relationships in key international markets, working closely with our partners to expand their offerings and provide comprehensive cyber safety protection to millions of customers. Our strategy to diversify the distribution channels and grow the value of the offering with these partners is actually working.

On the innovation front, we maintained a strong pace throughout fiscal year '23. We introduced more than 10 new products and features, including international privacy monitoring assistance, Norton AntiTrack, Norton Identity Advisor, Avast email Advisor, Avast Identity Solution with Avast Secure Identity and Avast One Platinum, Norton Executive Benefit Program for the C-suite with reputation management features, utility account alerts for U.S. LifeLock and Norton 360 numbers. Each of these is a step forward in our strategic efforts to rapidly expand capabilities, protection and geographic reach in privacy and identity.

We have accomplished a lot in the business this year, but I would be remiss to not mention the tremendous job the team has done in bringing together Avast and NortonLifeLock. Within 6 months of growth, our sales, G&A and overall infrastructure processes have been fully integrated. Our single ERP integrated, code cash processes, unified go-to-market structure and functional organizational structures are all in place.

We've already realized 2/3 of the cost synergies as we exited fiscal year '23. This was no small feat given the size, scale and complexity of the 2 businesses. Overall, we have accelerated the integration process, and we are on track to achieve the $300 million plus annual cost savings exiting fiscal year '24.

Our integration efforts helped us deliver another point of sequential operating margin improvement in Q4, reaching 57%. In fiscal year '23, we scaled operating profit to $1.8 billion, up 24% year-over-year and more than doubled compared to 3 years ago. This profit margin and the resulting unlevered free cash flow gives us great confidence that we can navigate to the short-term volatility and uncertainties of the global economy.

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MAY 11, 2023 / 9:00PM, GEN.OQ - Q4 2023 Gen Digital Inc Earnings Call

Product integration, broadly defined, is what remains in front of us and is well underway. We see it as an opportunity to accelerate our march towards our vision of cyber safety that is digital life-centered, tailored to your needs and easy to use. This requires a unified and simplified product architecture. Progress on this front will allow us to extend our reach to more people, giving them exactly what they need while better enabling us to educate them on additional protection and value that we can offer. This is a key enabler of our revenue synergies in fiscal year '24 and '25.

We still have work to do here. But with our comprehensive set of products, we believe these changes unlock not only those midterm opportunities, but also position us perfectly for the long term in cyber safety and in trust-based adjacencies.

You've heard me talk time and time again about all of our opportunities, but let me sum it up briefly. (technical difficulty) cyber safety much more accessible, engaging and easy to use for everyone. That will undoubtedly continue to grow our customer appeal and loyalty. To start, and in particular within the Avast business, we can improve the customer experience and fully integrate our customer journey. Avast retention improved 2 points in the last 6 months, and we believe the potential is at least 10 points improvement as we incorporate user-focused changes.

Secondly, customers always focus on value, and we have a tremendous opportunity to show them the value of our cyber safety offering and to continually add to it as the needs evolve and the threats increase.

The move towards protection of identity, privacy and the protection of your full digital footprint will continue. We have increased monthly ARPU $0.26 or 4% in the last 6 months. And our long-term objective is to move above $8, where we were with NortonLifeLock adjusted for a new geographical mix.

Finally, we know that customer count is a critical metric for our long-term success. In addition to continued growth in indirect customers, where a portion of the market is moving to, we know that in the long term, we will grow our customer materially. And we believe that our initiatives in mobile, emerging markets and optimizing marketing spend amongst a few will help us stabilize the trend in direct customer count and ultimately return it to growth.

And with that, let me pass the floor to Natalie, who will talk about our detailed performance.

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 full year fiscal 2023 performance followed by our Q4 results and wrap up with our outlook for Q1 fiscal year '24. I will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated.

Fiscal year 2023 was another year of progress towards achieving our long-term $3 EPS target and was our fourth straight year of organic growth as a pure-play consumer cyber safety company.

As we successfully closed our merger with Avast and integrated as one Gen company, we finished fiscal year 2023 with over $3.3 billion in total revenue, growth of 19% in USD and 23% growth in constant currency. When including Avast's historical financials, cyber safety revenue grew 4% year-over-year in constant currency amidst the dynamic macro environment.

We challenged ourselves to accelerate the execution of our committed cost synergies and remain disciplined in our investments, which enabled us to expand full year operating margin to 55%, up 220 basis points year-over-year. This growth and discipline led us to deliver $1.81 in EPS, up 4% from the prior year and up 10% in constant currency after incurring a significantly higher amount of debt cost than anticipated at the time of the deal announcement.

Our customer base is resilient with over 38 million direct cyber safety customers. Across our Gen business, we have a strong and increasing customer retention rate of 76% and a growing direct monthly average revenue per user, or ARPU, of $7.24 as we scale our cross-selling and upselling efforts, providing increased value to our direct customer base with new security, identity and privacy offerings.

Our business with partners continues to grow, and we've expanded together to a total paid customer base of approximately $65 million.

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MAY 11, 2023 / 9:00PM, GEN.OQ - Q4 2023 Gen Digital Inc Earnings Call

We are enabling growth with the continued evolution of our product portfolio and introduced over 10 new products and features this year to provide best-in-class protection and unlock new capabilities for our customers.

Turning to Q4 performance. Q4 was our 15th consecutive quarter of growth, and our results reflect another quarter of consistent execution. We exceeded our revenue guidance and came in at the high end of our EPS guide.

We also crossed $1 billion in bookings for the first time, with Q4 bookings up 29% in USD and up 32% in constant currency. When including Avast's historical financials, cyber safety bookings grew 2% year-over-year in constant currency.

Q4 non-GAAP revenue was $948 million, up 32% in USD and up 35% in constant currency. This also includes an unfavorable FX headwind of $21 million year-over-year or 3 points of growth. When including Avast's historical results, cyber safety revenue grew 3% year-over-year in constant currency.

Direct revenue was $831 million, up 32% in USD and up 3% when including Avast historicals.

We continue to drive higher value and loyalty with our existing customers as both ARPU and retention improve. As I referenced above, monthly direct ARPU is USD 7.24, an expansion of $0.15 quarter-over-quarter driven by our cross-sell and upsell efforts and as our identity and privacy offerings grew double digits in the quarter. Ending direct customer count was 38.2 million, a decline of 183,000 customers quarter-over-quarter, a trend we are working hard to reverse.

Lower web traffic demand continues to impact the customer acquisition funnel despite improvements in conversion.

We continue to invest in a diverse mix of marketing spend to reach new audiences, drive more traffic to our sites while dynamically optimizing the channel and geographic mix to drive the highest returns.

It is imperative that we continue to focus on improving retention in our existing customer base. Our aggregate direct retention rate improved 1 point quarter-over-quarter to 76%, which is a strong indication that our efforts to increase customer engagement are working. Offering the best customer experience remains at the core of our values, and we are pleased with the progress made this quarter.

Before I move off the direct business, I want to give a quick update on revenue synergies. As I shared 6 months ago, we expect traction with revenue synergies to be measured directly through ARPU and retention improvements over the coming quarters to support our bookings and top line growth expectations. Two quarters later, we have expanded monthly ARPU by over $0.25, translating to $3 of increased annual ARPU.

We have improved Avast retention making progress to narrow the prior 20-point retention differential between NLock and Avast observed at the time of close. You will continue to see us expand our ARPU and retention rate over the coming quarters.

Moving on to partners. Partner revenue was $100 million in Q4, delivering 35% growth year-over-year as reported in USD and 9% growth when including Avast historical results. This was our third consecutive year of double-digit revenue growth in our partner business as we continue to scale our identity offerings through key channels like employee benefits, telcos and breach protection.

With our broad reach and omnichannel strategy, we will continue growing our pipeline, scale and nurture existing partnerships and build further growth momentum.

Rounding out our revenue, our legacy business lines contributed $17 million this quarter and now make up less than 2% of our revenue. We expect legacy to continue its decline at a similar pace as Q4.

Turning to profitability. Q4 operating income was $541 million, up 38% year-over-year. We expanded operating margin to 57% as we continue to make strong inroads to the 60-plus margin framework we've outlined in our long-term model.

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