NortonLifeLock : Q3 FY22 Transcript

Corrected Transcript

03-Feb-2022

NortonLifeLock, Inc. (NLOK)

Q3 2022 Earnings Call

	Total Pages: 13
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NortonLifeLock, Inc. (NLOK)	Corrected Transcript
Q3 2022 Earnings Call	03-Feb-2022

CORPORATE PARTICIPANTS

Mary Lai	Natalie M. Derse
Vice President-Investor Relations, NortonLifeLock, Inc.	Chief Financial Officer, NortonLifeLock, Inc.

Vincent Pilette

Chief Executive Officer & Director, NortonLifeLock, Inc.

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OTHER PARTICIPANTS

Saket Kalia

Analyst, Barclays Capital, Inc.

Matthew Hedberg

Analyst, RBC Capital Markets LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good afternoon, everyone. Thank you for standing by. My name is Paul, and I'll be your conference operator today. I would like to welcome everyone to the NortonLifeLock Fiscal 2022 Third quarter Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

At this time, for opening remarks, I would now like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Miss, you may begin.

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Mary Lai

Vice President-Investor Relations, NortonLifeLock, Inc.

Thank you, Paul, and good afternoon, everyone. Welcome to the NortonLifeLock's fiscal 2022 third quarter earnings call. Joining me today to review our Q3 results are Vincent Pilette, CEO; and Natalie Derse, CFO.

As a reminder, there will be a replay of this call posted on the Investor Relations website, along with our earnings slides, press release defining our non-GAAP metrics. I'd like to remind everyone that during this call, all references to the final metrics are non-GAAP and all growth rates are year-over-year, unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release, which is available on our IR website at investor.nortonlifelock.com.

Today's call contains statements regarding our business, financial performance and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which 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 our current beliefs, assumptions and expectations and speak only as of the current date. For more information, please refer to the cautionary statement

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NortonLifeLock, Inc. (NLOK)	Corrected Transcript
Q3 2022 Earnings Call	03-Feb-2022

in our press release and the risk factors in our filings with the SEC; and in particular, our annual report on Form 10-K for the fiscal year ended April 2, 2021.

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

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Vincent Pilette

Chief Executive Officer & Director, NortonLifeLock, Inc.

Thank you, Mary, and welcome, everyone. This was another strong quarter, double-digit growth on both the top and bottom line, and we continue to drive improvements across several key business areas that we believe are critical to our long-term success. Q3 revenue and bookings grew 12% and 11%, respectively. The growth profile we delivered was broad based, reflective of diversification across our product portfolio, our channels and our geographies. And with 16% growth in EPS, our profitability remained strong and continues to grow faster than revenue.

Later in this call, Natalie will provide you with more details on our Q3 results, but let's take a step back for one minute. It is clear to all of us that we are living more and more of our daily lives online: shopping, working, learning, creating, sharing, you name it; we are doing it all online. All of it is designed to make our lives easier and better, but it does come with a very real risk of more cyber criminality. Every day, this team wakes up driven by a singular purpose, making the world cyber-safe for everyone and ultimately powering their digital freedom.

Today, we are protecting and empowering approximately 80 million users in more than 150 countries, but we are just getting started. Our strategy is built around our customers and their digital lives. We are focused on accelerating innovation, expanding access and reach and relentlessly serving our customers' needs.

Our innovation engine continues to thrive. In Q3, we introduced Avira Breach Monitor, where we actively scan their Internet and alert users if their e-mail is a part of a data breach. In identity and in privacy, we continue to expand our reach internationally, combining Dark Web Monitoring, AntiTrack and ID Navigator and bringing it to over 20 countries.

Not only do we bring new products to market, we also improve upon category-leading products that we have offered for years. For example, using machine learning, we rolled out new alerts detecting unusual transactions for our LifeLock subscribers, better protecting people from various frauds or unusual activities.

Day after day, this team brings energy and new ideas about how we can better build out the Norton 360 Cyber Safety integrated platform. Within various plans of Norton 360, our members automatically receive the benefits of our latest innovation: simplified and frictionless onboarding experiences, new device detection and addition through QR codes, easy backup activation, software updater, improved integrated VPN, game booster, cryptocurrency mining and wallet options; and enhanced identity protection features like Identity Lock and social media monitoring. These are just a few of the new features made available into our Norton 360 platform over just the last few months. And it's not just innovation, it is a continued commitment to protecting our users as highlighted with multiple AV-TEST awards and the most recent, the SE Labs' Best Consumer Anti-Malware Awards for 2021.

We know we are on the right track as over 14 million customers are now on Norton 360, with more than 1 million members added since our Investor Day last May. We are thrilled that over 60% of our direct customers are now protected by the Norton 360 platform and it keeps growing. Whether it's launching entirely new products, bringing these products to more people or improving our industry-leading platform, we know that innovation is a core driver of our success.

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NortonLifeLock, Inc. (NLOK)	Corrected Transcript
Q3 2022 Earnings Call	03-Feb-2022

When customers make the decision to trust us to help protect their digital lives, they stay with us. We have improved our Net Promoter Score by 5 points to high 40s in the last 12 months. That strengthening engagement is also reflected in our retention rate, which is something we are particularly proud of. In Q3, it was slightly above 85%. If you exclude the first year customers, retention is at 87% in aggregate and as high as 90% for some cohort of customers with the identity offering. It speaks to the power of our Norton 360 platform with identity protection as traditionally in this industry, renewal rates for the first year customers or security-only customers are lower. But even in this category, we believe we have room for improvement. We've already improved Avira retention to 83%, up 3 points since we acquired them.

Through our evolving and innovative product portfolio and expanding distribution channels, we have now added customers to the platform consistently over nine consecutive quarters. Total direct customers are now over 23.4 million, up 12% or 2.4 million customers added year-over-year and 126,000 customers sequentially. The growth was broad based, although slightly higher mix in security as expected for a December holiday-driven quarter.

In our direct-to-consumer channel, we observed some market pressure on [ph] add (07:40) prices that slightly pushed up our customer acquisition cost. We partially offset those increases with improvement in shopping cart convergence.

One of the key investment areas in our go-to-market strategy is the expansion in indirect channels. The net direct customer count increase that I just shared does not include customers coming through our partner channels, including employee benefits or through the app store, for example. In those two channels alone, we added almost 0.5 million customers year-over-year and over 100,000 customers sequentially.

And interestingly, almost two-thirds now of our new customer from app stores have installed the Norton 360 app. You will see us continue to expand and invest in our multichannel approach to reach more customers.

While it is great that we've brought innovations to the market, added customers to our platform and retain them, it is also clear that we are delivering value. In Q3, our average revenue per user, or ARPU, was $8.87, but excluding Avira, we achieved a record organic ARPU well above $9, driven by higher Norton 360 adoption and successful cross-sell and upsell activities.

Avira's installed base is more focused on traditional security feature, which drives an ARPU at just below $5. But we view this as one of the many opportunities we have to continue to grow and provide more rounded protection to all customers, Avira and internationally. Natalie will provide more details on ARPU in her section.

To wrap up, I'm also excited to announce that we are driving to an accelerated close date for the merger with Avast. As you will recall, we originally expected to close in mid-calendar year 2022. However, while there remain some outstanding regulatory conditions that will need to be satisfied or waived before we can close, we currently expect to close on February 24, 2022. We have made great strides towards combining the two companies, including receiving approvals from both NortonLifeLock and Avast shareholders, satisfying regulatory conditions in the US, Czech Republic, Australia, New Zealand, and securing permanent financing commitments.

On the remaining regulatory conditions, we have submitted antitrust filings for the UK, Germany and Spain and are fully engaged with each of them. We fundamentally believe that this merger will allow us to increase our pace of innovation and better serve consumer around the world.

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NortonLifeLock, Inc. (NLOK)	Corrected Transcript
Q3 2022 Earnings Call	03-Feb-2022

In the meantime, we'll keep driving our business forward. We've made great progress and frankly can't wait to merge with Avast. Together, we will accelerate the transformation of consumer cyber safety and power digital freedom for everyone.

And now I will pass the call over to Natalie to cover details of the financial results and the activities supporting our merger with Avast.

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Natalie M. Derse

Chief Financial Officer, NortonLifeLock, Inc.

Thank you, Vincent, and hello, everyone. For today's discussion, I will focus on non-GAAP financials, starting with our Q3 results and then provide our outlook for fiscal year 2022.

We delivered another excellent quarter. Our Q3 revenue was $704 million and at the high end of our guidance range. Revenue was up 10% in USD and up 12% in constant currency, including a 2-point currency headwind as the euro and yen weakened against the US dollar.

Bookings growth accelerated sequentially and year-over-year, up 10% in USD and 11% in constant currency. We continue to effectively utilize the levers we have at our disposal to accelerate growth.

Our total direct customer count increased to 23.4 million, adding 2.4 million customers year-over-year and adding 126,000 net new customers quarter-over-quarter. This was our ninth consecutive quarter of sequential net direct customer adds, with close to 0.5 million net new customers added already this year.

We remain focused on acquiring more customers at the top of the funnel in an increasingly competitive landscape. Q3 growth was broad based. We saw strength in both the US and international regions. Our new products and services in key international markets have improved our overall global reach. While our customer mix still skews higher in the US, we are capturing more international opportunities as we scale.

Looking at our performance in Q3 across key operating metrics. Overall, unit retention was slightly above 85% in Q3, and our monthly average revenue per user, or ARPU, expanded sequentially to $8.87. Collectively, this contributed to 9% revenue growth in our direct business versus 5% growth in Q3 last year and no growth the year before. We believe this consistent growth momentum is built on the foundation of our Norton 360 platform as well as our expanding product portfolio and the increasing value we provide to our customers.

Retention is a major area of focus for us. Our renewal rates remain strong across cohorts, including our newer customers, which now reflects a larger mix of our customer base.

Our cross-sell, upsell efforts are also beginning to bear fruit, supported by new product velocity and expanding feature releases in global markets. While driving strong engagement throughout the customer journey and bringing more value to our customers, we, in turn, continue to increase retention and drive growth in our ARPU over time.

Our partner business continued to grow double-digits in Q3, with revenue up 17%, scaling in multiple channels including employee benefits and app store.

Our employee benefits channel continues to grow double-digits as we broaden our identity offerings to more employees in North America. Our app store channel was up double-digits for the fifth consecutive quarter, driven by the success of our Norton 360 app.

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