Good afternoon, everyone. Thank you for standing by. My name is Paul, and I will 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 like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Miss, you may begin..

Thank you, Paul, and good afternoon, everyone. Welcome to the NortonLifeLock 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 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?.

simplified and frictionless onboarding experiences, new device detection in 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 one 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. 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 five 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 three 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 sequentially. The growth was broad-based, although slightly higher mix in security as expected for December holiday-driven quarter.

In our direct-to-consumer channel, we observed some market pressure on ad 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-third 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 remains 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 U.S., Czech Republic, Australia and New Zealand, and securing permanent financing commitments.

On the remaining regulatory conditions, we have submitted antitrust filings for the U.K., 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 consumers around the world. 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 cybersafety 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..

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 two-point currency headwind as the euro and yen weakened against the U.S. 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 U.S. 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 U.S., 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.

While our indirect business is just over 10% of our total business, we continue to dedicate more resources in this area as we focus on broadening our go-to-market reach and drive this as a key tenet of our long-term growth strategy. Turning to profitability. We continue to deliver high operating leverage.

Q3 gross margin sustained at 87% and operating margin was 52.8%, up 180 basis points year-over-year. We remain diligent in our cost structure in pursuit of efficiency opportunities and to create capacity for reinvestment to drive growth. We are operating our G&A functions at approximately 4% of revenue down from 10% of revenue just two years ago.

We continue to make investments in sales and marketing while navigating through the competitive advertising environment and higher ad costs. With R&D, we focused on our energy on increasing the pace of new product launches while also effectively driving efficiencies.

Looking ahead with Avast, we will continue to operate with a disciplined approach in our cost management in order to drive synergies we committed and pre-integration plans are already underway. Q3 net income was $260 million, up 14% year-over-year. Diluted EPS was $0.44 for the quarter, up 16% year-over-year and at the high end of our guidance range.

We remain committed to driving EPS expansion and achieving our long-term EPS objective of $3. Turning to our cash flow and balance sheet. Q3 operating cash flow was $330 million and free cash flow was $328 million. Year-to-date operating cash flow is $648 million, growing over 80% year-over-year.

We continue to maintain both a strong liquidity position and a healthy balance sheet. Our net debt leverage lowered to approximately 1 point times in the quarter – 1.5 times in the quarter. But please note, this does not include any of our expected acquisition financing as that does not become funded until the deal close.

In Q3, we returned approximately $73 million to shareholders in the form of a regular quarterly dividend of $0.125 per common share.

For Q4, the Board of Directors has approved a regular quarterly cash dividend of $0.125 per share to be paid on March 16, 2022, for all shareholders of record as of the close of business on February 22, 2022, as described in the press release.

We still have approximately $1.8 billion remaining in the current share buyback program, which is not being deployed at this time due to the pending Avast transaction.

As a reminder, depending on the Avast merger shareholder elections, an incremental share buyback of up to $3 billion is possible to the extent that Avast shareholders elect for the majority stock option. Before I get into our guidance, let me give you a brief update on the Avast merger financing.

As you may recall, back in August of last year, we successfully syndicated our term loan A commitments for the acquisition financing. At the start of this calendar year, we launched the syndication of our term loan B commitments to be prepared for the deal close. We received strong interest and great reception in the debt markets.

In fact, the demand was notably oversubscribed. We're pleased to report that we have successfully raised all of the required financing we had planned for this merger and we'll be ready to fund at the accelerated date for the deal close. Now turning to our outlook.

We have narrowed our full year fiscal 2022 non-GAAP guidance to the high end of the range. We now expect to achieve fiscal 2022 annual non-GAAP revenue in the range of $2.795 billion to $2.805 billion, assuming stable currency rates quarter-over-quarter, which translates to approximately 10% growth year-over-year in constant currency.

For fiscal 2022 annual non-GAAP EPS, we expect to be in the range of $1.73 to $1.75, narrowing against that high end. Please note this guidance does not include any impact from the anticipated Avast merger close. We look forward to closing out another successful fiscal year. We remain well positioned as the leader in cybersafety.

We have growing momentum, a very healthy business model and strong operating capabilities. I want to reiterate what we said last quarter. As we navigate forward, we will continue to challenge ourselves to anticipate, prioritize and meet customer needs in a growth-focused manner.

Thank you for your time today, and I will now turn the call back to the operator to take your questions. Please do keep in mind, we are not able to answer any questions related to any specific M&A at this time.

Operator?.

Thank you, ma’am. We will now begin the question-and-answer session. [Operator Instructions] Your first question is from the line of Saket Kalia with Barclays. Your line is open..

Great. Hey, Vincent.

Hey, Natalie, how you’re guys doing?.

Very good. Thank you for asking..

Absolutely. Thanks for taking my questions here. And great to see the results. Vincent, maybe I’ll start with you. I understand the disclaimer just on talking about specific M&A, but I think the most surprising news with the release here, in my view, is the earlier expected close for Avast on February 24.

And so maybe to the extent you can, can you just share with us just some of the regulatory hurdles left, right, just to understand the time line from here to the 24th? And then also to – in as much detail as I guess you’re allowed to, what gives you the confidence in that earlier close date compared to the June time frame that we thought about earlier?.

Yes. And to be honest with you, I never believed that I would say what I’m going to say, which is despite the fact that we posted a double-digit quarter, quarter, the most exciting news is, for me too, that we are now scaling the close of the merger with Avast for February 24. We, as you imagine, are super eager to get started.

We’ve made great progress in our planning activities, and we know that this merger will offer an increased capacity for innovation, for global reach, to make Cyber Safety reach for consumers. So, we’ve been patiently working all the processes. As I mentioned in my prepared remarks, we made great progress on many fronts.

We still have regulatory conditions to meet in the UK, Germany and Spain. We’ve done now all of the filings and we are openly and actively, if you want collaborating with those stories answering all of the questions they have.

Based on the progress, and I won’t go into every detail, we’re now confident that we will be in a position on February 24 to either meet all conditions or waive all conditions and be able to close. So that’s, as you mentioned, a great news..

Yes, absolutely. We’ll look forward to that. Natalie, maybe for you just to zero in on the core business. To Vincent’s point, I mean, great to see the double-digit bookings growth. You talked about a couple of the levers in your prepared remarks, the better retention, the ARPU and continued customer acquisition.

Can you just go one level deeper into sort of how you’ve been able to accelerate that growth to double digits here?.

Yes, hi Saket, thanks for the question. In our prepared remarks, you heard us, right? The growth was pretty broad-based, both the U.S. and international and across security and identity. How we continue to post double-digit growth, I think, is exactly what we’ve said.

It’s really having our new products come to market faster, which is allowing us to offer increasing value to our new as well as our existing customers. We continue to focus our efforts in expanding our customer reach across the globe, that’s driving both domestic expansion as well as international expansion.

We’ve got – with Avira, really seeing the premium to paid conversions as well as combine and diversified through the partner and indirect channels. Think all of that’s just really coming together, and we’re focused on all of those key tenets to drive that double-digit growth..

Got it, got it. That makes a lot of sense. Vincent, if I could squeeze another one in, it’s a product question. I thought the social media monitoring solution that was announced recently was very interesting.

I was wondering if you could just talk a little bit about the competitive landscape there and the additional value that you can capture with a tool like that. Because I guess in the world of unfortunately, cyber bullying, I imagine that's an interesting product.

So can you just dig a little deeper into that?.

Yes, I'm with you. And to be honest, so we have a very broad purpose, right, really protecting and empowering everyone to have the digital lives being safe and getting the maximum value for it.

As we know, as we move more online, we, of course, expose either the users or our kids or family to more risk coming from that cybercriminality that continues to evolve all the time.

I mentioned at our Analyst Day that moving up the stack of value from that core device security to multi-device, to then including password manager, VPN, then adding identity features and then moving into privacy features is what our mission is to build just the best cybersafety platform, full stop.

And then on top, offering additional services that would have a lot of value because they are part of that cybersafety platform.

I mentioned a category we really look at very closely within that privacy and protection is your reputation online, reputation, privacy reputation management, and then protecting against all sort of activities that would expose you. Cyber bullying being one of them.

And so social monitoring is just another feature, if you want, in a long road map that we keep developing to protect our children against different worlds, different exposure that you would not want to have and creating an alert system and a blocking system that help spotting that.

You should, as part of kind of a development, as we continue to build up the different categories. When it comes to competition, I have to tell you, we see a lot of innovation, startups, either geographically located or product category-focused, that bring interesting new ideas. And this is why we like the position we have.

And we will even reinforce with Avast. We're going to fully up-capacity for innovation and continue to accelerate the rate of value we bring into the overall portfolio. So you should see it as a long-term development and understanding that we continue to move the value and build up that full definition of what cybersafety means for an Internet user..

Makes lot of sense. I will get back in queue. Thanks guys..

Thanks, Saket..

Your next question is from the line of Matt Hedberg with RBC. Your line is open..

Hi guys, thanks for taking my questions and congrats on the double-digit growth. Vincent, you talked about capturing more international business, and obviously, Avast will accelerate that. But wondering if you can provide a bit more detail on what's working internationally.

And maybe how is Norton 360 resonating in international markets?.

Yes. No, very good question. So every geography is important. But as you know, Norton came with a more U.S.-centric base, right? 70% of our business coming from there. And when we started as a company two-years ago, we say we have a big opportunity internationally, first, with the current product portfolio, and we did that.

Then we realized that in many local countries, there's many features that are more free features and introducing, in our portfolio, the ability to manage a freemium model was important.

We acquired Avira and we did a lot of testing and realized that actually combining in one country under the same roof at full-life cycle from freemium to premium to full cybersafety platform is actually working. And we were able to grow almost all line of all cohorts when we're doing those tests locally.

So that has been, of course, a proof point that give us the confidence to say, hey, the combination with Avast would be definitely a fantastic, very powerful move to offer more innovation to these customers, including the commitment to the free, and that's number one.

Number two is, we have seen it with Avira but also with Norton, as we continue to move more value up the, I can call it, value chain, when you look at the pyramid at the base, the basic security moving into your data being protected and your data inform a live, protecting your full live, that's an identity or multiple identities and protecting that.

We can see both, of course, the value creation of the ARPU going up and then the retention actually going up along with the customer satisfaction. We started to launch more combined product AntiTrack starting at the basic with Dark Web Monitoring in many different countries to introduce the notion of that identity protection.

And you'll see us more committed and going to drive that digital identity internationally. In Europe, as you know, digital identity has a decent meaning than in the U.S. And so having a presence in each region and understanding the – both the local market in a global framework is very important and we'll be fully committed to that.

The third one, I would say, internationally that we have seen is once a customer gets more of that value that I mentioned under either Norton Identity or different single products, AntiTrack or others, we've seen retention improving. Some of the Avira retention improved internationally and we can see in the various countries.

Every country has a different renewal rate, but they move up when they move up the value chain and become more a member of a cybersafety platform. So that gives you an idea, if you want, of the different levers we will have to continue to accelerate growth as we share best practices with our friend at Avast..

No, that's super comprehensive. I think we all recognize the international opportunities is significant for you guys. The other thing that really stood out to me, you had a lot of positive things to say about indirect success as well. Now I think you said it's just over 10% of your business. You're focused on driving more success there.

Maybe tell us, what are some things there? Obviously, it's been more of a direct historically, but it's really, I think, exciting to see a lot of indirect success, which seems like another lever of growth..

I totally agree with you. Let's be very clear. We know that to reach out the 5 billion Internet users, we can't just do it through a DTC business model.

We have to continue to partner, whether it's going indirect to a simple channel or combining with other solutions to offer a better mix or a fully integrated value, combining, for example, with an insurance provider and a cybersafety offering, et cetera. So expect us to continue to develop our channels that way.

I think we mentioned publicly that employee benefit was one of them. That's more U.S.-centric. We've increased our investment a year ago in that and we now see the fruition to that. There too, it's not only a channel because then we get feedback around adjustment to the product portfolio and we can add more value for the employee benefit of customers.

So customers that come through that channel. We want to be – of course, we want to move fast.

Of course, we want indirect channel to be bigger but we want to be very thoughtful, making sure that our brand is recognized, that we have engagement with the customers, which is not the case with every legacy indirect channels, making sure we have the ability to continue to move up the value chain of customers.

Those are some of the criteria we really consider before really putting the trigger on increasing investment in one area. But a lot of opportunities there, want to be thoughtful.

We're particularly excited – sorry to come back with all the time with that, but when Avast will come in, they have a VSB/SOHO Channel, so focusing on the gig economy or the home-worker person around that cybersafety, we expect to increase that channel as well. So – and we have none in our NortonLifeLock.

So definitely expecting direct channel to continue to be an expanding part of our go-to-market strategy..

Super exciting. But thanks Vincent. Thanks everybody..

[Operator Instructions] Your next question is from the line of Jona Heinz [ph] with Morgan Stanley. Your line is open..

Hi everyone. Thank you for taking the question online from Hamza. So our first question is on the net subscription ads, which was a little bit below typical seasonality. I was wondering if you could just please expand on that a little bit.

Has there been any change in renewal rates?.

Yes. Thanks for the question. So look, growing our customer base has consistently been and will continue to be a key ingredient to our strategy. And we've just posted our ninth consecutive quarter of quarter-over-quarter net-ads. But we've chosen to report our customer ads to you defined as direct customers.

We'll continue to invest in driving this area, very, very fruitful to acquire customers to direct acquisition. But it's not the only avenue to customer acquisition. I think you've heard us today a couple of times talk about the indirect channels.

These are diverse channels that we can go to market and really expand our reach, and we're putting resources behind that. We absolutely want more customers, direct paying customers through our funnel. And that's why it's so important for us to focus on how we expand our reach globally in all different channels.

The direct channel is becoming increasingly more competitive; both from a competitive spend perspective but also just add costs. And so we're trying to strike the right balance and really leverage all of the diversity of the channels that we have out there to acquire users and/or indirect customers that will over time feed into our installed base..

There's one ad I want to say, I know it's doubling down on what I already said and Natalie mentioned it briefly but we have a lot of also indirect customers. A year ago, we launched Norton 360 on mobile, Android and iOS.

In employee benefits and mobile app, we increased 100,000 net new customers or over 100,000 net new customers in those two channels quarter-over-quarter. We saw for the first time actually in mobile app, 65%, about two-third of the mobile app purchases were Norton 360, which is a very big change.

That is impacting how we report the direct customer count. We've made some analysis Avast, for example, is including the mobile app into the customer. So as we merge with Avast, we’re going to take a fresh look on how we report this customer count. So investors can have a full view on how we looked at our business across all dimensions..

Okay, got it. That's very helpful. One follow-up, if I could. So how should we think about ARPU going forward now that the Avira acquisition has lapsed? Any thoughts on price increases, given the current inflation that we're seeing? Thank you..

Yes. So as it pertains to price increases inflation, et cetera, I know it's being talked about across the globe. Very, very top of mind and relevant, for our business though, we're software-based so we really don't have a ton of logistical and raw material inflation in our business.

What we focus on when we think about price, when we think about inflation, it's more so how are we driving customer value? How are we bringing innovation faster to market? How are we making sure that we are the number one customer choice, in the decision where they choose how to protect themselves and their family? And that's how we focus and that's how we think about our price.

We want to make sure that the price to value equation makes sense and not necessarily focusing on price increases just because it's top of mind and across the world today..

And when it comes to gross, we balance retention, ARPU, new customer acquisitions. If your question is, can you go higher than the $9 average? The answer is yes. We still have the majority of our customers that don't have identity protection that are just on the core security. Nobody is anymore just on the AV.

They have more than just security like password manager, et cetera but they haven't really made the leap yet on understanding the benefit of having identity – digital identities being protected. And I think that's really our effort, creating the innovative portfolio to really drive that increased adoption of identity protection..

Okay. Thank you both very much. Congrats on the results..

Thank you..

At this time, there are no more questions. I will turn the call back to Vincent Pilette, CEO for NortonLifeLock..

Yes, thank you, Paul. And thanks everyone, for joining us for this call. We appreciate your continued support, of course, and we look forward to connecting with you very soon. So stay safe and be well. Thank you..

This concludes the conference call. Thank you. You may now disconnect..