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 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. Ms. you may begin..

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?.

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.

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 2023, 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 three 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 US. We also expanded our reach with our vast capabilities in freemium 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 2023, up from 20 million three 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 2023. Our direct customer retention rate ended the year at 76% and our annual ARPU was nearly $87 as we exited fiscal year 2023.

In two quarters since the close of the Avast acquisition, we have increased our overall annual ARPU by $3 and our overall retention rate by one 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 2023, 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 2023 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 2023.

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 US 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 six 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 two-thirds of the cost synergies as we exited fiscal year 2023.

This was no small feat given the size scale and complexity of the two 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 2024. Our integration efforts helped us deliver another point of sequential operating margin improvement in Q4, reaching 57%.

In fiscal year 2023, we scaled operating profit to $1.8 billion, up 24% year-over-year and more than doubled compared to three 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.

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 2024 and 2025. We still have work to do here.

But with our comprehensive set of products, we believe these changes unlock not only those mid-term 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 two points in the last six 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 six 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..

cyber safety business to grow mid single-digits, post-synergy structure of 60-plus percent operating margin, free cash flow deployed towards debt paydown and share buyback, SOFR for curve trends indicate rates below 3% exiting fiscal year 2025. Diluted share count expected to be around pre-Avast merger levels.

In summary, we were closing out this fiscal year with a strong sense of accomplishment. We have successfully introduced Gen to the world and are excited to scale as the leader in global cyber safety protection. Our financial model remains resilient powered by our best-in-class products and technologies and a loyal customer base.

As we look forward to fiscal year 2024 and an evolving macroeconomic environment, we will remain very disciplined in how we operate focusing on executing our plan and will be strategic and intentional in where we invest to maximize long-term shareholder value. As always thank you for your time today.

And I will now turn the call back to the operator to take your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Saket Kalia from Barclays. Saket, please go ahead..

Okay. Great. Hey, good afternoon, guys. Thanks for taking for my questions here..

Hey, Saket..

Vincent maybe first for you. Great to see the improvement in retention, I think you said it was one point for the company overall quarter-over-quarter. Great to see that.

Can you just maybe talk us through what's driving that in your view? And maybe as part of that just touch on what's happening within the Avast base from a retention perspective?.

Absolutely. And as you know we don't like to share our operational know-how with everyone in the world and like to nurture that is our own process IP, if you want. But let me give everyone here a few examples of what we've been doing. So as you mentioned overall company retention improvement 76% plus one point. It's driven by two things.

One is continued stable retention in Norton and LifeLock brands and then an improvement of two points of the Avast retention. I do mention the stabilization of our retention in the brands of NortonLifeLock, which as you know are industry-leading retention rates because it's no small feat.

This does not happen by itself we're really working and developing all of our values for the customers there. So, on the Avast side just as a reminder I know you know but for those on the call Avast retention rate was about 20 points lower than the Norton and LifeLock business around 65%, which is 85% for NortonLifeLock.

And we had already acquired -- before the acquisition of Avast experienced in retention with freemium business model such as Avira, which was also driven slightly above 80%. And so we had a plan to identify the operational opportunities. We identified about half of the gap to be operationally driven about 10 points.

And the other half and the other 10 points to be driven by more structural changes such as the geographical mix, the business models the value of the products et cetera. And so we decided to first tackle the first bucket of 10 points. We made a bunch of operational changes. I'll give you a few.

We combined our renewal team for all of the brands as one team.

We separated the renewal activities with the customer journey activities, with customer journey focused on education and understanding the communication and touch points value-adds to the customers versus the more transactional renewal activities, centralized marketing operations for renewal only across all of the brands worked with our e-commerce third-party partner to share our own e-commerce experience.

As you know NortonLifeLock has an in-house engine Avast was outsourced. And so we're starting to share best practices and making sure, we can apply the quick wins we had identified. Those are the operational work if you want in progress. It will take a few quarters as we continue to evolve.

Overall, once the operational buckets, if you want is being tackled and fully digested consciously increasing the value to the customer moving them to high value full portfolio of cyber safety moving them to the platform view, using the customer journey team to drive the usage and engagement of the functionalities to make sure they understand the full potential of the protection that the customer has bought.

All of those are activities that create value. And we are cautiously optimistic that, that improvement will continue over the next few quarters. .

Got it. Got it. That's super helpful. Natalie, maybe for my follow-up for you. I thought it was great to see the delevering in the quarter. I think it was about $300 million. You correct me there if I'm wrong.

But can you just maybe talk through how you're thinking about debt paydown this year? And maybe related to that, how you're thinking about interest expense even just broad brush?.

Yeah sure. Hi, Saket. Just for a reminder for everybody else on the phone so we did -- since the funding of the deal we did $460 million of debt repay down -- repayment. $400 million of that, including the April voluntary payment $400 million was voluntary.

Yes with $7 billion of debt at an increasing in volatile SOFR with Q4 SOFR up to 5% it's a meaningful challenge for us to overcome. If you just extrapolate the Q4 interest expense that's $600 million to $700 million on an annualized basis of interest expense. That's $0.75 to $0.80 of EPS. So yes, it's a huge headwind/challenge to overcome.

And if you looked at that in isolation combine that with our stated targets on leverage over the long term, the cost the expense and the level of debt that we've got that would point you to deploy as much capital as you possibly could to get that paid down. But we know, we have multiple levers in our business.

We know that, we have expressed a balanced capital allocation. And if you look at the $17 stock price that we've got and you look at our strategy and vision on where we're going over the long term, I personally believe that we're massively undervalued. And so that makes the share buyback capital deployment very, very important.

And so when we talk to you guys about a balanced approach on our capital allocation, it's exactly that. Both of them are challengers of each other, but both of them are incredibly viable and critical to drive our business and to achieve our long-term objectives.

So what you'll see us do on a go-forward basis whether you specifically call it Q1 2024 or over the long-term is strike that right balance looking at all of the dynamics that we've got in our business..

Got it. Super helpful. I’ll get back in queue. That was very helpful. Thanks guys..

Thank you..

Thank you. [Operator Instructions] Our next question comes from Angie Song from Morgan Stanley. Angie, please go ahead..

Hi. Thank you guys so much for taking my question today. I'm speaking on behalf of Hamza Fodderwala from Morgan Stanley. So just had a quick question on net adds. The last quarter you mentioned that adds for NortonLifeLock lines a little bit more under pressure compared to a vast net add.

So could you just talk a little bit more about the dynamic of net adds for NortonLifeLock versus Avast for this quarter? And how should we think about this dynamic as we model out fiscal year 2024? Thank you..

Yeah. Hey, Angie, thanks for your question. So as you mentioned right so, Q4 sequential decline in the direct customers is about 180,000, the lowest of the year. So we see the trend stabilizing. And we're working very actively, our plan to as we said first stabilizing and then returning customer -- direct customer counts to growth.

We continue to grow or we grew -- continue to grow our indirect customer counts. On the direct piece, last quarter it was a little more pressure on the NortonLifeLock side on a ratio basis if you want then Avast. And I think it was two-thirds, one-third of the decline. The quarter before it was the reverse.

So we also said quarter-on-quarter just be careful not to drive trends within the brands. We see the overall tensions to be about the same across the globe, but being more focused on the security side versus the identity side, so slightly more focused on security.

And then I would say Avast because we improved retention two points, of course, continue to reduce the gap if you want. And we're very confident that we'll return them to growth once we fully bridge the 10-point retention of Avast versus Norton. So that should give you some color of the dynamic..

Great. Thank you. And just one more if I may. So on the long-term target, I know that the Avast acquisition definitely brought some complexity into the equation.

And given the recent macro backdrop that caused even more uncertainty, could you just remind us what your confidence level is now as we have a little bit more visibility into fiscal year 2024 in achieving your $3 EPS target exiting fiscal year 2025? Thank you so much..

Yeah, absolutely Angie. And I'll pass it to Natalie on the confidence, so you'll hear directly from the CFO. But what I can tell you is that when you talk about Avast bringing complexity, in one sense, it's right. It's merging multibillion dollars companies together.

But it's a similar business model with very complementary strengths, so we're very focused every day on the opportunities that Avast is bringing. And we talked about the complementary of the product portfolio. They're bringing more strength on the privacy side.

Combined with our identity that now allow us to offer across 65 million paid customers and hundreds of millions of free user, full cyber safety and we gave you some proof points of us being on track to that. We said we can -- going to bolster our technology with Avast and you'll hear more about our pace of innovation now for the combined R&D.

We said that now being more global, cyber safety has no borders as you know. And threats are across the globe and people are moving virtually in the world. Being truly global is a real asset for us. We also said that we have some revenue synergies and the Avast retention rate is the beginning of that.

You'll see more of that in 2024 and 2025 as we return to growth using those revenue synergies. And then the cost synergies where we delivered only two-thirds of the $300 million plus promises. Now where is the complexity coming from that you may have mentioned? Yes, we did not anticipate the cost of the debt.

Frankly when the time we signed the deal, it was a SOFR being 0% and today is 5%. Natalie mentioned that, but we will deliver quickly with our cash flow. And if I follow you guys, investor’s community predicting SOFR at 3% by exiting fiscal year 2025 by then you will see the full realization of those synergies.

So our focus is really on the opportunities that this acquisition is bringing to us. And I'll pass it to Natalie for the confidence in the bridge and the different levers..

Yeah. I think you heard about the majority. I would just summarize it into -- from a growth perspective, we really look at it from a value, reach and loyalty perspective. Value is where the innovation is coming from or coming into play where we will constantly innovate, bring great products and services to market in a very competitive way.

Reach is our intent and our priority to expand our reach globally, really focusing on international and bringing different products and services, different vectors to new global markets.

And then loyalty is about looking at how we can best service our customers, focus on NPS, but also increase the engagement of our existing user base through cross-sell/upsell and really focusing on our retention metrics.

Combine that with the expressed discipline that we've got in our cost structure, driving the company to a 60%-plus margin structure that is going to be incredibly a strong feeder into the $3 EPS.

We also said, don't forget, back when we came out with our Analyst Day, we said M&A could be also considered as an accelerator, as we continue to generate very, very strong cash flow and as we look at other products and services other – as cyber safety protection continues to expand and evolve.

And so all of that in really what you have to believe we just laid out some of the assumptions that we've got with the $3 EPS. When you ladder all that up from a whiteboard perspective or just the back of the envelope, it's not hard to see how you get to the $3 EPS target over the time frame we've provided..

Thank you so much..

[Operator Instructions] Our final question is a follow-up question from Saket Kalia from Barclays. Saket please go ahead..

Okay. Great. Hey, guys. Me again. Sorry, I just had a couple more follow-ups. Natalie, maybe for you. I know it was great to see the ARPU expansion quarter-over-quarter. Maybe a question for you.

Where do you think that can go over time? And sort of how do you think about that?.

Yes I think we're just getting started honestly.

I think with the expanded portfolio that we now have as Gen and with the express desire and strategy and commitment to invest in more and more innovation, I'm confident that we're going to continue to bring great products and services to market that honestly, I think will be easy sell to our customer base.

And so where specifically ARPU will go, I'm not sure. It's going to be a balanced or a dynamic approach depending on markets, customer cohorts, the source of those customers, et cetera.

But if you even look at the progress we've made already with the equivalent of a $3 ARPU expansion, just start applying that to more and more and more of our customer base, in my opinion we're just getting started.

We have a ton of space to increase our ARPU, as we expand and really bring to market that innovation but then also expand our reach across our existing 38 million. And as we bring in new customers as well just be able to expand there as well..

Got it. Got it. Maybe for my follow-up for you Vincent. Listen, I mean we're clearly trying to control what we can with margins and operational improvements in retention. Of course, the other part of the net add equation is new customer acquisition. And so maybe the question is for you Vincent.

What can you do on the new customer side to sort of continue the stabilization of net adds that we've seen but then maybe turn that corner and reverse the trend?.

Yes. And if you allow me to think slightly differently, where you compare margin and what we control versus customer acquisition, I would say, you can take a stable stake that the operational commitment of running lean and really redirecting every dollars to either innovation or sales is what we do.

This is what is in our DNA and in our culture and we'll continue to do that very, very well. The value we drive and the price we're able to charge, representing that value, coupled with operational discipline is what drives the margin. As you know, it's a very high-margin business.

When it comes to the growth and how we grow our business, we really for us have the three buckets. Natalie mentioned the ARPU and supported with innovation, how much more do we add to the value of the portfolio. And Natalie is right that in some way it's not like a daily focus.

I told you the first proof point we can go to is where we were with NortonLifeLock, above $8 adjusted for the mix between the geographies and the portfolio. And over the next eight quarters to this time frame we gave you we believe we'll cross $8 at the same cohort. So that's number one.

Can we later on get to $10 per month or more? Absolutely, but it will come from added value new adjacent services, the ability for you to manage your digital reputations that are services above and beyond to what your core cyber safety membership brings. The second one of course is the retention, right, as the second bucket for the growth.

The more retain, the more we satisfy you as the customers, the more value we'll be able to drive for the business. And there you've seen some of the progress. I talked about the operational view. Our whole focus here is, around customer journey giving them peace of mind, in this hacking world that continue to evolve and is actually pretty scary.

And then the third one is about, bringing new people to cyber safety, which is the acquisition side and it will be a real trade-off, between those three activities depending, if you get faster progress on one of those three buckets, you may have pressure on the other metric.

But overall, the value towards our long-term mission will continue to progress. On the net path, right? The first one is, you retain more and then you try to acquire new customers. We now have a full set of capabilities from freemium, to product sales, to membership sales to all the countries we can go after.

But we know, that we're not perfect in every one of them, and we still have more opportunities. We're doubling down into mobile. Everything we do needs to be mobile. It's where the digital life is first touch points, today. Even though you still use your desktop and all of that, you may want to act and interact through mobile.

Mobile is a big channel for us, in terms of growth. We know that some customers would want their cyber safety to be part of other solutions, financial solutions or employee benefit that they get. And so partnering with others to continue to get more customers, touch to cyber safety, is an important one.

Once we have them, the cross between indirect customer and direct customers, which we're trying to do here, which really should be viewed as more direct interaction with our customers, is another set of activities that we're driving.

With Avast, a strong footprint in emerging markets and now bring a full cyber safety to emerging markets, would be another one where we can add new customers and back to my comment, would have a little bit more pressure on ARPU, because the price per month in emerging market is lower than in the western world, but it's a healthy balance, that we're trying to achieve.

And then another one, I can mention and we have a lot of activities is the balance of our marketing spend activities, across all channels including accelerating the freemium in stores, the freemium to the paid conversion and value demonstration. All of that is in full swing. I'd rather not give you a precise quarter of customer count.

We're confident we'll return that metric to growth. We're working -- you've seen the reduction of the gap. I would say, in Q1, you plan with similarly -- similar trends that you've seen in the last two quarters, but we continue to improve.

And by the end of fiscal year 2025, when we give you that model, we're assuming that we will be returning in a balanced way, on growth, on all three of the buckets I've just mentioned. .

Very helpful, guys. Thank you..

Thank you. At this time, as there are no more questions, I will turn the call back to Vincent Pilette, CEO for closing remarks..

Excellent. Thanks, Lauren. And I want to thank each Gen employee for their hard work, and for embracing and directly managing through so much change.

Our entire team is driven to protect and advocate for our customers, and we do not take for granted the millions of people around the world, who trust us to help them safely navigate the complex digital world. We have a strong culture of innovation and execution.

We have a winning strategy, and we will continue to execute to drive profitable growth, and create long-term value for all our stakeholders. So thank you for joining our call today, and I look forward to talking to you soon. .

This concludes the conference call..