Well, good morning, everybody. Thanks for being here. My name is Hamza Fodderwala. I'm a director pretty much for everyone in the family. With me, I have the pleasure of having the team from Gen Digital. We have CEO of Gen Digital, Vincent Pilette, as well as the CFO, Natalie Derse. Vincent, Natalie, thank you so much for coming today.
Absolutely.
Thanks.
Yeah. Thanks to you for coming and listening. We hear an echo, but-
Okay.
Good.
Yeah, maybe not so loud.
That's gonna be hard, I think.
Mm-hmm.
Before I begin, just for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/disclosures. With that, I'll kick it off.
Turn it off.
Okay. There we go.
There you go.
All right. I guess I was talking to myself.
Woo.
Maybe we'll just start off with the first question for Vincent. Just to level set folks who are maybe newer to the Gen Digital story or haven't been following as closely, can you give us a sense of the flat few years, the transformation to Gen Digital, and how you view the consumer Cyber Safety market today?
Yeah, let me do that. I'm sure most of you know. We came from Symantec. 2019, Symantec was made of enterprise cybersecurity and consumer cybersecurity, about two same-size divisions. We decided to sell the enterprise security division to focus entirely on the individual, and that also to recognize that the cyber risk that an individual is facing in our digital world, digital economy is changing rapidly from being mainly focused on security problems on your device to becoming a full exposure of your digital life, digital data, digital persona, in this very distributed world.
Combined with the evolution of hacking activities, moving from simple malware on your device with a funny face showing up and saying your device is blocked to a full malicious phishing, scamming, activities that could impact an individual without that individual even knowing it, and the dark web becoming the market, if you want, for hackers to monetize their platform. Moving from hacking as a hobby to hacking as a profession and exposing everyone individually. Which had different dynamic than the enterprise security side of the house. We said focus entirely on the consumer. We became NortonLifeLock, not a very creative name. We took the Norton brand and the LifeLock brand and put it together and say NortonLifeLock. We launched our company that way.
At the same time, we launched the first full integrated Cyber Safety platform that for a membership fee you can subscribe to and be fully protected for all of your cyber risk, and that was Norton 360. We launched in various shape of membership. We moved over the last three years on the NortonLifeLock install base from about 0% adoption to 60% adoption plus, about a year ago. We decided to continue to expand our channels and expand our scale to fully finish the buildup of that standalone company dedicated to consumer Cyber Safety, and we closed the acquisition of Avast.
Number three in the space, also a company fully dedicated to consumer Cyber Safety, more focused on Europe and emerging countries and coming up with a different background, which is really a freemium model, which in the consumer space is important in many respects. Upgrading co-consumers to a free to a paid to a full-fledged Cyber Safety platform. We closed that acquisition in September of last year. With the acquisition, we decided to rename the company Gen Digital, and it's really to recognize that generation is not just a matter of age, that today all generations are impacted by that digital life. Our mission or vision is to make sure we can empower every individual to fully benefit from that digital world without any worry for safety or being fully in control of your own digital data and persona on that digital world.
All right.
Quick, quick background.
Great. Thank you for that. Let's start off maybe kind of digging into the model. You know, NortonLifeLock has this $3 earnings target exiting Fiscal Year 2025. When we look at the stock today, you know, certainly that screen's, you know, very favorable from a valuation perspective. There are sort of three components when we think about that $3 target. There's a top line. I think you talked about steady state growth in sort of the mid-single digit, you know, once you lap the Avast transaction. There's the cost side of the equation and then the capital allocation. I wanna start with the top line. When you think about your top line growth going forward, how much of that do you think is going to come from growth in customer count versus ASPs versus leveraging other channels beyond the traditional?
Yeah. The $3 EPS commitment we have is to show the earnings power of the model we've built. As you mentioned, there are multiple components to that, I'll let my partner, Natalie, talk about all the components. I am singly focused on that top line and less about the way you brought it up, but more for us at the high level in term of penetration. Today, if you take people that consciously pay for a full cyber safety protection of their digital life. You can maybe sum up to less than 5% of the internet connections, being fully protected. Many people are asking me, "Okay, but why is that such low penetration? We don't see a lot of growth." It's a little bit like an insurance view.
Once you're being hacked and you're victim of something, then you're going to pay and you're going to be loyal customers for life. Until then, you're aware of the risk, but you're willing to take the risk. I think as we see the evolution of hacking activities, risk on the digital life, and the desire of the new generations to more and more maybe less protect, but more take control of that digital life and the need for it, we see an evolution of our portfolio that will continue to help penetrate more of that market. number one is getting more people consciously protecting themselves online through our solutions, which is the best in the market, or through subpar solutions if they want to.
The second one is really to move from a need of basic security, which I think everybody somewhat understand, to addressing the full need of managing your digital identity and over time, your reputations. How many young people, like my daughter, who is just turning 18, has a full digital footprint out there through the various app and many different pictures and data, and she's soon going to hit the job market and does not realize that recruiters going to look at who she is online without even talking to her. That control from a consumer standpoint of your digital life is the next expansion in the overview. Moving the customer from a basic security all the way to a full adoption of that Cyber Safety is an important one. The third one is the market is more developed in Western countries.
Could it be because those countries are more digitized than others, or they have more purchasing power? Maybe not, because when you travel everywhere, you have everybody driving the digital life, whether it's in India, it's in Africa, it's in Russia, it's in Northern Europe, and it's in the U.S., and it's in Japan, and it's Germany. I think there is a different solution for different behavior in those market and the portfolio still have to evolve. Continuously evolving the channels, whether a geographical channel or vertical channels, is the third element that we're pushing through. When you step back and you say, "Okay, when you guide your top line, where is it coming from? New customers, value growing or maybe more retention?" All three drivers I've expressed will balance that growth over time.
Got it. Maybe just like currently, I think you talked about the top of the funnel, being a bit weaker just given the macro. What are you seeing there? Do you expect that to stabilize at some point? I mean, you know, none of us are macroeconomists, but, how what are some of the things that maybe might be in your control versus, you know, things that are not?
In value, shape, or form, that question comes in every meeting.
Yeah.
Whether it's a board meeting, a management meeting, or an investor meeting, of course, which is, "Hey, if the economy gets worse, what does that do to our model? Or is the economy getting worse?" The reality is the need for cybersecurity will always exist. Hacking as an activity could even peak that time of recession versus not, and people praying for or trying to get more money and preying on weaker environments. Actually, we've seen that through our history. Of course, there is the consumer sentiment that when you are in a tougher economy, we cannot say we're in recession, but in a more recessionist environment, you're going to manage all of your budget and want to make sure that you don't waste your money.
It's upon us to continue to demonstrate the value we bring through the subscriptions. Today, yes, we see global traffic being different than it was a year ago. In Northern Europe, in various part of the business, we see that view, as I think we've expressed it enough on our earnings call. We'll continue to be very disciplined in our marketing spend, which is really the building up the top of the funnel. We don't want to be managed by a single one driver or metric, such as like customer counts. We know we have a big install base. We know that that install base is still two-thirds mainly security focused and can be educated for the needs or the risks of not having a full digital identity protection.
We also know that we have weaknesses in terms of how we manage the retention and retention rates in our combined business. I see today the trends, we mentioned it in our last earnings, being stable over the last six months, less great than one year ago, but somewhat in the same trends over the last six months. Yes, mildly impacted by the macro-level environment.
Got it. Maybe some of the stuff that is in your control on the unit side of the equation, right?
Mm-hmm.
You talked about improving, the Avast retention rate.
Mm-hmm.
Closing the gap versus, the core NortonLifeLock.
Yeah.
Can you explain how you go about doing that? They have been other vendors who've been able to execute on that, but just curious.
Yeah.
What the strategy for Gen?
Just to reset the frame for those not fully aware of the numbers, Norton and LifeLock had retention rates in units of about 85%. Slightly lower on security, slightly higher on identity, but on average 85%. We had bought a smaller freemium business, Avira, that also reached 80%+ in retention. Avast is at 67% retention. We split that delta in two buckets. One is a set of operational measures that we believe can improve retention rates. Another one is a set of structural activities that may or may not be improved. The structural could be a different geographic mix. We know retention rate in Brazil will always be different than in the U.S. As an example by nature of the market.
Or another structure could be a premium to paid customers is a different behavior than one that immediately start at a premium model. We're still going to work on some improvement there, but we're not putting them in our model. In terms of the operational activities, we say it will take about two years. We've seen a sequential improvement in this first quarter post-close. We should see a continuous trend of sequential improvement bridging that gap of about 10 points. I'll stay away from any operational process or more proprietary activities that we do.
I would say in general, as customer move more towards the identity side of the offering and start to really understand the full Cyber Safety protection and start to understand the risk on new PII data and putting the PII data into our alert systems, we see a higher retention. Migrating the customer from we already studying that core of Avast to that full value of the portfolio is one of the many contributors we expect to have.
Got it. Great. Now maybe this shifts to the cost side of the equation. You know, I think you talked about $300 million in annual savings or synergies with the Avast transaction. Can you just briefly explain, like, what the building blocks around that are, and how are you progressing on those synergy targets?
Sure. Just for context, I think when we first announced the deal, we said $250 million. We've raised that to $300 million. Don't forget the plus. We see a ton of opportunity as we come together as Avast. Talk about focus on what you can control under Vincent's leadership, and the entire leadership team is totally on board with really just a relentless desire to run the company as lean as, and as efficient as possible. That includes running G&A, you know, 3% of revenue. That includes, you know, really running and making sure that when we take a look at the workforce that we've got across the combined company, that it's right-sized. That was about 50% of the synergies that we articulated.
The other 50% were things like when you bring two mature companies together, two big mature companies together, you're bound to see contractual fees, rates, synergistic opportunities. When you bring the back ends together, whether you think about your GL or you think of some of the other financial or other types of systems, when you bring those together, you obviously reap that cost out of there as well. Just a ton of opportunity. I think, we're doing really well. I would say we're ahead of cycle or ahead of plan, especially on the workforce reductions.
Quite frankly, we wanna right-size the teams and get the teams connected very clear on what the roles and responsibilities are, so that as we move forward on these, you know, milestones that are not easy. When you think about revenue synergies, when you think about a low- to mid-single-digit rate of growth in this macro environment right now, those things aren't easy. The best thing we can do is focus on what we can control, get the workforce plans implemented, get the teams really connecting, and get the balls rolling in terms of our growth initiatives. That's we're doing really well on that ahead of schedule. On the other stuff it takes, some of them have been low-hanging fruit, and we've reaped those benefits into the margin improvements that you've seen now quarter-over-quarter.
Some of the other ones take a little bit more time in terms of, you know, when you think about the back-end engine type of simplification, or you think about more of the larger contractual negotiations that we've still gotta do. What we said at the end of Q3 was, annualized, we're about a third of the way there. We said we'd be at full bore, annualized by the end of Fiscal Year 2024, you'll see us improve from now until then.
Got it. Super helpful.
If I can add, one of the benefit of us coming together with Avast is the scale, right? We now address about 40 million of paid customers, hundreds of million of free users. For every innovation, we only need to innovate it once. For every lab engine we have, we only need to do it once. We had 3 times before. Every one of our innovation capacity, if you want, can be rationalized, and we said that some of those savings would be reused to reinvest to build the next generation of Cyber Safety, and so that's what we're really focused on.
Got it. I mean, over 40 million, you know, paying subscribers, when we think about billions of users out there, certainly not penetrated a lot. I think one of the questions that we get a lot is just around the competition from Microsoft Defender. As cybersecurity starts to, let's say, impact the consumer consciousness more and more, are you seeing any change in consumer behavior around, you know, purposely buying, intentionally buying a Cyber Safety solution?
Yes. The awareness of Cyber Safety, which is different than your device security, is growing for sure. Between awareness and making it a purchase decision, that still has a gap to bridge. In term of Microsoft Defender, we've seen them improving their Defender. If it's about just the core security of just your device, which frankly almost nobody is only worried about today, that might be good enough. At the same time, we see an expansion, and Microsoft itself is realizing it. As you know, in Windows 11, they've expanded their Defender to take a more cybersecurity. They call it cybersecurity, we call it Cyber Safety. Those are big part of Microsoft 365, a paid version, which, you know, not everything comes for free. It gives us the ability to compete on an innovation, point of view and addressing the best, the needs of the customers.
Got it. Just on the capital structure. In terms of Norton today, you've got, I think, about $1.5 billion in run rate free cash flow, unlevered. I think you're about a little over 4 x net levered. Over 70% of the debt is tied to variable rates. There's some managing of the dilution as well post the deal. When you think about capital allocation priorities between paying down debt, doing the share buyback, as well as continuing to pay that dividend, what's sort of the priority level to reach that FY 2025 target?
Yeah, I think, just if we back up, the long-term capital allocation priorities haven't changed. They won't change. I would say, you know, just to clear the obvious one, we've committed to the dividend, and we'll continue to stay committed to that, as, you know, in the current landscape. When you think about the balanced approach between accelerated debt paydown and opportunistic share buyback, they're real challengers of each other. I think, you know, nobody that works at Gen is satisfied with the stock price today. We believe we are gonna generate more and more and more value. We're gonna look to see that in the stock price. I think right now, personal opinion, we're massively undervalued. How do you not really seriously take a look at opportunistic share buyback?
With that said, look, the cost of debt is no surprise in terms of it's nothing special for us versus anybody else out there in the debt market. The SOFR curves have skyrocketed in the last year. We didn't see this coming, for sure. At the time that we did the deal, we had really industry-best financing, and we were really, really proud of that. Now a year later, we're inching up to $700 million on an annualized cost of debt perspective. It's definitely rocked the business model in terms of just, you know, as we thought that was gonna ladder up versus where we're at today. I don't wanna cause any, you know, panic.
We are very proactive in terms of how we manage all these different levers, and that's what I would want you guys to walk away from is, first of all, we're a very, very high executing operational team. When we put out a number, the SGI ratio, since we've stood up NortonLifeLock, has been extremely high. We've been at or above the high end of our guidance every quarter that we've operated. When we say a number, when we commit to a number, when we tell you guys how we're gonna perform, you should really, in my opinion, have high confidence in that. Beyond that, within the business model, whether you look at it, the business model in of itself or how we run the business every day, we just have so many levers.
Yes, the cost of debt right now is very, very tough to swallow. You can't ignore it. We will proactively make that balance across opportunistic share buyback and accelerated debt paydown, but it's not the only thing that we can go after. We've got multiple levers to go after for growth. We are very, very clear on how efficient we wanna run the company. You guys have seen that margin accretion quarter after quarter will continue to do that. That balanced approach between as we create more and more dry powder in our margin efficiency, how much are we gating to really just try and drive that growth in revenue, which obviously drops down to the bottom line or the EPS line, you know, dollar for dollar.
It's, yeah, the conditions in the business are tougher than we expected a year ago, but we've got the team aligned on where we're trying to go, and we're in it for the long haul. It's gonna be, you know, exactly what we're going after and how we prioritize is exactly how we guide you guys. Long term, mid-single digit rate of growth. We're gonna run as lean as possible. We'll have a greedy margin. We said 60% margin plus in the core business. We're gonna get after those cost synergies. We're driving the revenue synergies, and we'll manage the cost of debt as that SOFR curve changes.
Got it. Just to put a finer point on it, I mean, if we assume sort of a consistent environment, obviously it's hard to assume that, over the next 12 months, are we saying we're committed to a dividend?
Mm-hmm.
Sounds like debt paydown, just given the cost of debt, and then opportunistic share buyback. Would it kind of be that the order of priorities?
I don't know. In terms of where our stock price is today, right? I mean, I think we're gonna see a mix of opportunistic share buyback and accelerated debt paydown. You know, somewhere in the, in the range, super high level, a third and two-thirds is where I think if you would fairly model that, I think that would be appropriate.
A, third and two-thirds
Accelerated debt paydown, two-thirds opportunistic share buyback.
Okay. Okay. I just wanna leave it open to anyone in the audience if you have any questions. Anyone? Okay, I can continue. Maybe go back to the top line. revenue synergies, Vincent, I think you talked about $200 million with Avast and Norton. half of that I wanna say was the retention improvement that you mentioned earlier. Can you comment on the other half and sort of what the early progress is there?
The second biggest one opportunity is really to move, and I mentioned it briefly too, to move from an Avast install base, about 16 million of our subscribers, to have basically core security, but nothing around the digital identity protection offering, which is the new frontier of your Cyber Safety protection. We just launched actually identity theft protection for Avast customer. 24/7 monitoring, alert restoration agents to service your needs in term of product, protecting that digital identity. Cross-selling and moving up that full Cyber Safety portfolio across the install base, taking the Avast benefit from BreachGuard and others into a combined privacy offering. Understanding the overlapping between identity and privacy, maybe combining in full identity and privacy to complete the Cyber Safety is really the next big one.
Takes a bit of time because once you've launched the product, the backend architecture, the in-app messaging, the moment of truth identification, requires an integration of our portfolio. That's why we put more revenue synergies on the longer tail, if you want, or the second part of the period versus the cost savings, 'cause we want to drive it through that in-app experience versus just marketing activities through emails or contact.
Okay. You know, one of the natural levers in the model as well, is around when you do see the subs base slow, the top of the funnel slow, there's a natural uplift in the ARPU, right? 'Cause more of the growth is coming from your.
Renewal
... existing renewal base. I think we would've seen that more apparently had it not been for some of the FX headwinds. Can you describe to us what happens when a customer does renew versus, you know, new? How what's the sort of ASP differential around that?
The dynamic, yeah. Depending on the countries and offering, it may change. Basically what you're referring to is that in our industry, an entry price or a first-year membership price is different than a renewal price. You have an uplift. On the NortonLifeLock side, it was on average a discount of about $50 for an ARPU that was $9 a month or $110 a year. Again, if you take that and try to model across, it will change because there is a mix of region products and different products have different approaches. It's roughly give you an idea, which is what you say is leading to an uplift in your ARPU in the second year.
That has to be offset with the fact that you still have, at least on NortonLifeLock, we had 15% attrition, and you compensate those too. If I can step back, top of the funnel and new customer accounts, one lever, and we're going to expand, would put marketing on the free to paid conversion on Avast and expanding to new channels, as I've discussed. The ARPU growth is from first year to renewal, also from cross-selling product. Even if you come in the first year or in the second year in a core product, you're going to identify the moment of risk you're going to have, whether we find you identity data on the dark web, or if we can identify a risk that you are exposed to an unsecure Wi-Fi or other views.
We lead you to be more aware and then willing to protect yourself against that bigger risk. We expect to grow an ARPU today, on aggregated portfolio, has come down to about $7 a month from $9 before the merger of the two companies. We believe we can return to $9 as we cross-sell and upsell and as we continue to drive innovations maybe across that line. Retention Avast and ARPU are the two primary factor of growth in a more challenging macro environment.
Got it. Got it. Maybe just last question. Oh, sorry, go ahead. Were you gonna say... Okay. Last question. 10%-15% of the sales today are coming from partner channels. Just a rough breakdown of what that looks like, any channels that you're particularly excited about?
Yeah. The history is Symantec was really OEM focused, so that's PC device, moving to direct to consumer approach about 90% and then exploring new partnerships level, telcos or financial services, online retails, and anything else like an employee benefit that where we believe a combination of our offering Cyber Safety with the core product would benefit the consumers is what we are exploring. Recently we've signed up a telco that was core security moving into the identity space, which is new, offering an identity protection through a telco. We keep pushing those boundaries. That partner channel, about 10% of our revenue, has been growing at double digit, and we expect that's going to grow in excess of that core D2C channel.
Okay, great.
Cool.
Well, Vincent Pilette, thank you so much for your time.
Thank you.
Appreciate it.
Thanks for the good time. Yeah.