Gen Digital Inc. (GEN) Earnings Call Transcript & Summary

All right. Thanks, everybody, for joining us for another session here at the Citi 2020 Virtual Tech Conference. I'm Walter Pritchard [indiscernible] Citi. Happy to have with us the team from NortonLifeLock. We have Vincent Pilette, who's the CEO; and Natalie Derse, who is the CFO. I was going to go through some questions that I have prepared. And Soohwan Kim, the Head of IR, is on the line as well. I'm going to go through some questions that I had prepared. And you'll notice in your conference interface on the left-hand side, there is a tab that says questions. And if you want to send us any questions through that, you can do that, and I will do my best to incorporate that into the discussion. So again, thanks both of you for joining us. Appreciate it very much.

Yes. Hey, Walter.

Hey. All right. So I guess, Vincent, maybe we could start. You joined Symantec, sort of, proper as the CFO. And then very quickly, the company went through a process to separate off the assets and you've gone through much of that process. Could you talk about sort of where we are today? What that separation has enabled you to do as a company? And how clean are things at this point? Are you able to sort of operate the way you want? Or is there still some vestiges of what you've done with the separation to be done here before you can kind of get to where you want to be?

Yes, for sure, Walter. Allow me to go back a little bit. First of all, I joined Symantec in May 2019, and it was definitely a full company and went through the full process of being approached by Broadcom to buy our Enterprise business as an asset sale. So the interim CEO of the time, Rick Hill and myself, went to the assessment of the assets we had on hand and how those 2 divisions, Enterprise, Security Enterprise and the Consumer Security division of where and how they were positioned in the market versus competition. And while everybody was actually advising to sell the Consumer Security business because it was cash flow rich, stable business and try to fix the Enterprise, selling the Enterprise for $11 billion, more than the discounted value of any turnaround plan we had seen so far, was a great opportunity. And looking back, analyzing the Consumer business, we realized that when you talk about security, most of the investors, the analysts and people in the industry think about enterprise security. But on the consumer space, there were very few companies focused specifically on protecting consumers from cybercrimes. And my predecessor in the job, Greg Clark, did a brilliant move by buying LifeLock and merging full consumer, the Norton division, Consumer Security with LifeLock Identity Protection to create a vision around cybersafety for consumer. And the hypothesis was that more and more of your consumer lives will be lived online. And that security for consumer came from initially 15 years ago, very device-centric. And as we bought LifeLock, we became user-centric and merging both security and identity protection. And the same way that we saw an explosion of devices, we've seen an explosion of digital identities, supporting commercial and other activities moving online and cybercriminals adapting to that new environment. The team built Norton 360 as a platform, kind of an offering for membership, giving you the right to have cyber peace of mind, if you want, fully protected by -- or from cybercriminals with Norton 360, and that was the vision. And we realized that, that was not really well understood in the market. It was well ahead of where the competition was. But the division was really managed as a profit maximization business. So when we sold the Enterprise business, the first order of our priorities for the management team was twofold. One was to eliminate all stranded costs from the asset purchase from Broadcom, so basically taking a division and putting it as a stand-alone public company able to support itself. And the second one was to put marketing investment behind the rollout of Norton 360. We're now 3 quarters later, as you know, Walter, we are fully done with the elimination of the stranded costs. At the last earnings call in July, we said that 95% at the end of June were eliminated. We also said during earnings that in August, we would write off the last ERP, and after which we would be fully done and we are completing that process. We also invested more in marketing. We said we would return to a low single-digit growth rate after transition and a mid-single-digit growth rate in the long-term model. And so far, we've delivered 3 quarters of growth at around 4%, turned a declining customer count to what I would call a positive stabilization of customer count, which means slightly growing. And we're now all marching towards the long-term vision, which is building that cybersafety to protect and enable consumer to live the digital life free from cybercriminals.

Got it. Great. And so as we look forward, I think with a lot of that complexity behind the company, it's a cleaner story, how should we look at the sort of drivers of growth for the business? Albeit your targets for growth are modest, mid-single digit, but how should we think about the drivers of that growth? Maybe you could break those out for us? And then I had a follow-up on what that growth rate could be.

Yes. Walter, I love that you said that mid-single-digit is a modest growth rate. 8 months ago, when we said we're going to grow low single digit, people took offense and nobody believed us. And now we say, okay, you would only see mid-single digit. I think we have to build the long-term potential, frankly, would be 7.5 billion individuals that should and should have cybersafety. So the potential is vast. But we need to build to get there. In the long run, at the end of the day, in the long run, we're a product company. It will be about product innovation. Cybersafety is a broad umbrella. You still have the majority of the folks, whether it's an IDC or Gartner investor analyst that we separate a security pillar, an identity pillar, not sure it's storing define was that there is a privacy peer, privacy, maybe it's its own stand-alone pillar or is the next frontier of security, one can discuss. There is the connected home and family that can play into that as well. And so when we define cybersafety or protection and enablement of a digital life free from cybercriminals, the number of applications is vast. I can give you, today, 10 applications that will be exactly relevant for our portfolio, but that we don't have yet. But if I have them tomorrow, you would say it makes total sense. So that's the long-term potential investment organically or inorganically to build up that portfolio, that's absolutely where we're going. When you bring it back more to today, the rollout of Norton 360. Today, we have slightly over 40% of installed base on Norton 360. I think the ability to move more to that is an important one as a vector of growth. The continuous investment in the user experience, you should consume cybersafety with the same simplicity than connecting to your Netflix and having streamlined opportunities that is still a little bit more complicated. So streamlining that overall portfolio is one membership and you have all of your environment protected. Investing in marketing to drive this new message and expanding that marketing from U.S.-centric to international-centric from traditional communications to new form of communications are all of the operational growth driver that we are working on.

Got it. And Natalie, to bring you into the conversation here, I think one of the things we've heard the company talk a lot about, and Vince already alluded to it, was on the marketing spend that the -- just the investments in the business, generally, that this was a relatively starved business a year plus ago, and you've attempted to move that in the right direction. What have been the investments on the marketing side that have been the highest return so far? And how do you think about that, the sort of appropriate level of investment given where the past is and where the future could go?

Yes. Thanks for the questions. So yes, you got it right. In terms of -- approximately last year, the -- Vincent and the rest of the management team decided to create the capacity to invest. It wasn't 0 to the annualized 300, it was more so, a bit of a lift in terms of the existing marketing. The business was relatively starved from a marketing perspective when we were still together with the Enterprise side of the house. So it was the right thing to do. It was the right time to really take a look at how do we fuel and how do we fund resources for growth. So at the time, really set the expectations, set the bar for approximately $300 million on an annualized basis. What we've done with the fund so far, I would just generally categorize as we've started to diversify and so I think it's no news. It's no surprise that, historically, we've been pretty heavy on more traditional forms of media such as TV, radio. We're not completely moving away from those. I would say we're diversifying into more of the online space, the performance media, the digital media space, not only for international and more global diversification and expansion also demographics, right? We want to make sure that we are really allocating those resources as marketing resources to really test new markets, test new demographics, see a couple of kind of responses we're getting from a traffic and conversion perspective. I would say it's relatively too early to tell to say which -- do we have a winner and which one is the front-runner in terms of the specific channel of media, just know that we are absolutely pushing diversification within those resources. For sure, we've got all of the normal marketing ROI/payback/COV metrics on our radar. And we're assessing how we get not only efficiencies within that marketing spend, but how do we get the efficiencies across our cost structure so that we can again turn around and just continuously fuel that marketing funds.

And how do you think about the different drivers for either one of you or maybe both of you, I mean to some degree, this is a very simple business. You have -- Vincent, you mentioned 7.5 billion people on earth, and there's a user count, and then there's a price. And this isn't enterprise sales with some complexity there. Can you talk about sort of how we should think about the sort of user opportunity? And then you've talked about the cross-sell and the 40% of the base on Norton 360? And in the past, there's been price increases in this market and so forth. But how should we think just sort of loosely about those 2 sort of vectors of growth, the units and the price side?

I can take a first crack. So let's just be very clear. Yes, you're right. It's a much simpler set of levers. At the end of the day, our long-term success will be based on building up the portfolio that offer a great user experience. And from a measured fee, you can have cybersafety or protection of your digital lives. There's a lot of complexity in moving customers that had a product that's in their back end. And if they don't hear from the product means it's good, if they hear from the product that's something bad to a positive experience, even in cybersafety, there's a lot of complexity to ensure that in a very simplistic way, you can have all of your environment being safe. There's some complexity into enabling from 1 device to multiple device to 1 identity to multiple identities to an overlap of physical and digital identities and protecting that. And this is where our R&D investments, our 1,000 engineers, our experience, give us the right to play and to think about the long term, creating a lot of value. Now when you come back to short term, we said it pretty clearly. If our objective #1 is to grow bookings, i.e., revenue, right, so to grow revenue, our #2 metric's, when you do some trade-off, is to grow customer count and is to bring more customers to experience cybersafety. As we continue to improve the experience and build up the new functionality, that give us a chance then to really retain them and do things like that. So while we have multiple levers, I would say, total revenue growth driven by customer count growth is our priority. Now that doesn't mean that we're going to forget about retention or forget about ARPU, the revenue per user, but even if I bring most customers and the first year retention is lower than the 85%, which is very high that we have today or if I bring a first year customer at a lower price at a normal renewal price, that may put pressure on retention and on ARPU on an aggregated level, and we're okay with that because the priority is total revenue growth driven by more customer coming and experiencing cybersafety.

Okay. Got it. Natalie, maybe on your end, from this perspective, from a metrics perspective, I think the company has sort of evolved out of being split out or taken out of Symantec, and so there's a set of metrics there. Vincent, I think you've had some influence on that. But how do you think about sort of the way to communicate the growth story to investors, a la financial disclosure and so forth, as you are taking over in the CFO role.

Yes. I guess what I would say first right out of the gate is, I'm known for -- I'm very, very hungry for data. And I'm pleasantly surprised as I come in, like, this is a very data-driven data, lots of data available. So it's -- and folks, the leadership team is just very hungry to have their data at hand, really understand their metrics, et cetera. So there's a lot to work with here. What I would say is we -- but we won't be a company that has a set of metrics on a spread sheet and us just manage of off a spreadsheet. We are very, very much driving the behavior, driving the rigor, driving the focus on those input metrics. And so to the extent that we can really spend most of our time analyzing, projecting and honestly, reallocating resources to really a well-rounded set of input metrics. That's really where I'm going to be trying to drive the company. Make no mistake, like every other CFO, we have a ton of metrics. We've got a ton of information that we're managing in the back end. But really, what I'm trying to push the team to do, especially in the sales and marketing functions, is really focus on those input metrics, not necessarily the output metrics like retention or like the dollar-driven metrics. We really want the focus on the health. We want them focused on the top of the funnel. We want them focused on a very, very clear and crisp value proposition message to our customers in a diversified way.

Got it. Okay. That makes sense. And then, I guess, Vincent, from a product innovation perspective, I'd imagine what's gone with the territory that you inherited was it was business was somewhat starved from a marketing perspective. How do you think about just the culture of the engineering organization, the ability to build things internally and what the pipeline looks like there as well as you already alluded to, organic and inorganic innovation and how we might expect you to use M&A to continue to innovate on the product side?

Yes. So first of all, I have to tell you, we have a long history of building things in that consumer business. They created the AV market and we still have some of those architects that have a ton of experience. I think the R&D quality we have is extremely high and we spread across 3 continents, and so I'm really pleased by that. They did spend over the last 2 years between 2018 and 2020, really working on building that integrated platform, Norton 360. And it was the first platform, we've seen some competitors doing some bundling and other things. But frankly, doesn't have the same architecture concept, if you want, that now enables us when the functionality become fully commoditized, if you want, to move it to a lower level of membership or offer it for free as part of a platform that you pay to which you bring new functionalities. And I think that's a great vision, and a first step with the launch of Norton 360. They were really consumed by that. As we were able to roll it out and launch it and we -- with the traction we have, we freed up some bandwidth. And now it's all about shifting the culture and the mindset to take a lot to more risk, be a little bit more consumer driven. And as you know, enterprise versus consumer, very 2 different software development processes and quality level, and you do a lot more trial and error on the consumer side because if you don't work, you just drop the functionality and you haven't jeopardized an entire company's network, as an example. So the velocity of that R&D is improving. We are hiring people, we've hired people in Ireland, creating a new lab for prototyping. We are definitely building up momentum on that aspect of the house. Now it takes time to get there [Audio Gap] Team and both product people in or indeed a functionality or a product set. So more work to do, but good momentum on that side of the house.

And so as we sort of extend that into maybe what investors should be watching for, Vince, you mentioned a handful of markets. You've talked about sort of home safety, you talked about privacy. What are some of the sort of adjacent opportunities that you think investors should be focused on that might be -- might benefit from the products of that innovation internally?

There's plenty of opportunities. The great news is, it's not like we're suffering, but saying, what do we do next? I still have so many investors saying, why the AV market is a mature market. And at one point in time, Microsoft will have eaten all of it. And if you go back to your script in 2005, it was the same comment. But you still have those comments. And our view is we're not spending our time there. We're really spending our time on all of the new functionalities that could make sense and could be relevant under cybersafety umbrella. I don't want to go into too specific, but any ideas that come either from our customers, from our product team, from the market, we put it into our funnel of product innovations. All of which came a few things like the home title protection, that was customer-driven. A gaming edition of our Norton 360, that was internally driven by our product management person that is really passionate by gaming. And then viewing that, actually, the digital identities in the e-gaming space is exploding and the overall umbrella of protecting your virtual asset in the e-gaming environment could be an opportunity as well. And like this, we continue to build up. That your kids get a cell phone now at 10 years old and all get connected, expose them to cyber, if it's not crime, it's definitely cyber challenges that you don't want them to be exposed to and/or protect them from. And that also brings a whole set of new functionalities we are teeing up and working on. To your question you had asked before was it organic or inorganically. We don't start that way, right? We really look at what are the adjacencies that do make sense study in 3 years or in the future horizon. And then we decide, okay, do we have the capability in-house? Or do we have to hire people? Or is there someone that has already developed either a prototype, a product or a business around that functionality, but that's how we approach it. And at the end of the day, if there is the opportunity to do kind of a functionality acquisitions, it will be a financial trader discussion of doing it organically in time to market versus buying it.

Got it. And you mentioned it from a competitive perspective with Microsoft. I think with Windows 10, they've more closely brought the protection functionality for the Windows operating system into Windows 10. You have a number of freemium sort of competitors in the market. And you have some peers that have pursued mostly paid for. How do you think about the changes in the competitive landscape? The ones that are favorable for you as well as ones that are maybe things you're having to contend with more so than in the past?

But I think it's all about -- it starts with a vision. And it's not a vision that will provide the best AV for any devices, it's really a vision that is user-centric and will provide the best cybersafety for all of your operations that you conduct online and the recent events in the world have just justified that high priorities is more that's all of your activities from schooling to shopping to learning are happening online. And it's a race towards filling up the portfolio towards that vision versus trying to really spend time to discuss what's happening at the bottom of your market. We have to assume that, over time, any one of our functionalities in that portfolio can become commoditized or integrated or offered for free, but the integration of that overall cybersafety enabled us to continue to fill the funnel with new innovative functionalities, while others become more commoditized. So that's our first comment. Today, we're not selling a simple AV competing with either Defender in Microsoft or a freemium from any other competitors. The first level of membership is AV, but it's also smart firewall, it's about password managers, and we can continue to add functionality at that basic level and then move up on the level of management. And that's the way we compete. That's the way we see the market and how we drive it.

Got it. Great. Now returning to the conversation we had about marketing, I think one of the things we've been trying to figure out recently is you turned on the marketing sort of 3 quarters ago, I think Vincent has an anecdote that he's talked about at one point of the team almost didn't believe him when he gave them more marketing budget because it had usually been pulled back. But how do we think about the sort of time frame that, that marketing has been effective? And sort of potentially incremental effectiveness to come from the spend that you've already had? Or you've already put in the market versus additional spend that you may put in on the marketing side?

Do you want to take it?

Yes. So I think that, yes, it is a behavior shift, right? And I think that we definitely have the team that is responsible for that spend. I've talked to you already about the diversification. I already talked to you about we will be very, very diligent, making sure that we understand what the paybacks and the returns are for that investment. But we will do it through a growth lens or a growth mindset. We want to invest for growth. And so we want to make sure that the teams understand that. I mean when you put in marketing just for putting in marketing's sake, and you expect to be very, very specific or very stringent or very short-term in nature in terms of those returns, the teams can make different decisions, right? And so we've been very, very clear with the team that, of course, we have a combination of short-, medium- and long-term goals, and we'll continue to fuel and fund the marketing. I just -- I think -- I don't know if you have -- if you would answer it differently, but...

No, no. I'm sorry, so look, in marketing, I would say, we're far from being fully efficient. We're going to anniversary here in Q3 when we started to really ramp up marketing. But in terms of tweaking and adjusting our marketing spend, we still have a long way to go. How much more productive I can get out of it? I'm not sure. I wouldn't go into the forecasting game here. But I can tell you from our daily review and yesterday, Natalie and I, we had a 2-hour review on that marketing spend. We still are missing plenty of knobs, if you want, that we can turn. Secondly, it comes also with now -- initially, it was Norton 360 with marketing. It comes with new product and product functionality. We just launched a gaming edition in July. In July, we also hired Krista Todd as our Head of Marketing, coming from Logitech and have a long experience, as you know, in e-gaming and she's like, oh my God, you guys, the beginning only of what you can do, bring gamer influencer, communicate this, go to these shows. And so tweaking our, I wouldn't call it communication rates, but it's marketing, communication efforts to reach the right consumer based on how the product evolves and/or new functionality comes in, still has to -- has a long way to go compared to where we could be.