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

Good afternoon, everyone. Thank you for standing by. My name is Alex, and I'll be your conference operator today. I would like to welcome everyone to the call announcing the combination of NortonLifeLock and Avast. Today's call is being recorded. [Operator Instructions] 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, Alex, and good afternoon, everyone. Thank you for joining us today. Earlier today, we announced the merger of NortonLifeLock and Avast. The details include the 2.7 announcement, press release and investor slides, all can be found on the IR website at investor.nortonlifelock.com. As a reminder, there will be a replay of this call posted on the IR website. Joining me today to discuss the merger are Vincent Pilette, NortonLifeLock's CEO; Natalie Derse, NortonLifeLock's CFO; and Ondrej Vlcek, Avast's CEO. Before I pass it to Vincent, I would like to remind everyone that the information we share today will be limited to what has already been disclosed in the 2.7 announcement and summarized in the investor deck we posted on our IR website. In addition, certain financial measures, such as operating margin, earnings per share and free cash flow are non-GAAP financial measures. A reconciliation of historical non-GAAP financial measures to U.S. GAAP financial measures is included in our recent quarterly earnings release, which is available on our IR website. We are unable to provide a reconciliation of forward-looking non-GAAP financial measures to U.S. GAAP financial measures because certain information is dependent on future events, some of which are outside of our control. Today's call contains certain forward-looking statements regarding, among other things, ours and Avast's combined business, potential financial performance and operations as a combined company and the time frame and expected benefits of the proposed merger. Such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. These 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 the presentation and the risk factors in our filings with the SEC, in particular, the annual report on Form 10-K for the fiscal year ended April 2, 2021. With that, now I will hand the call over to our CEO, Vincent.

Thank you, Mary. Welcome, and good afternoon, everyone. Thank you for joining us in such a short notice. 18 months ago, as I became the CEO of NortonLifeLock, I had the opportunity to meet with Ondrej who also had just been named the CEO of Avast 6 months earlier. Over that breakfast, we talked a lot about the evolution of a typical person's everyday life and how more and more that life was being touched by or replaced by the digital world. Today, most people's lives are indistinguishable from the digitalized, and this is driving a critical need for cyber safety to transform. Cyber safety used to mean antivirus software on new devices. But today, it has evolved to become a platform to protect and manage your privacy and identity in addition to provide core security. As Ondrej and I stayed connected and maintained regular conversations, it became very apparent that Avast and NortonLifeLock share a very similar vision and have both common values and complementary strengths. We started to envision the possibilities of combining our complementary strengths and the opportunity for us together to transform cyber safety for everyone. Today, we took the first step of that new journey in pursuit of that common vision: to protect and empower people to live their digital lives safely, or what Ondrej calls empowering digital freedom for everyone. Indeed, earlier today, NortonLifeLock and Avast reached an agreement on the terms of our recommended merger. This recommended transaction has an election feature, which provides Avast shareholders with the option to choose between a majority stock option or a majority cash option. We will let shareholders review the details of the offer in our filed documents. But our respective Boards believe that the merger has a compelling strategic and financial rationale, and they have unanimously approved and recommended this transaction. Actually, believing in this vision and the opportunity for us to achieve it together, Avast founders and directors have irrevocably agreed to support the transaction and take the majority stock option. The combined company will have dual headquarters in Prague in the Czech Republic and Tempe in Arizona. We expect that the combined company will be renamed at a later stage, with the new name reflecting our combined vision, to empower digital freedom for everyone, as well as the company's broad global prospects. From a leadership and governance perspective, we both agree, Ondrej and I will take the role of President and CEO, respectively. We agree on many things and have complementary background. Natalie will be our CFO. And finally, Pavel Baudiš, Avast's Co-Founder, and Ondrej will join our Board. This merger has the potential to deliver substantial benefits to consumers, shareholders and other stakeholders. The combined company will have over 500 million users globally and approximately $3.5 billion in revenue. The scale and strength of the cyber safety platform will drive innovation and adoption of adjacent trust-based solutions. Combining Avast's strength in privacy and NortonLifeLock's strength in identity, supported by our combined AI capabilities, will enable us to create a broad and complementary product portfolio beyond core security and towards adjacent trust-based solutions. Furthermore, the merger would broaden our geographic diversification and increase our presence in the SOHO and VSB segments. Financially, the combination also unlocks significant value creation to approximately $280 million of annual gross cost synergies and will provide reinvestment capacity for innovation, partnerships and marketing to further accelerate our growth. The transaction will enhance the financial profile of the combined company through increased scale, long-term growth, synergies and strong free cash flow generation, supported by a resilient balance sheet. As I mentioned, based on our last reported financials for both companies, we'll have scaled the top line to approximately $3.5 billion of combined revenue. We will have created an operating lever of approximately 52% in blended operating margin, that is pre-synergies, delivering approximately $1.5 billion of annual free cash flow, also pre-synergies. We will have the opportunity to empower approximately 40 million combined direct customers with our complementary product portfolios and culture of innovation. Together with Avast, we will solidify our foundation to drive high single-digit top line growth with double-digit long-term potential. One thing is for sure, people want to enjoy the advantages of a digital world without compromising their security, privacy and identity. And our sole mission is to bring that and more to everyone. And with that, let me pass it to Ondrej to offer his views on our merger and the opportunity in front of us to transform cyber safety. Ondrej?

Thank you, Vincent, and hello, everyone, and thank you for tuning in. It's a privilege and total pleasure to be here side-by-side with NortonLifeLock today. And what a unique opportunity it is to combine our complementary strength to create a new, industry-leading, global consumer cyber safety business. With this combination, I have no doubt that we have the right foundation to do just that. We're going to make use of our established brands, our go-to-market reach and complementary strategies, our technical expertise and the innovation capabilities of our 2 companies. On top of that, it is exciting to bring together 2 strong and highly experienced consumer-focused management teams to tackle the increasing problem of cyber criminality. And the global strength of the company will also be supported by the expected dual headquarters in Prague and Tempe, Arizona. Avast directors, including our 2 founders, have irrevocably agreed to support the transaction and go with the majority stock option. On the completion of the transaction, Avast shareholders are expected to own between approximately 14% and 26% of the combined company, depending on Avast shareholder elections. Let me also say a few words about the underlying driver of the cyber safety segment to address all aspects of the cyber criminality problem. The increased dependence on technology, now further accelerated during the global pandemic, has fueled the increase of digital activities that people do online. At the same time, there is no question that the volume of cyber threat is increasing. Attacks are more complex and sophisticated than ever before, and new privacy and identity related challenges are emerging. We believe that we can tackle this dark problem with a differentiated approach and a technology-based solution. From a product and technology perspective, this combination is really powerful. Out of the box, together, we'll have greater scale in threat visibility, a geographically distributed cloud data platform and advanced AI-based automation and classification capabilities. And thanks to that and the incredible talent of our combined team, we will be able to offer a market-leading suite of solutions to millions of individuals and families globally. I'm also energized to note that the combination provides us with the opportunity and responsibility to support over 500 million users, including approximately 40 million direct customers. This is well aligned with Avast's vision to empower digital citizens. And together with NortonLifeLock, both companies are accelerating the shift towards a user-centric approach to protecting digital freedom for everyone. Thank you for allowing me to share my thoughts around this merger, and I'll now pass the call to Natalie.

Thank you, Ondrej, and hello to everyone. As you've heard from both Vincent and Ondrej, there's a compelling strategic rationale behind this combination. First, let me talk to you about the cost synergies and revenue opportunities. We expect to unlock significant cost synergies of approximately $280 million in annual gross spend pretax, which represents approximately 15% to 20% of combined adjusted spend, including cost of sales and OpEx. As you can expect from us, we have thoroughly analyzed the overlaps and possibility to drive efficiencies. The run rate synergies are expected to be fully realized by the end of the second year following the completion of the merger. We expect to realize approximately 60% of the run rate cost savings by the end of the first full year following completion of the merger and 100% by the end of the second full year following completion. Through these synergies, we expect to free up new investment capacity to deploy into innovation, partnerships and marketing initiatives to help accelerate long-term sustainable growth. We have reaffirmed our long-term objective of $3 EPS previously presented during our Investor Day back in May this year. At the time, we intended that M&A would be an accelerator, and so we feel even more positive today about achieving that objective. And this deal will enable us to get there faster than we could otherwise. We believe that the combination of NortonLifeLock and Avast solidifies the foundation for driving long-term double-digit revenue growth. As Vincent said earlier, the combined company is approximately $3.5 billion of revenue on an aggregated basis with approximately 52% in blended operating margin before any synergies. This acquisition is expected to generate double-digit EPS accretion within the first full year following completion. Moving on to financing. The transaction is expected to be financed with cash and $5.35 billion of new permanent debt facilities comprised of a combination of Term Loan A and Term Loan B at a blended rate of approximately 2%. Other existing debt of NortonLifeLock with upcoming maturities will be refinanced prior to the closing of this transaction, and the revolving credit facility is expected to be upsized to $1.5 billion, but to be undrawn at close. Now let me spend a few minutes specifically on capital allocation. Our capital allocation strategy is growth focused, leveraging the strong cash flow generation while retaining a resilient balance sheet and maximizing value to shareholders. The combined company will generate annual free cash flow of approximately $1.5 billion pre-synergies on an aggregated basis, which is expected to grow in line with the business. We plan to return 100% of free cash flow, excluding M&A, to shareholders over the long term. In this context, we plan to deploy capital through regular dividends, share buybacks and tuck-in acquisitions while operating at about 2 to 3x net leverage ratio. We intend to maintain the current NortonLifeLock quarterly dividend of $0.125 per share. At the same time, we are targeting a net leverage of 3.5x post close. To the extent that Avast shareholders elect the majority stock option, we intend, subject to market conditions and other capital requirements, to implement an incremental share buyback program over time following completion of the merger which, if implemented, would be up to approximately $3.5 billion to optimize our capital structure. Given the expected strong cash flow generation from our business, we plan to rapidly delever to operate at net leverage of approximately 2 to 3x, which is in line with our long-term capital allocation strategy. We look forward to building on this growth momentum with our scalable foundation. We're excited about the tremendous opportunity ahead. Thank you for your time today, and I will now turn the call back to the operator to take your questions. Operator?

[Operator Instructions] We have our first question coming from the line of Hamza Fodderwala from Morgan Stanley.

Congrats on the transaction announcement. Vincent, I'm curious if you could maybe give a little bit more detail on some of the top line synergies that you see coming from this transaction. Obviously, with Norton traditionally being sort of a more premium offering and sort of the more premium base of Avast, what are some of the opportunities you see there? And then for my follow-up, for Ondrej, I'm just curious what made you ultimately decide to merge with Norton? And kind of what are the opportunities that you see for the combined asset as well?

Great. Thanks for your question. I'll take this first one, and then Ondrej will answer the second one. And since you're my first question, allow me to [ brawl ] it a little bit. Obviously, growth and top line and making cyber safety available to everyone is our #1 mission. And so it's a very important question. Before I answer the top line, let me be very clear for all investors. We are very disciplined operators. And Avast has the same reputation. So when we came together, we obviously had the same mindset in terms of operational discipline. We know that to make a merger of this size a success, we have to be very, very disciplined in our plan. We did base the business case, the base business case, on current momentum of the businesses, respective businesses, and then worked on the cost synergies. And we've identified about $280 million of cost synergies. That's gross synergies. And we also said that we will reinvest a portion of to synergies. We did not base the base case and the financial transaction on revenue synergies, which we will go after as our number one objective but will be upside to our model. From an overall perspective, on growth, it's important to recognize that cyber safety is transforming. It's not anymore your core security of your devices and, obviously, identity protection, digital identities' protection, so it's growing even one -- more than 1 per consumer. Privacy, privacy concerns, privacy solutions for consumers are very important. And our intent with this merger is to provide more value, more innovation to all consumers globally. So that's our mission and our goal. There will be more short-term cross-sell, upsell, providing value to consumers, and there will be long-term ones. In the short term, the obvious one. We, as you know, have the LifeLock brand and LifeLock solutions that's very well recognized in the U.S. When we acquired Avira, we started to develop a more Norton identity international. Both LifeLock in the U.S. and Norton identity international have started to cross-sell in the Avira environment. We're going to take these learnings now and provide that value to the consumers and the customers of Avast today. The second one is privacy. And BreachGuard and Avast has been focusing really about enabling consumers to control the data and manage their privacy, giving them tools for that. It was an important topic for us, but we are behind Avast's portfolio from that respect. And so taking Avast's technology and products and offering that to the Norton consumers will be very important, whether that is a stand-alone product or merging the products into what will become more and more a platform, a cybersecurity -- a cyber safety platform that consumers choose to opt in and in which we can provide more value. Another, still in the short term and midterm range, is the gig economy where, in VSB segment, very small businesses, you have very much behaviors of consumer type, if you want. Avast is already focused on that segment. We can expand our overall now combined portfolio of security, identity and privacy in that segment, and we'll go after that as well. A fourth one would be by country. We saw a lot of complementarity in countries: France, Italy, other countries where Avast is very strong. We obviously have a strong foothold in Germany. In Latin America, Avast is very strong. We are not at all. And so able to reach out on a global basis to reach the maximum number of consumers is very important. So those are the midterm. And then I'll mention the long-term one that we'll go after, and it's really requiring incremental investment. We're not ready to quantify those today. But as we develop our plan, get closer to close the transaction, we're obviously going to refine those plans in 3 areas. We can continue to expand partnerships, go after all different ways, B2B2C or direct, to reach a maximum number of customers. The second one is innovation. It's obvious to you when you read Ondrej's background, he's very strong on technology and innovation. I'm more of a business operator. Together, we're going to have a really rounded agenda of developing innovation, increasing the cadence of value creation for consumers. And the third one of long-term would be about, what I would call, marketing. We've seen already, early on when we acquired Avira, which was a smaller freemium solution mainly focused on that, the German-speaking country in Europe, we applied some of the marketing capabilities, budget, analytics onto that freemium base, and so an increase in the conversion rates. And so we're going to continue to identify areas where we can drive more freemium penetration and then, later on, more value by increasing the conversion rates. So those are the overall areas that, at this point in time, we have discussed between Ondrej and I. And Ondrej, I'll pass it to you for the second question.

Well, thank you, Vincent. That was a really, really exhaustive answer you just gave us. The interesting thing is that, as we spoke, Vincent and I, it was interesting to see that we share a common vision. And really, the vision is about transforming this space, this entire space, where we see rapid changes, intrepid kind of changing opportunities ahead of us. First of all, it would be the competitive landscape. Vincent spoke about cyber safety no longer being about antivirus and the competitive landscape. It's now much, much broader in many regards. And we see real interesting innovations when it comes to security, privacy, identity coming from all directions, including the big tech. And making sure that our companies stay relevant and are successful in this ever-evolving space is one of the key things here. Now the vision that we share and that we want to execute on is really interesting in that it does go beyond the existing solutions. And I'm sure we'll get a chance to talk much more about that as we get closer to the actual closing of this deal. But what I can say is that what this deal does, and we are all hopeful will do, is a rapid acceleration on our journey to transforming this space together.

Your next question comes from the line of Saket Kalia from Barclays.

Congrats to both of your respective companies on this proposed merger.

Yes. Thank you.

Vincent, maybe for you, to start. Clearly, the combined entity will be a leader in the space. But I'm curious, how do you think about this -- how do you think this potentially changes the competitive dynamic versus other competitors that focus in the space or other folks that have a presence in this space, like Microsoft? Any views on sort of the market after this, I think, very powerful combination? I'm curious how you folks think about that.

No, absolutely. And I know you understand the space very well. But if you're not very close to the space, many times, we get a misconstrued understanding around 8 antivirus and you have only 2 or 3 players. The reality is cyber security has started already to evolve a few years ago with the emergence of the digital lives. Obviously, it took an even stronger step function over the last 2 years. And with that, the intensity in the competitive environment, the innovation, the money flowing in, moving from a traditional AV into a core security, into identity protection, into privacy has been very dynamic. And I think this combination will offer a bigger, broader IP and R&D capabilities to go and create a more efficient cyber safety protection, well-rounded. We call it Norton 360. 360, an important number in that for all consumers. And I think we'll be better equipped as we bring the strength of both companies here together to deliver more value to consumers. As you know, Microsoft is really the leader in that antivirus functionality, I would call it, today, not a product anymore. And then you have a lot of innovative, small companies that bring new solutions. The importance of technology will be very important. And I know Ondrej has invested a lot in the AI capabilities. And I think technology innovation, coupled with our go-to-market and marketing capabilities, will be the way to compete in this much more dynamic market than people may perceive today.

That makes a ton of sense. Natalie, if I may, for you. Obviously, still a ton to do here between now and the close of the deal. And I think you touched on this a little bit during the prepared remarks, but I'd love to flesh it out a little bit. Can you just remind us how you think about sort of maximum leverage in the business and how big that maximum cash component might be here sort of given the range of scenarios? Does that make sense?

Yes. Thanks for the question. We said it in the script, but just to reiterate or to flesh it out, to your point, we're targeting our leverage at the time of close to be approximately 3.5x. So of course, given the structure of the deal, the shareholders will still need to elect between the majority cash offer and the majority stock offer. If the majority of the shareholders elect the majority stock offer, then we're going to move forward with a buyback. And so regardless of the mix, right, of course, we've looked at the bookends and then every mix in between, regardless of how that mix shakes out post election, we're targeting that 3.5x. And then to your second question in terms of the max cash. So again, if you look at the bookends, and let's just assume, if you did the math on the cash offer where it's a 90% cash, 10% stock, excluding the founders, which we know are going to take the majority stock offer and just look at if everyone else took the cash offer, we'd be really using approximately $6 billion. But again, regardless of the bookends, we're going to manage that mix to get back to about approximately 3.5x.

Got it. Got it. If I could sneak in one other one here as well. Maybe relatedly, as we're talking about leverage, Natalie, can you just maybe talk about sort of a delevering sort of framework as you think about those range of scenarios?

Yes. Sure. I think you've heard us say a couple of times now that we stay committed to maintaining over the long-term in our capital allocation structure around 2 to 3x. And the delevering that we're talking about, honestly, from a NortonLifeLock perspective, you're familiar with what strong cash flow generators we are. Avast is too. Combined, we're going to generate approximately $1.5 billion. So if you just flush that through, that's going to be the main driver, the main component of the delevering that we expect over the long term.