Jason Starr:

Thank you, Joel. Good afternoon, everyone. Welcome to Gen's Fourth Quarter and Fiscal Year 2024 Earnings Call. Joining me today are Vincent Pilette, CEO; and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the Investor Relations website, along with our 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 reconciliation of non-GAAP to GAAP measures is included in our press release and earnings presentation, both of which are available on our website at investor.gendigital.com. We encourage investors to monitor this website as we routinely post investor-oriented information such as news and events and financial filings. Today's call contains statements regarding our business, financial performance and operations, including the impact of our business and industry that may be considered forward-looking statements and such statements of 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 as of today's date, May 9, 2024. We undertake no obligation to update these statements as a result of new information or future events. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC, and in particular, our most recent reports on Form 10-K and Form 10-Q. And now I'll turn the call over to Vincent.

Natalie Derse:

Thank you, Vincent, and hello, everyone. For today's call, I will walk through our full year fiscal 2024, followed by our Q4 results and wrap up with our outlook for Q1 and full year fiscal 2025. I will focus on non-GAAP financials and year-over-year growth rates, unless otherwise stated. Please recall that our acquisition of Avast closed in September fiscal 2023 near the end of our second quarter and therefore, I will break out select financial metrics for relevant annual comparisons throughout today's call. Fiscal year 2024 was a pivotal year for Gen as we integrated Avast, returned our direct customer base to growth and delivered our fifth straight year of organic growth. We finished the year with over $3.8 billion in total revenue, growing 14% in USD and 15% in content currency. When including Avast historical results, cybersafety revenue and bookings increased 3% year-over-year in constant currency with broad-based growth across our and across geographic regions. We delivered nearly $300 million of annual cost synergies within 18 months of the Avast acquisition, $20 million more than our original plan, and we used less cash than previously planned to achieve this. As a result, fiscal 2024 operating income was over $2.2 billion, with full year operating margin of 58% and exiting the year at 59%. This represents seven full points of margin expansion since the close of the transaction, net of partial reinvestment. Driving continued top line growth, our operating discipline and our strong capital allocation strategy enabled us to deliver $1.96 in full year EPS, in line with our guidance and up 8% from the prior year and up 11% in constant currency. We've also made significant progress reducing our net leverage to 3.4 times, down from 3.9 times at the time of the merger. Now with the integration largely behind us, we look forward to the next chapter driving our strategic priorities into fiscal 2025. Turning to Q4 performance. Q4 reflects our 19th consecutive quarter of growth with financial results in line with our guidance. Q4 bookings were a record $1.044 billion, exceeding $1 billion for the second consecutive quarter, growing 2% in USD, and 3% in constant currency. Cyber safety bookings also grew 3% year-over-year in constant currency. Total Q4 revenue was $967 million, up 2% in USD and up 3% in constant currency. Cybersafety revenue was also increased 3% year-over-year in constant currency. Our revenue growth is driven primarily by the US market, up 3% as we scale the adoption of our privacy and performance offerings through cross-sell and increased our membership revenue. particularly in our higher-tier Norton 360 with LifeLock memberships. In our more developed international markets, growth was mid- to high single digits in constant currency as we expanded our identity partnerships. And we continue to drive double-digit growth in our emerging markets as we capitalize on the growing safety awareness for a mobile-first population. With varying degrees of market maturity, the growth levers will be different, and we will continue to execute on all levers at our disposal to drive broad-based growth in a profitable manner. Direct revenue was $847 million, up 3% in constant currency. We are making progress across our key performance metrics. Our installed base is healthier compared to prior year, growing in both scale and in value as we execute all components of our growth strategy. Let me share some specifics. A key ingredient to our growth strategy is driving new customer acquisition. And in Q4, we have expanded our customer base for the third consecutive quarter, increasing to $39.1 million up over 230,000 customers sequentially and over $900,000 year-over-year. To help drive this growth, we continue to invest in diverse mix of market then to reach new audiences, generate more traffic to our sites while dynamically optimizing the channel performance. We are acquiring positive new adds at healthy ROIs across all brands, fueling our renewable base. And our growth is coming through our diverse set of acquisition channels, particularly international growth markets and mobile devices. On monetization, our monthly direct ARPU was US$7.24, up $0.03 versus last quarter and in line with last year's results. But note, as reported, this result absorbed $0.06 of negative FX headwinds given the dollars rise over the year, particularly against the Japanese yen, and we expect these headwinds to continue impacting reported ARPU comparisons through the next fiscal year. With that said, let me provide additional commentary on the operational drivers of our expanding ARPU. In Q4, the ARPU of our online customers, which is the vast majority of our customer base is up on a year-over-year and a quarter-over-quarter basis across Norton, LifeLock and Avast brands. This growth reflects the synergistic efforts and learnings from the Avast cross-sell model brought into the Norton and LifeLock go-to-market efforts, with cross-sell penetration nearing 20%, up approximately 5 points over the past two quarters. In addition, the ARPU on mobile customers was stable on both a year-over-year and a quarter-over-quarter basis with measured healthy ROI, another proof point of our ability to balance customer acquisition costs, ARPU, and retention rate across the channels. Demand for our increased cyber is growing as threats evolve and we are well-positioned with a broad portfolio of cross-sell products. Across our customer cohorts, we will continue to drive expansion through their journey, increasing value through additional product offerings suited for their Cyber Safety needs or upselling to a higher tier membership, offering more comprehensive protection for their growing digital footprint. This increase in engagement drives retention. In Q4, our overall customer retention rate increased to over 77%, improving by over 1 point year-over-year and improving by 2.5 points since the merger. A key component to our 5 for 5 growth strategy is driving retention rates to 80% over the next few years, and we have made progress towards that target in our first year operating as Gen with every brand in our portfolio, increasing retention rates year-over-year and quarter-over-quarter. As we look forward, we expect to drive additional uplift leveraging our strong trusted brands, while creating more personalized customer experiences through their journey. And although we already have industry-leading retention rates today, we have many opportunities to drive higher customer loyalty and increase lifetime value through simplification, optimization, and personalization. And we have the expertise across our team and the technology to ensure we are providing the experience our customers want. Turning to our partner business. Partner revenue was $105 million in Q4, up 5% year-over-year. We have a record pipeline and employee benefits. We continue to build strategic partnerships with financial services and insurance providers, and we have seen strong traction already in our newly launched Norton Private Browser. Scaling our partner business to $0.5 billion in annual revenue is a key component to achieving our overall growth plan. We are proud of the traction we're making across multiple partner channels and we look forward to sharing more progress in the coming quarters. Rounding out our revenue, our legacy business lines contributed $15 million in the quarter, down from $17 million in prior year. As a reminder, we expect our legacy revenue to continue to decline double-digits year-over-year, and represent less than 2% of our total revenue. Turning to profitability, Q4 operating income was $569 million, up 5% year-over-year, translating to an operating margin of 59%. Since the close of the merger, we have reduced our overall operating expense profile from 30% to 27.5% of revenue, while maintaining gross margins above 86%. We've right-sized our organization to under 3,400 full-time employees, down from approximately 4,500 at the time of the merger, representing productivity of over $1 million of revenue per employee. You will see us continue to invest in marketing as well as product and technology to reach new and existing customers, to bolster our product portfolio with differentiated solutions, to amplify our international presence, especially in identity and privacy, and expand into trust-based adjacencies that will touch more parts of the consumers' digital life. These investments feel progress in each of our growth levers and strengthen our position to accelerate revenue growth to mid single digits over the next three years. We will continue to operate our G&A functions at approximately 3% of revenue, reinvesting any further productivity into levers for growth. Q4 net income was $336 million, up 14% year-over-year. Diluted EPS was $0.53 for the quarter, up 15% year-over-year and up 16% in constant currency. Interest expense related to our debt was approximately $154 million in Q4. Our non-GAAP tax rate remained steady at 22%, and our ending share count was 637 million, down 7 million year-over-year, reflecting the impact of share repurchases. Turning to our balance sheet and cash flow. Q4 ending cash balance was $846 million. We are supported by over $2.3 billion of total liquidity, consisting of our ending Q4 cash balance and $1.5 billion revolver. Q4 operating cash flow was $1.398 billion, and free cash flow was $1.395 billion, which included the $900 million tax refund received in January and approximately $114 million of cash interest payments this quarter. Turning to capital allocation. We remain intentional and balanced with our capital deployment and are committed to returning 100% of excess free cash flow to shareholders. We voluntarily paid down $600 million of our TLB during the fourth quarter, with an additional $58 million repaid per our maturity schedule. We are now at 3.4 times net levered, down from 3.9 times at the time of merger with $1.2 billion in repayments in fiscal year 2024. We also deployed $300 million for share repurchases this quarter, the equivalent to 14 million shares. Since the start of fiscal year 2023, we have deployed a total of $1.3 billion of share repurchases and we're pleased to announce the Board has recently expanded our current buyback program to $3 billion with no expiration date to support our future capital allocation strategy. We paid $78 million to shareholders in the form of a regular quarterly dividend of $0.125 per common share. For Q1 fiscal 2025, the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on June 12, 2024, for all shareholders of record as of the close of business on May 20, 2024. With our strong cash flow generation now nearing $2 billion unlevered excluding onetime items, and our disciplined capital deployment, we will continue to pay down debt and deploy opportunistic share buybacks to help achieve our goals of delivering EPS growth of 12% to 15% and driving net leverage below three times EBITDA by fiscal year 2025. In summary, fiscal year 2024 was about bringing two large companies together as one operating business. Starting to tail our revenue synergies by returning our customer base to growth and increasing our retention rate, while driving improvements in our cost structure and executing our integration commitments. We have accomplished a lot since the merger. Now looking forward, our margins are world-class with room to make disciplined investments into our organic growth initiatives, outlined in the 5 for 5 structure we shared at our Analyst Day in order to accelerate growth to mid single digits. Turning to our Q1 and fiscal year outlook. For fiscal year 2025, we expect full year revenue in the range of $3.89 billion to $3.93 billion, translating to 3% to 4% growth in Cyber Safety expressed in constant currency and supported by expected Cyber Safety bookings growth of 3% to 5%. We expect non-GAAP EPS to be in the range of $2.17 to $2.23 per share, representing an annual increase of 12% to 15% in constant currency. Please note that we expect continued FX headwinds impacting our reported revenue primarily from the Japanese yen, which has depreciated over the past year and is now at multi-decade lows. For Q1, we expect non-GAAP revenue in the range of $960 million to $970 million translating to approximately 3% growth in Cyber Safety. And Q1 non-GAAP EPS to be in the range of $0.52 to $0.54, up 12% to 16% in constant currency. As we kick off our new fiscal year, we are in line with the expectations we set out at Analyst Day back in November 2023. We remain steadfast in driving our long-term growth plan. We are focused on delivering our commitments always in a disciplined and balanced manner. Our key performance indicators are trending in the right direction. Our strategy is working. And our financial model is resilient. We're committed to investing in our business to drive sustainable and profitable mid-single-digit growth and create shareholder value over the long term. We look forward to reporting on our progress in the quarters ahead. As always, thank you for your time today, and I will now turn the call back to the operator to take your questions. Operator?

Vincent Pilette:

Hi Peter.

Vincent Pilette:

Hey Peter, I'll take that one. So, I would refer to the AI-infused roadmap that we shared that at AIB, right? We've started with a very strong membership structure, which we upgraded on the VA side and now deploying Norton 360 on the New Gen stack. And so we're warning that out that enable a very strong modularity, scalability, and a much more flexible usage from a customer perspective to which we'll be able to add a lot of different value. We already, over the last two years, have added like reputation management and other services will move Norton Genie into the membership and again going to grow into discover of deep fakes, protecting your financial transactions and progress. So, over the next few years, you'll see us to launch more features into these areas.

Vincent Pilette:

Yes. And today, we don't have anything in our model. That's not how we see it. We first wanted to develop our air models using the vast data that we have building this new generative AI interface for people to interact with their security officer in the pocket, if you want and we continue to develop the model. The goal was really grow the adoption first and foremost, and that's our strategy. The second aspect is to add new features. So moving from text, e-mail, scans to voice and others and progressing towards the value add. The third item is to move that feature as part of the membership. Remember, 545 from Natalie is of course, to acquire new customers, retain them with great features, cross-sell where you can, but mainly moving up into the membership, full protection. So at some level of our membership level, it will be integrated into the price. And as you know, we price for value. And then only -- and only then, will then come up with the Gene Pro, which is our project name, which would be a monetized version. But it's down the line and not in our model today.

Natalie Derse:

I don't think we've seen too much change in terms of what people -- what the external community rates. I mean we've talked about number of cuts, et cetera. Of course, I don't know what's going to happen, but we're tracking right along with the latest and greatest in the news. And from our business model and the way we choose to allocate our capital, the beauty of it is we've got a lot of cash flow generation, which frees up a lot of deployment opportunity. And every time we deploy our capital, we're looking at the most competitive option, the most profitable thing that creates the most shareholder value. And so you're going to see us continue to strike the right balance across share buyback our share repurchases and accelerated debt paydown. But we've made notable progress in fiscal year 2024 on both fronts. And I would encourage you to expect the same disciplined approach that cash flow generation and turning that into the most advantageous capital deployment for our business.

Operator:

Thank you, Peter. The next question is from the line of Dan Bergstrom with RBC. Your line is now open.

Vincent Pilette:

Yes. We won't share the full road map, obviously, but we're super excited, right? Part of the opportunity in this merger was to be able to write a client and a full stack that can use AI for more personalization that can have a better user experience, as you know, the product in security were built a couple of decades ago with the idea that it would run in the back end. And then over the years, it evolved to become much more of a partner in new security and becoming front end. So the user experience also is tremendously improved the way we communicate in that, which is contextual and personalized is all opportunities. And then it's fully scalable. So we don't have to a new app or something else we can roll up new features. And based on your membership or price level you sign up for, you will have or can activate different future. We will take full fiscal year 2025 to deploy it. Obviously, you want to be very cautious if it goes smoothly, we may accelerate that. But so far, we have three countries testing it -- and it's early, we have April under our belt and very positive signs. So we'll progress that. We'll move into a little bit more global countries. Some countries open here at the end of the quarter. And then we'll move as fast as we can depending on what we see.

Vincent Pilette:

Yes, absolutely. And as part of the new tax structure and deployment coming with the Avast 1 free concept and deploying it's part of it. So for the Avast installed base, it's still vast majority is on contract -- and as we migrate to the new stock, we'll for the opportunity to upgrade. So we have the same way that 2.5, three years ago, we moved Norton 360 and reach 60% in the Northern installed base. We have progress to make on that side. But we have no doubt that's where it's coming or going, especially with an agile stack that can really mimic a single product, if you pay only for a single feature or benefit from the value of the full stack. It's that flexibility of scalability, if you want, that we're super excited about.

Vincent Pilette:

Thank you, Dan.

Saket Kalia:

Hey, great. Hey, Vincent and hey, Natalie. Thanks for taking my questions. You have nice progress of the year.

Saket Kalia:

Hey, Natalie, maybe -- absolutely. Natalie, maybe just to start with you, I think the guide for fiscal 2025, we said 3% to 5% bookings growth, great to see. I think that implies a little bit of a pickup in bookings growth compared to fiscal 2024. So do you just maybe have a general rule of thumb on how much of that can be driven by subscribers or ARPUs? Is a mix of growth? How do you sort of think about that growth formula for next year?

Saket Kalia:

Got it, got it. That's super helpful. And maybe that's a good segue into the follow-up for you, Vincent. I think you said we expanded retention rates on the Avast customer base by more than two points since the deal, which has been great to see. How are you may be thinking about that retention rate for next year? And maybe relatedly, is it the same blocking and tackling that's going to just continue to lift that retention rate, higher as the years go on? Or are there other parts to the playbook around improving that retention rate for Avast.

Saket Kalia:

Thanks, guys. Appreciate the time.

Operator:

Thank you, Saket. That concludes our Q&A session. I'd like to turn the call back over to Vincent Pilette, CEO of Gen.

Operator:

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Jason Starr:

Thank you, Victoria, and good afternoon, everyone. Welcome to Gen's third quarter fiscal year 2024 earnings call. Joining me today are Vincent Pilette, CEO, and Natalie Derse, CFO. As a reminder, there'll be a replay of this call posted on the Investor Relations website along with our slides and press release. I'd like to remind everyone that during this call, all references to financial metrics are non-GAAP, and all growth rates are year-over-year, unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release and earnings presentation, both of which are available on the IR website at investors.gendigital.com. We encourage investors to monitor this website as we routinely post investor-oriented information such as news and events and financial filings. Today's call contains statements regarding our business, financial performance, and operations, including the impact on our business and 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 as of today's date, February 1, 2024. We undertake no obligation to update these statements as a result of new information or future events. For more information, please refer to the cautionary statements in our press release, and the risk factors in our filings with the SEC, and in particular, our most recent reports on Form 10-K and Form 10-Q. And now, I'll turn the call over to Vincent.

Natalie Derse:

Thank you, Vincent, and hello, everyone. For today's call, I will walk through our fiscal Q3 2024 results, followed by our outlook for Q4. I will focus on non-GAAP financials and year-over-year growth rates, unless otherwise stated. Also, please note, this is our first fiscal quarter that includes full financial results from Avast in both periods as we have now passed the anniversary of the closure of the deal. Q3 was another quarter of consistent execution. Q3 revenue was $951 million, up 2% in USD and up 3% in Cyber Safety, excluding legacy business lines. Cyber Safety bookings grew 4% in constant currency, supported by continued growth in cross-sells and our direct acquisition channels. Direct revenue was $837 million, up 3% in constant currency. Our direct customer base expanded for the second consecutive quarter, increasing to 38.9 million, up 330,000 customers sequentially, and adding 0.5 million customers year-over-year. Driving new customer acquisition remains a priority for us and is growing double-digits year-over-year. Leading with our expanded product offerings and broadening our geographic efforts, we have deployed incremental marketing spend to capture structural demand growth for Cyber Safety, especially in channels like mobile and international markets. As we move forward, our robust product roadmap will continue to extend our reach into new markets and cohorts, as well as continue to support our retention efforts over the long-term across all of our cohorts. On the monetization front, monthly direct ARPU was $7.21 in USD, an increase of $0.12 year-over-year and a decrease of $0.07 sequentially. As previously shared, ARPU is impacted by many factors, including new customer growth, cross-sell adoption, geographic and channel mix. With a stronger growth in our new customer acquisition and traction in mobile in emerging markets, we are seeing the mix impacts on blended ARPU. While lower than the ARPU average, the cohort of customers we are acquiring in these new markets and channels are accretive to our installed base, and we able to acquire these new cohorts at a lower acquisition cost, proving out to be healthy ROI on our performance marketing dollars. These cohorts will also blend into our flywheel and offer opportunities for further expansion into our portfolio of products and services, in essence, feeding our cross-sell and upsell opportunity funnel. Within our more mature cohorts, ARPU continues to scale as we drive cross-sell adoption, and this expansion reflects our customers' demand for increased coverage in the ever-changing cyber safety landscape. Turning to retention, our overall customer retention rate remained steady at 77%. As we've shared previously, we made significant progress in our retention rate in the first year as a combined company, yet still have many opportunities to improve retention across cohorts and across brands as we make progress towards our 80% retention rate target over the next few years. Currently, we are focused on driving retention rates up by improving user engagement, introducing new products and features, and clearly demonstrating value to our customers with our best-in-class comprehensive cyber protection offerings and services. And as we move forward, we expect to drive additional uplift by continuing to execute on our product migration plans, and even more importantly, by creating hyper-personalized AI-powered customer experiences and incorporating them into our differentiated products and omni-channel go-to-market strategies. Turning to our partner business. Scaling our partner business is a key component to achieving our overall growth plan. Partner revenue was $99 million in Q3, up 4% year-over-year. We continue to drive growth in this channel through employee benefits, with a record pipeline and additional expansion plans to accelerate further. Given the long nature of partner sales cycles, the progress will be non-linear, and we will remain competitive with our offerings to capitalize on partner readiness across multiple channels. Driving our partners business to $0.5 billion remains the longer-term objective, and we are excited to share more progress in the coming quarters. Rounding out our revenue, our legacy business lines contributed $15 million this quarter, down from $23 million in prior year. As a reminder, we expect legacy to continue declining double digits year-over-year and accounts for less than 2% of our overall total revenue. Turning to profitability. Q3 operating income was $558 million, up 6% year-over-year. We increased operating margin to 59% as we work towards our 60% margin goal we outlined in our long-term model. Every point of operating margin expansion is harder to achieve than the last, but this expanding operating leverage enables us to redirect some of the efficiency gains back into our growth investment framework. You will see us continue to invest in performance marketing to reach new and existing customers, to bolster our product portfolio with differentiated solutions, to amplify our international presence, especially in identity and privacy, and expand into trust base adjacencies that will touch more parts of the consumers' digital life. These investments help fuel progress in each of our growth levers, and strengthen our position to accelerate revenue growth to mid-single digits over the next three years. Q3 net income was $317 million, up 9% year-over-year. Diluted EPS was $0.49 for the quarter, up 10% year-over-year, and up 11% in constant-currency. Interest expense related to our debt was approximately $158 million in Q3, and EPS impact of $0.19. Our non-GAAP tax rate remained steady at 22% and our ending share count was 645 million, down 6 million year-over-year, reflecting the impact of share repurchases. Turning to our balance sheet and cash flow. Q3 ending cash balance was $490 million. We are supported by $2 billion of total liquidity, consisting of our ending Q3 cash balance and a $1.5 billion revolver, and we have no near-term maturities due until April 2025. Q3 operating cash flow was $315 million, and free cash flow was $307 million, which includes approximately $201 million of cash interest payments this quarter. Turning to capital allocation. We remain intentional and balanced with our capital deployment, and are committed to returning 100% of excess free cash flow to shareholders. In Q3, we paid down $250 million of our Term Loan B, and are now 3.9 times net levered. We also deployed $100 million for opportunistic share repurchases, the equivalent of almost 5 million shares. We have approximately $730 million remaining in our current share buyback program. Finally, we have paid $81 million to shareholders in the form of our regular quarterly dividend of $0.125 per common share. For Q4 fiscal 2024, the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on March 13, 2024 for all shareholders of record as of the close of business on February 19, 2024. Please note that the Q3 balance sheet and cash metrics above do not include a $900 million tax refund we received at the end of January, associated with tax capital losses disclosed in our fiscal year '23 10-K. This domestic cash payment increases our liquidity. It's available for debt prepayments, and/or share repurchase, and reduces our net leverage by 0.4 points to approximately 3.5 times net. With our strong cash flow generation and disciplined capital deployment, we will continue to use a balanced approach in paying down debt and opportunistic share buybacks, to help achieve our goals of delivering EPS growth of 12% to 15%, and driving net leverage below 3 times. Now, turning to our Q4 fiscal '24 outlook. For Q4, we expect non-GAAP revenue in the range of $960 million to $970 million. We expect Q4 non-GAAP EPS to be in the range of $0.52 to $0.54. This translates to fiscal year 2024 non-GAAP revenue in the range of $3.805 billion to $3.815 billion and non-GAAP EPS to be in the range of $1.95 to $1.97. While this guidance is within the full year range we provided in November at our Investor Day, we recognize it's at the low end as a result of some of the factors mentioned earlier. Yet, we remain steadfast in driving our long-term growth plan. We are focused on operational excellence and delivering on our commitments, always in a disciplined and balanced manner. Our key performance indicators are trending in the right direction. Our strategy is working, and our financial model is resilient. We're committed to reinvest in our business to drive sustainable and profitable mid-single-digit growth, and create shareholder value over the long term. We look forward to reporting on our progress in the quarters ahead. As always, thank you for your time today, and I will now turn the call back to the operator to take your questions. Operator?

Vincent Pilette:

Hey, Saket.

Natalie Derse:

Hi.

Saket Kalia:

Natalie, maybe I'll start with you. Maybe my first question is, the bookings growth of 4% was really good to see. The revenue growth of 2% was a little bit below. I was just wondering if you could help us bridge those two metrics a little bit, and when you think those two growth rates maybe start to converge?

Saket Kalia:

Got it. That makes sense. Vincent, maybe for my follow-up for you, what's in the highlight for me was the better net-adds. I mean 330,000 was great to see. It feels like the ARPU profile though for some of the gross adds are -- for some of the newer adds are changing. So, maybe it's early to talk about this, but as you think about the growth formula in Cyber Safety, do you think that we should think about different mixes of sort of what comes from the installed base versus what comes from ARPU? How do you think about that sort of conceptually?

Saket Kalia:

Got it. That makes sense. I'll get back in queue to ask my next one. Thanks very much.

Operator:

Thank you for your question. The next question comes from the line of Hamza Fodderwala with Morgan Stanley. Your line is now open.

Hamza Fodderwala:

Hey, good evening. Thank you -- hey, how's it going? Thank you for taking my question.

Hamza Fodderwala:

Vincent, understand that progress is not always linear across every metric, but clearly the ARPU did come in below your expectation. I'm wondering if it's just a function of just the higher mix of incremental international mobile subs, or did the churn rate for your, let's say, higher-paying subscribers, the NortonLifeLock subscriber, if you will, did that come down more than you would have expected or didn't improve as much as you'd expected?

Hamza Fodderwala:

Got it. And just on the topic, I know the main driver for you is to continue to deliver value through upsell and cross-sell. But If I'm -- unless I'm mistaking, I don't think you've taken really any price over the last couple of years, despite what has been record-high inflation and some of your peers are raising prices. So, I'm just curious how you're thinking about maybe perhaps taking more price for the value that you're delivering going forward?

Hamza Fodderwala:

All right. Okay. I'll hop back in the queue. Thank you.

Vincent Pilette:

Hey, Peter.

Vincent Pilette:

Yeah. So, as we reported, Q2, first quarter of sequential growth. As you know, we said we're finishing strongly in September with good momentum outside of the US and international and new emerging markets. That's what at Analyst Day we indicated, kind of the profile of customer by those markets, so we can model them. Obviously, they carried into Q3 at a stronger pace than we anticipated. We told you it would slowdown, we didn't know it was sustainable. We saw it was sustainable and continue to put marketing dollars into those trends. And I think going into Q4, we now have two quarters sequential experience with it, if you want, we plan to continue into Q4. We'll give more indications when we give the annual guidance of '25 in May. Plenty of things can happen between now and then, especially making the progress in retention. In term of retentions, we -- actually as I mentioned, we made good progress across the brands. So, I see nothing changing from a fundamental progress and you know that we have the aspiration to bring the Avast brands to closer to where the Norton is, and we're making good progress there in term of trading off certain initiatives for platform integrations that were more day-to-day through the quarter as we were preparing for integration.

Vincent Pilette:

Definitely. In partner, we have multiple channels, right? So, employee benefit is one of them. We have the telcos, we have some of the retail, we have strategic partners as well, and they all behave slightly differently. They also have a different relationship between your bookings and your revenue compared to the normal DTC business, which is 90% of our business as you know. In term of the employee benefit channel, we continue to grow the pipeline. We've been growing double digits, maybe we're a bit overoptimistic in term of closing certain of these deals that would then carry immediate impact here during sign-up times, and those will be delayed and carry going into fiscal '25, they're not lost deals, but it takes time to deploy. We're also deploying into those installed base higher value proposition, which may be started initially as basic identity protection, adding all the way to the full membership structure with ReputationDefender, a new product, and those taking a little bit more time. Each channel may have different ARPU of their employee base is very close to LifeLock, maybe 20%, 25% lower than the average, but very close to it.

Operator:

Thank you for your question. The next question comes from the line of Matt Hedberg with RBC. Your line is now open.

Vincent Pilette:

Hey, Matt.

Natalie Derse:

Yeah. I think from -- like you heard Vincent talk about, when we -- now we see two quarters of the momentum that we see, and look, we like what we see. I don't want that to be lost in the overarching metric with ARPU sequentially down and now two quarters of sequential customer adds. I think it's important to understand as much as we can and explain to you guys what's happening at the cohort level. So, let's just talk about ARPU for a second first. If you break that down and we really see the core online business, we see expansion in ARPU, and we've seen that for many, many, many quarters in a row, especially as we continue to drive in a successful manner more and more adoption of cross-sell, that has been a growth driver and lever for us in the recent quarters. And as you heard in back in November, it will continue to be one of our main levers as we drive forward, not only with the different cohorts that come in as we expand internationally, but as we, again, have a robust product portfolio and continue to bring new products to market. And then, when you look at the economics of the other cohorts, they're very healthy. We've said and we've been very explicit that we will continue to invest in marketing to drive growth and drive expansion and diversify, but we don't burn money in the parking lot. So, even as the cohorts mix together, and at the top-level metric, on a blended basis, it looks down quarter-over-quarter -- it is down quarter-over quarter, within the cohorts, they're very healthy. And so, as we look forward in that metric, or we look forward as to where the customer acquisition is going to come, and we achieved compared to as they come through the funnel what products and solutions are they choosing at which time, it's definitely all about diversification, and it's all about growth, and we don't pick and choose or prioritize one channel, market, et cetera, over the other. What we're looking for is sustainable and profitable growth. And as we look at the performance of the performance marketing dollars, we put the fuel behind the most fruitful opportunities that we can in a balanced approach. Now, how that all that math comes together quarter in, quarter out, I think that's going to look different, and it's going to flex as we make those decisions. And what we've got to make sure that we lay out for you guys is that it is a balanced and disciplined approach, and that the diversity that we are driving is a healthy one for Gen.

Vincent Pilette:

Yeah, definitely a few key deals slipped into fiscal year '25, and we did not put them into our Q4 forecast.

Matt Hedberg:

[indiscernible].

Matt Hedberg:

Thanks a lot, Natalie. Thanks a lot, Vincent.

Operator:

Thank you for your question. The next question comes from the line of Jonathan Eisenson with Bank of America. Your line is now open.

Natalie Derse:

Hi, Jonathan.

Natalie Derse:

Yes. So, the deal linearity, we just -- our partner channels are so diverse. I know you attended the Investor Day, but for everybody else in the call, like, we've talked about how many different channels are in partner, and quarter in, quarter out the timing of those deals and the diversity of those channels, and how they come together, they won't be linear. What I would reiterate is that what we talked about at our Investor Day, and I would reiterate here is the partner channel is very, very critical for us. We laid out a growth plan over the long term to add about $100 million of incremental partner revenue. And so, the teams are aligned to that, driving towards that, and we'll stay focused on that goal and give you guys progress updates along the way. And then, in terms of the share buyback, in terms of -- I don't really want to comment on conservative or aggressive, but we definitely will have a balanced capital allocation. We had already had -- prior to the receipt of that $900 million, we had earmarked a balanced approach across share buyback and accelerated debt pay down for Q4. Again, as we laid out for you guys in November. We'll continue that balanced approach. And then, like we said, the $900 million is now available for us to deploy. We already have that in, and ready to go in terms of how we're going to deploy that in Q4.

Natalie Derse:

Sure.

Saket Kalia:

Hey, guys, thanks for fitting me back in. Maybe just one follow-up, if I could. Natalie, maybe for you, so the pipeline in the employee benefits and sort of the partner -- that partner business sounds great. Just given some of the deal dynamics that didn't necessarily benefit here in Q3, and what we are now assuming in Q4, I was just wondering if you could put a finer point on what the revenue impact was here in Q3. I mean, clearly there's some ARPU impacts right that we've talked about quite a bit. But I'm curious how much of that partner business maybe contributed to some of the revenue delta in the quarter.

Saket Kalia:

Got it. Very helpful. Thanks.

Operator:

Thank you for your question. Our final question comes from the line of Hamza Fodderwala. Your line is now open.

Vincent Pilette:

Yeah, absolutely. And we have a lot of activities with partner, that's why partner is so strategic. As we embedded into security and security concerns into solutions that the consumer buy, and then directly with the consumer, we have a full set of activities in term of educating, reminding them. It's also part of our customer success journey that we drive directly with all of our customers. Hygiene, as you know, in cyber security is a big component of that. We definitely are using more and more AI as Ondrej mentioned at the ID using AI to combat AI, if you want. The shift towards a personalized, interactive, intuitive cyber safety companion, if you want, is absolutely essential. We launched Norton Genie as an example of early on what we can do to try to identify some of those fake scams that will become more and more sophisticated. And with that our product will become more and more powerful as it really can scam the entire spectrum of digital threat. So, you will see the evolution of cyber safety for consumer becoming more and more embedded and personalized to you or your behaviors.

Jason Starr:

Great. Yeah, thanks, Hamza. This concludes our conference call today. Thanks for joining.

Mary Lai:

Thank you, Hannah, and good afternoon everyone. Welcome to the Gen First Quarter Fiscal Year 2024 Earnings Call. Joining me today to review our Q1 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 our IR website at investor.gendigital.com. Today's call contains statements regarding our business, financial performance and operations including the impact of our business and 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 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 and the SEC and in particular our most recent reports on Form 10-K and Form 10-Q. And now, I will turn the call over to our CEO. Vincent?

Natalie Derse:

Thank you, Vincent and hello, everyone. For today's call I will walk through our first quarter fiscal 2024 results followed by our outlook for Q2 and full year fiscal 2024. I will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated. Q1 was our 16th consecutive quarter of growth reflecting another quarter of solid execution. We came in above the midpoint of revenue and at the high end of EPS guidance. Q1 non-GAAP revenue was $946 million, up 34% in USD and 35% in constant currency. When including Avast historical results, cybersafety revenue and bookings both grew 2% year-over-year in constant currency with broad-based growth across brands and across regions. We continue to execute on our committed cost synergies in an accelerated fashion, which helped expand our operating margin to 58%, up 50 basis points sequentially and up 6 points since the merger. Direct revenue was $832 million, up 33% in USD and up 2% when including Avast historical results. We continue to make progress across our key performance metrics with consistent retention rate improvement and ARPU expansion, which represents our customers' resiliency and loyalty and the strong demand that our product innovation drives. Our quarter-over-quarter direct customer count growth is approaching breakeven. Ending Q1 direct customer count was $38.2 million, a decline of only 29,000 customers quarter-over-quarter, a trend we have worked hard to improve. During the COVID period, customer acquisition was at an all-time high, as the step function change in our digital lives pushed people to find solutions to protect themselves and their families as we were forced to live more of our lives at home and online. And over the last year as the world mobilized back to a normal life with more employees back in office and students back in school, we've seen the levels of customer acquisition normalize in line with that shift. Throughout this period as the elevated number of customers cycled through the life cycle, even though our retention rate remained strong, the units of churn were not in line with our current state of customer acquisition and therefore resulted in five quarters of net quarter-over-quarter customer count decline. It's worth noting however, that when you normalize for the COVID periods of acquisition, in Q1 this year our gross adds grew high single-digits when comparing to pre-COVID periods, representing a low to mid-single-digit CAGR over a three-year period. We are proud of that level of acquisition, driven by our high innovation rate and marketing efficiency, especially given the current market conditions. With our newly expanded Gen product offerings and broader geographic expansion efforts, we see growing demand in mobile and higher acquisition in international markets. Always operating with speed and intent, we have deployed marketing spend to capture growth as we evaluate the long-term sustainability of these green shoots. In our more mature channels, we remain focused on improving the conversion of our direct-to-consumer traffic, leveraging our strong brand presence and engaging our customers with our additional product offerings to ensure they are fully protected against the ever-changing cyber threats. Customer count remains a priority for us and we are making continued progress. We expect to return to sequential customer count growth in this fiscal year as we stay steadfast in our go-to-market expansion, our marketing investments, continue to offer the broadest and strongest product portfolio and drive growth in our green shoots. Turning to retention rate. Since we became a standalone consumer company in fiscal year 2020, our total direct customer base of 20 million grew to over 23 million by fiscal year 2023, a 5% CAGR over three years. Over that period of time, we had stable retention of 85% and even improved it slightly above 85%. Fast forward to now post-merger, our combined customer retention rate continues to increase sequentially now over 76% with 150 basis points of improvement since the merger. When we unpack this further, we have improved Avast retention rate by over two points in line with our revenue synergy plans and the industry-leading Norton and LifeLock retention rates remain stable with more tenured identity cohorts at 90% plus retention rate. We know we still have opportunities to improve churn across cohorts. We see a strong correlation between retention rate and increased adoption of our cybersafety membership suites now closer to 40% of our direct customer base after the merger. We are focused on driving higher retention through higher engagement continuously bringing new products to market and demonstrated value to the customer with comprehensive protection and world-class service. On the monetization front monthly direct ARPU was US$7.26, an increase of $0.28 since the merger. The growth in our revenue per user is primarily driven by engaging our customers and demonstrating increased value through additional products and services we provide. When we closed the deal one of the exciting opportunities we shared was the cross-pollination of our operational know-how between both companies. Avast had built a $900 million-plus top-line from free-to-paid conversions and cross-sells forging a strong operational expertise in driving high first purchase and conversions with the right moments of truth messaging and product offerings. Meanwhile, Norton and LifeLock had industry-leading retention rates of 85% plus with a strong emphasis on elevating membership value and customer service. As we've leveraged the strength of both companies, we are now driving higher conversion and penetration across multiple customer cohorts, product lines and geographies as well as improving retention on cross-sell products. As we progress through the fiscal year, we are excited to continue scaling this arm of the business with future product introductions. Our partners business remains an important distribution channel for us and is a growing contributor to our paid customer base. Partner revenue was $97 million in Q1 up 35% year-over-year as reported in USD and up 3% when including Avast's historical financials. With the secular tailwinds from the growing pervasiveness of breaches the need and demand for consumer identity protection is increasing not only for consumers, but also businesses and state agencies. More institutions are now turning to our solutions to protect their employees and residents. Although, there is a longer sales cycle, we expect the partner business to continue benefiting from a growing pipeline in the coming quarters and we will continue our investments in diversified channels. Rounding out our revenue our legacy business lines contributed $17 million this quarter and continue to make up less than 2% of our total revenue. We expect legacy to continue declining double-digits year-over-year. Turning to profitability. Q1 operating income was $545 million up 43% year-over-year. We expanded operating margin to 58% as we continue to make strong inroads to the 60% plus margin framework we've outlined in our long-term model. In Q1, our operating expense profile was 30% of revenue moving within our target of 28% to 30% and down from approximately 35% at the time of the merger a testament to the progress we've made on cost synergies. The speed of execution enables us to redirect some of the efficiency gains back into our growth investment framework. You will see us continue to invest to bolster our product portfolio with differentiated solutions, amplify our international presence, especially, in identity and privacy and expand into trust-based adjacencies that will touch more parts of the consumers' digital life. These investments along with the revenue synergies enabled by our remaining product integration will strengthen our mid single-digit rate of growth assumption built in our long-term model. Q1 net income was $305 million up 15% year-over-year. Diluted EPS was $0.47 for the quarter up 5% year-over-year and up 9% in constant currency including $0.02 of currency headwind. Interest expense related to our debt was approximately $164 million in Q1, an EPS impact of $0.20 and a $0.16 headwind compared to last year. Our non-GAAP tax rate lowered to 22% following our legal entity integration and our ending share count was 643 million down one million shares quarter-over-quarter reflecting the weighted impact of share repurchases in the quarter. Turning to our balance sheet and cash flow. Q1 ending cash balance is $623 million. We are supported by a total liquidity of over $2.1 billion, consisting of our cash balance and $1.5 billion revolver and we have no near-term maturities due in the next two years. Q1 operating cash flow was $226 million and free cash flow was $222 million, which includes approximately $152 million of cash interest payments this quarter. Despite the increase in interest payments year-over-year, our EBITDA to interest coverage ratio is 3.4 times, a testament to our strong earnings power. Since the Avast merger nine months ago we've generated $850 million in free cash flow and over $1.3 billion in unlevered free cash flow, approximately one times EBITDA as our business consumes very little CapEx. This also includes $55 million of restructuring cash payments since the merger. Please keep in mind that in Q2 every year, we have seasonal cash tax payments that will impact free cash flow next quarter. Turning to capital allocation. We remain intentional and balanced with our capital deployment. In the last nine months since the merger, we've returned $1 billion of capital to shareholders with nearly $650 million of share buybacks and the rest in the form of our regular quarterly dividends. In addition, we've paid over $500 million in debt repayments in the same time period. In Q1, we paid $83 million to shareholders in the form of our regular quarterly dividend of $0.125 per share. For the next quarter Q2 fiscal 2024, the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on September 13, 2023 for all shareholders of record as of the close of business on August 21, 2023. With our strong cash flow generation and disciplined capital deployment, we will continue to utilize our capital to deliver EPS expansion. Our net leverage is 3.9 times and we remain committed to the target of approximately three times over the long-term. We will maintain a balanced approach, commit to regular dividends, pay down debt and deploy opportunistic share buyback. Now turning to our Q2 fiscal 2024 outlook. For Q2, we expect non-GAAP revenue in the range of $940 million to $950 million, translating to a single-digit growth in cybersafety expressed in constant currency. We expect Q2 non-GAAP EPS to be in the range of $0.46 to $0.48 per share as cost synergies are partially offset by near-term increased interest expense based on current SOFR forward curves. Now that we are largely complete with our operational integration, we are reintroducing guidance for the full year fiscal 2024. We expect full year non-GAAP revenue in the range of $3.8 billion to $3.85 billion translating to single-digit growth in cybersafety expressed in constant currency. We expect full year non-GAAP EPS to be in the range of $1.95 to $2.02 per share. We're off to a great start in fiscal 2024. We are relentlessly focused on executing on our plan and delivering on our commitments always in a disciplined and balanced manner. Our key performance indicators are trending in the right direction and our financial model is resilient. As we look to the future, we're committed to reinvest into our business to drive sustainable growth and create shareholder value in the long-term. Our future is very bright and I look forward to the opportunity to share more details with you at our Analyst and Investor Day in the fall. As always, thank you for your time today and I will now turn the call back to the operator to take your questions. Operator?

Vincent Pilette:

Hi, Peter.

Vincent Pilette:

For sure. And, obviously, the topic of innovation and the future development is a huge important framework discussion that's difficult to address in a very fix time frame here. So, we'll share more at our Analyst Day, about that specifically where do we want to invest, how we use technology and the new capabilities we've built to address the next Gen of cybersafety and more. And when it comes to genie, it's both a future acquisition tool if you want, we actually acquired Avast as capabilities with freemium. Today the number one priority is adoption. And then we're going to continue to add values into the tool and turn a freemium into a premium. And at the same time, it's also a retention rate because it's adding functionalities and value to the current members. So, that's that. It's more than that, because the AI new developments if you want have impacted both for us the threat landscape on one side. So, it's changing what the threat looks like and from the past device security and protecting new data to personification, scams and frauds becoming a big topic. AI is accelerating that in ways that are multiple and we'll share more at the Analyst Day. And at the same time, it's also an opportunity for us to continue and improve our platform. The value we bring, not only against a lack of protection, but also an empowerment tool for you to help understand in the AI safety how algorithm and other machine learning and AI models can influence what you're looking at in the digital world, and how you use it. So we see the whole technology as a transformational strength here both on the threat and on the protection side that give us plenty of opportunity. We started currently with a very simple easy-to-use anti-scam tool, that you can download and very quickly check whether it's a scam or not, gives you advice on what to do and how to address it and then we'll continue to expand today, in early access and you'll hear more over the next few weeks months and quarters, how it goes. And then at Analyst Day, we'll share more about how we envision the Genie platform, to be part of our next-gen cybersafety.

Natalie Derse:

Sure. So, we've been on a path of diversification on our go-to-market. Even if you date back two years when we did our Analyst Day, we said we were going to expand internationally from a go-to-market perspective diversified through partners really extend our reach. And I would say, what I see coming through in the gross adds is that coming to fruition. So, we're really seeing a lot of the seeds that we've been planting over the last couple of years, especially in terms of international expansion really take hold. And so that's going to be a continued feeder into our gross adds, as we move forward. as we continue to put investment behind that, as we continue to diversify our marketing and really leverage the go-to-market sales reps that we've got across many different channels. In addition to that, what we're really seeing is customers come through the mobile platform. And so -- and I would say, that is what -- we see that happening across the globe in conjunction with NortonLifeLock with in Avast, we see the mobile channel being one, that we're going to put a lot of dry powder behind in terms of being able to access our products and service anywhere you are in your digital life. And then as it pertains to the Avast retention rate, we've seen nice gains since the merger, we're not surprised. We expressed that through our revenue synergy modeling and commitment. And so the teams just really worked strongly together and got out of the gate relatively strong on, any best practices that could be shared both ways from NortonLifeLock to Avast, Avast to NortonLifeLock. And we see a couple low-hanging fruit wins, so to speak since the merger. And we've continued to build on those learnings. And as the teams just become one Gen team, really having the best practice sharing really pushing the envelope as to what you can believe, and how we can reimagine how we go to market in a collective fashion is really -- has really been beneficial to us and we see that not only in the retention rate, we see that in ARPU as we strengthen and continue to scale the cross-sell upsell muscle, across all the brands. And as we continue to just have the robust product portfolio and the innovation come to come to fruition or come to market, it's just really all things combined has really helped us make some sequential progress there.

Natalie Derse:

Thank you.

Natalie Derse:

Hi Saket.

Vincent Pilette:

Yes. So, absolutely right. We -- first of all, yes, it's nice to see the direct customer count pressure we've seen for the last five quarters continuously being reduced on the path to breakeven and returning to growth. And if you look at the really, really post-COVID effect where I think we lost 400,000 customers that quarter. We've been reducing that gap all the way to almost breakeven here in Q1. We for the first time talk about those gross adds because many of you investors or analysts had the impression that maybe we're facing like a headwind that we were not controlling and it's really about flushing through the post-COVID impact that Natalie described I won't reiterate it. But when you look at the gross adds and where we are here in Q1 and it's up high single-digits over the last two and a half, three years low single-digit CAGR, it's actually right in line to what we had said three years ago which we will grow balancing all of our drivers including low single-digit growth rate on customer count and normalizing for COVID that's where we're getting to. Now, that is coupled with now having merged with Avast built Gen that has accelerated capabilities and the capabilities as we had mentioned was the breadth of the portfolio the capabilities whether it's renewal cross-sell or technology and then the channel and international expansion. You talked about the expansion internationally. And I'll give you one example because we actually -- internationally we feel pretty good about almost all areas. But Latin America was particularly strong and when you decompose the last three quarters' strength we've seen there it's really coming down together with our capabilities. NortonLifeLock was almost inexistent Avast already had a lot of presence. Then we brought into that region the portfolio of brands introduced products under Norton as well as we continue to then beef up the portfolio in introducing the first identity offering if you want -- so expanding the brand, expanding the cross-sell, and then expanding the channel, not just direct, but also indirect and having a combined view. Basically leveraging the strength of Gen as we came together with LifeLock -- NortonLifeLock and Avast. Basically the capabilities are coming together and over the next two years you should see us managing the macro level environment but really driving on our revenue synergies and accelerated our growth to that mid-single digits.

Natalie Derse:

Hi Saket, so thanks for the question. I would say from my perspective it's not things that are new or that have changed. I would say what we really wanted to do was focus on the close and the integration of the deal we'll get the businesses collectively running as Gen and really get through the lion's share of the integration. It was important for us to focus on achieving the cost synergies which as you've heard we're about 80% achieved. We're in an accelerated timeframe. So, this is just the right time for us to reintroduce a full year guide and really lay out for everyone what our expectations are for the performance. So from a topline perspective bookings revenue a range of outcomes in low to mid-single-digit rate of growth isn't new or isn't changed. We're just putting the marker down. We expect our growth to continue and to continue to build upon all of the actions that we're taking that are built into our operating plan. With that we should see the rate of growth on bookings and revenue build throughout the year not new but we will continue the cost discipline that we've expressed and that you know we're known for. And we are building throughout this year as we build towards the financial framework of a 60% plus margin business we'll continue to do that. And then as the growth continues to scale throughout the year we're going to take the opportunity to put some investment and solidify that rate of growth further accelerate that rate of growth and really put the support behind any productive green shoots that we're seeing albeit still within the margin structure that we've clearly laid out for everyone. What's new, I would say, if anything, or what's constantly changing is the interest rate environment. And so you saw what happened just as recent as last week with the cost of debt and the interest rate market. And so that will -- every single rate hike, just -- it creates another hurdle for us and our cost structure to overcome. Now we've been very disciplined and very quick to iterate, as we see those headwinds, which is why we're continuously recommitting to our profit structure. But if there's anything that's changed, I would say, it would be what's out of our control, which is one example is the cost of debt.

Saket Kalia :

Absolutely. Vincent if I could fit one more in just on that point around sort of flushing through some of the post-COVID hangover if you will, I think some of your comments on the call talked about maybe a positive trend sort of exiting the year. I know we don't guide to net adds, but how do you sort of think about that, right? Do we get back -- do we get to breakeven by the end of this year? Do we get back to something more positive? Any finer point, or any color you want to provide just on how that trend looks throughout this year?

Saket Kalia :

Very helpful guys. Thanks so much.

Operator:

Our last question is from the line of Angie Song with Morgan Stanley. Please go proceed.

Vincent Pilette:

We'll partner with Natalie, but I'll take the first crack at it. We can take offline on how you think that CAC is increasing depending on what is in the marketing line. But our cost of direct customer acquisition has been within a small range pretty stable for the last few quarters. Now we continue to invest in that. We now have a system that we feel is working. We have for our entire marketing spend by cohort and by investment, the CLV, the return on investment and the long-term value. And based on our very structured and data-driven framework, we continue to invest more in marketing as we see the growth. So as long as you see positive trend going you'll see us continue to invest in that. And we have not seen marketing rate change over the last short term, I would say, last few months. Natalie I don't know if you want to add anything to that? Okay. Okay. If there is no more question then let me quickly go to some closing comments. I want to mention that on Monday, we published our 2023 social impact report. As the new company Gen, we took the opportunity to reimagine what impact you want to make and reshape our global social impact strategy with our family of trusted consumer brands. Our dual head cores and more importantly our mission in mind. So, today, we're well positioned as a clear leader in consumer cybersafety and we're building a company that drives a real impact around the world. I'm very proud of the team and what we have accomplished so far. This is a reflection of our team so intensively mission-driven, focused on executing and creating value for all of our stakeholders. And while we have already achieved a lot since becoming solely dedicated to consumer cybersafety the truth is that we feel that we're really just getting started. So, thank you for joining the call today and I look forward to talking to you soon.

Mary Lai:

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?

Natalie Derse:

Thank you, Vincent and hello, everyone. For today's call, I will walk through our full year fiscal 2023 performance followed by our Q4 results and wrap up with our outlook for Q1 fiscal year 2024. I will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated. Fiscal year 2023 was another year of progress towards achieving our long-term $3 EPS target and was our fourth straight year of organic growth as a pure-play consumer cyber safety company. As we successfully closed our merger with Avast and integrated as one Gen company, we finished fiscal year 2023 with over $3.3 billion in total revenue, growth of 19% in USD and 23% growth in constant currency. When including Avast's historical financials, cyber safety revenue grew 4% year-over-year in constant currency amidst the dynamic macro environment. We challenged ourselves to accelerate the execution of our committed cost synergies and remain disciplined in our investments, which enabled us to expand full year operating margin to 55% up 220 basis points year-over-year. This growth and discipline led us to deliver $1.81 in EPS, up 4% from the prior year and up 10% in constant currency after incurring a significantly higher amount of debt cost than anticipated at the time of the deal announcement. Our customer base is resilient with over 38 million direct cyber safety customers. Across our Gen business, we have a strong and increasing customer retention rate of 76% and a growing direct monthly average revenue per user or ARPU of $7.24, as we scale our cross-selling and upselling efforts providing increased value to our direct customer base with new security, identity and privacy offerings. Our business with partners continues to grow and we've expanded together to a total paid customer base of approximately $65 million. We are enabling growth with the continued evolution of our product portfolio, and introduced over 10 new products and features this year to provide best-in-class protection and unlock new capabilities for our customers. Turning to Q4 performance. Q4 was our 15th consecutive quarter of growth and our results reflect another quarter of consistent execution. We exceeded our revenue guidance and came in at the high end of our EPS guide. We also crossed $1 billion in bookings for the first time with Q4 bookings up 29% in USD, and up 32% in constant currency. When including Avast's historical financials, cyber safety bookings grew 2% year-over-year in constant currency. Q4 non-GAAP revenue was $948 million, up 32% in USD, and up 35% in constant currency. This also includes an unfavorable FX headwind of $21 million year-over-year or three points of growth. When including Avast's historical results, cyber safety revenue grew 3% year-over-year in constant currency. Direct revenue was $831 million, up 32% in USD, and up 3% when including Avast historicals. We continue to drive higher value and loyalty with our existing customers, as both ARPU and retention improve. As I referenced above monthly direct ARPU is US$7.24, an expansion of $0.15 quarter-over-quarter driven by our cross-sell and upsell efforts and as our identity and privacy offerings grew double digits in the quarter. Ending direct customer count was 38.2 million, a decline of 183,000 customers quarter-over-quarter, a trend we are working hard to reverse. Lower web traffic demand continues to impact the customer acquisition funnel, despite improvements in conversion. We continue to invest in a diverse mix of marketing spend to reach new audiences, drive more traffic to our sites, while dynamically optimizing the channel and geographic mix to drive the highest returns. It is imperative that we continue to focus on improving retention in our existing customer base. Our aggregate direct retention rate improved one point quarter-over-quarter to 76%, which is a strong indication that our efforts to increase customer engagement are working. Offering the best customer experience remains at the core of our values and we are pleased with the progress made this quarter. Before I move off the direct business, I want to give a quick update on revenue synergies. As I shared six months ago, we expect traction with revenue synergies to be measured directly through ARPU and retention improvements over the coming quarters to support our bookings and top line growth expectations. Two quarters later we have expanded monthly ARPU by over $0.25, translating to $3 of increased annual ARPU. We have improved Avast retention making progress to narrow the prior 20-point retention differential between NLock and Avast observed at the time of close. You will continue to see us expand our ARPU and retention rate over the coming quarters. Moving on to partners. Partner revenue was $100 million in Q4, delivering 35% growth year-over-year as reported in USD and 9% growth when including Avast historical results. This was our third consecutive year of double-digit revenue growth in our partner business, as we continue to scale our identity offerings through key channels like employee benefits, telcos and breach protection. With our broad reach and omni-channel strategy, we will continue growing our pipeline, scale and nurture existing partnerships, and build further growth momentum. Rounding out our revenue, our legacy business lines contributed $17 million this quarter, and now make up less than 2% of our revenue. We expect legacy to continue its decline at a similar pace as Q4. Turning to profitability. Q4 operating income was $541 million, up 38% year-over-year. We expanded operating margin to 57%, as we continue to make strong inroads to the 60-plus margin framework, we've outlined in our long-term model. In Q4, we reduced our overall operating expense profile from 31% to 29% of revenue sequentially, while maintaining gross margins above 86%. Since the close of the merger, we've rightsized our organization structure to under 3,700 from approximately 4,500. Our hybrid workforce strategy has also enabled us to further rationalize our real estate and data center footprint driving structural reductions in our operating model. Exiting Q4, we achieved approximately two-thirds of the annual cost synergy target from a run rate perspective with the remaining integration efforts focused on product and engineering. We remain well on track to achieve cost synergies of over $300 million as we exit fiscal year 2024. Ultimately, our accelerated pace and track record of strong execution will unlock more operating leverage enabling us to selectively reinvest back into growth and innovation in fiscal year 2024 and beyond. Q4 net income was $296 million, up 9% year-over-year. Diluted EPS was $0.46 for the quarter, stable year-over-year and up 4% in constant currency including $0.02 of currency headwind. Interest expense related to our debt was approximately $160 million in Q4 and EPS impact of $0.19 and a $0.16 headwind compared to last year. Our non-GAAP tax rate remains at 23%. And our ending share count was 644 million, down $7 million quarter-over-quarter reflecting the weighted impact of last quarter's share repurchases. Turning to our cash flow and balance sheet. Q4 operating cash flow was $324 million. And free cash flow was $323 million which includes approximately $177 million of cash interest payment this quarter. This brings our total fiscal year 2023 free cash flow to over $750 million which includes $381 million of interest paid -- interest expense paid approximately $120 million of costs related to the Avast merger and $43 million of cash restructuring expenses. Our ending cash balance is $750 million. Turning to capital allocation. We remain intentional and balanced with our capital deployment. In fiscal year 2023, we returned over $1.2 billion of capital to shareholders with approximately $900 million share buybacks and the rest in the form of our regular quarterly dividends. In Q4, we paid $80 million to shareholders in the form of our regular quarterly dividend of $0.125 per common share. For the next quarter, Q1 fiscal 2024 the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on June 14, 2023 for all shareholders of record as of the close of business on May 22, 2023. In addition, since we closed the Avast merger, we have deployed approximately $460 million towards debt paydown when you include the April voluntary payment. We continue to be supported by strong total liquidity of over $2.2 billion and we have no near-term maturities due in the next two years. With our strong cash flow generation and disciplined capital deployment we will continue to utilize our capital to deliver EPS expansion with expected net leverage of approximately 3.9x within 12 months post Avast deal close and remain committed to the target of approximately 3x over the long-term. We will maintain a balanced approach, commit to our regular dividends, pay down debt and deploy opportunistic share buyback. Now turning to our fiscal Q1 2024 outlook. For Q1, we expect non-GAAP revenue in the range of $940 million to $950 million translating to low single-digit growth in cyber safety expressed in constant currency. We expect Q1 non-GAAP EPS to be in the range of $0.45 to $0.47 per share, as cost synergies are partially offset by near-term increased interest expense based on current SOFR forward curves. For the full fiscal year 2024, we expect bookings growth in low to mid single-digits, scaling through the year as we make progress on our key metrics. We remain focused on driving our long-term objectives and are still targeting to exit fiscal year 2025 on a $3 annualized EPS with the following underlying key assumptions

Saket Kalia:

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

Saket Kalia:

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?

Saket Kalia:

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?

Saket Kalia:

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

Operator:

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

Vincent Pilette:

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.

Vincent Pilette:

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.

Angie Song:

Thank you so much.

Saket Kalia:

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?

Saket Kalia:

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?

Saket Kalia:

Very helpful, guys. Thank you.

Vincent Pilette:

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.

Mary Lai:

Thank you, Francis. And good afternoon, everyone. Welcome to Gen’s fiscal 2023 third quarter earnings call. Joining me today to review our Q3 results are Vincent Pilette, CEO, and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the IR website along with our slides and press release. I’d like to remind everyone that during this call all references to the financial measures are non-GAAP and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release which is available on the IR website, at investor.gendigital.com. 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 with the SEC, and in particular, our most recent report on Form 10-K and 10-Q. And now I will turn the call over to our CEO, Vincent.

Natalie Derse:

Thank you, Vincent, and hello, everyone. For today's call, I will walk through our Q3 results, give an update on synergies and wrap up with our outlook for Q4, who will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated. Our Q3 results reflect another solid quarter of performance and consistent execution. We came in above the midpoint of our revenue guidance and at the high end of our EPS guidance. We drove our 14th consecutive quarter of bookings growth, supported by a resilient customer base and expanding product portfolio and our channel and geographic diversification efforts. We grew Q3 bookings 29% in USD and 35% growth in constant currency. When including Avast historical financials, cyber safety bookings grew 4% year-over-year in constant currency. Our major contributors to growth in Q3 included ARPU expansion as we scale our cross-selling efforts, stable retention with our existing customer cohorts, growing double-digits with our partners for the ninth consecutive quarter and driving our direct business to mid-single-digit growth supported by several new product launches. Q3 non-GAAP revenue was $936 million, up 33% in USD and 38% in constant currency, which includes a full quarter of Avast contribution. This also includes an unfavorable FX headwind of $34 million year-over-year or five points of growth, the highest it's been all fiscal year. When including a vast historical revenue, cyber safety revenue grew 4% year-over-year in constant currency. Now, let me walk through our cyber safety key operating metrics for the quarter. Direct revenue of $818 million grew 31% in USD and grew 3% when including a vast historical financials. Considering the continued macroeconomic pressures persisting in the market, we are proud of our performance in driving higher value and loyalty with our existing customers as measured by ARPU expansion and retention improvement this quarter. Direct monthly average revenue per user or ARPU was $7.9, an expansion of $0.11 quarter-over-quarter. We drove growth through our expanded cross-sell and upsell efforts, just like we said we would do back in November. Our scaling privacy offerings have strong traction with our existing customers who choose to attach these incremental services to their existing subscriptions, driving high double-digit growth in the quarter. Cyber safety membership adoption has increased again this quarter as customers choose the incremental value and services we offer through our integrated platform versus stand-alone offerings. Direct customer count ended at 38.4 million, a decline of $219,000 quarter-over-quarter as we continue to face into a challenged macroeconomic environment. Traffic to our e-commerce sites is lower than last year and is impacting our new customer acquisition funnel. We continue to invest in a diverse mix of marketing spend to help drive more traffic to our site, while optimizing the channel mix and dynamically adapting to market shifts in efforts to drive higher customer acquisition. We strive to delight and retain our existing customer base, and it's working with direct retention sequentially up and landing above 75%, with pockets of improvement in different cohorts. One of the primary synergy opportunities we shared in November was the Avast retention improvement. In a short period of time, we made early inroads with the Avast retention rate sequentially and while the improvement was nominal, we are encouraged by the early progress. Looking ahead, we expect traction with revenue synergies to be measured directly through ARPU and retention improvements over the coming quarters. Moving on to partners. We drove partner revenue to $95 million, 40% growth year-over-year as reported in USD and 11% growth when including Avast historical financials. This was our ninth consecutive quarter of double-digit revenue growth across our partner channels, a result of our growing international product portfolio, enabling us to sign new partnerships and capture more new business with existing partners. We continue to leverage existing telco and retail partnerships to drive the distribution of our expanded product offerings. Our employee benefits channel is a differentiator in the market with a strong growing pipeline, spanning across small, midsized, and large employers. With our broad reach and distribution, we will continue to invest and are well-positioned for growth in this channel. Turning to profitability, Q3 operating income was $526 million, up 41% year-over-year. We expanded operating margin to over 56% as a result of our continued cost discipline, our accelerated integration efforts, and our strong execution of cost synergies. Through Q3, we have reduced our overall operating expense profile from 35% to 31% of revenue. Synergistic workforce reductions from approximately 4,500 employees to roughly 3,850, facilities rationalization from a hybrid workforce strategy and early consolidation of duplicative enterprise IT contracts are structural contributors to our lower operating costs. We are making inroads to the 60% plus margin framework we've outlined last quarter. At the end of Q3, we achieved approximately one-third of the annual cost synergy target from an exit rate perspective, and we remain on track to achieve cost synergies of over $300 million as we exit fiscal year 2024. As planned, this creates more operating leverage to reinvest in product innovation and sales expansion as we move forward in our growth efforts. Q3 net income was $291 million, up 12% compared to last year. Diluted EPS was $0.46 for the quarter, up 2% year-over-year or 9% in constant currency, including $0.03 of currency headwind. Interest expense related to our debt was $148 million in Q3 with a negative EPS impact of $0.17 from total cost of debt in the quarter, $0.14 worse than last year. We anticipate the currency headwinds to continue and the interest rate conditions to remain volatile with a projected rise in SOFR in the near future. Turning to our cash flow and balance sheet. Q3 operating cash flow was $306 million and free cash flow was $305 million, which includes approximately $150 million of interest expense payments for this quarter. This brings our fiscal year-to-date free cash flow to a total of $428 million. Our ending cash balance was over $800 million. We maintain a balanced approach in our capital deployment. In January, we made a $250 million prepayment of our TLB. In Q3, we deployed $500 million of opportunistic share purchases -- repurchases, the equivalent of 23 million shares, and we have approximately $870 million remaining in our current buyback program. We also paid $80 million to shareholders in the form of a regular quarterly dividend of $0.125 per common share. For Q3, the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on March 15, 2023, and for all shareholders of record as of the close of business on February 20, 2023. We are well positioned with over $2 billion in total liquidity and we have no near-term maturities due until April 2025. With our strong cash flow generation and disciplined capital deployment, we will continue to utilize our capital to deliver EPS expansion and target net of approximately three times with a balanced approach to pay down debt and deploy opportunistic share buybacks. Now turning to our Q4 outlook. For Q4, we expect non-GAAP revenue in the range of $935 million to $945 million, translating to low to mid-single-digit growth in cyber safety expressed in constant currency. We expect Q4 non-GAAP EPS to be in the range of $0.44 to $0.46 per share as cost synergies are partially offset by increased interest expense based on current SOFR forward curves. Beyond Q4, we remain focused on our long-term objectives and are still targeting to achieve $3 annualized EPS exiting fiscal year 2025 with the following underlying key assumptions. Our cyber safety business continues to grow mid-single digits, post synergy structure of 60% plus operating margin, free cash flow deployed towards debt paydown and share buyback. The SOFR curve trends indicate rates below 3% exiting fiscal year 2025 and our diluted share count expected to be around pre-Avast merger levels. In summary, this was a solid quarter and in line with our long-term plan. We are proud of our continued growth, the level of execution across our teams, and the accelerated achievement of synergies. Amidst the headwinds we face, we remain focused on delivering the best products and services to our customers, both current and future, and we remain committed to driving incremental shareholder value with our robust business model high ratable revenue streams, healthy customer base and strong cash flow generation as we take advantage of the huge secular growth opportunity in front of us. As always, thank you for your time today. And I will now turn the call back to the operator to take your questions. Operator?

Vincent Pilette:

Hi Saket.

Vincent Pilette:

Good.

Vincent Pilette:

Yes, it's a very good question. We said on the last call that we will first really focus on fast integration of our operations than of our products to put in the best position to grow the value for our customers. On the last call, for those who were not on the call, we identified about $200 million of revenue synergies to be realized over the next two years. Half of those revenue synergies were about improving retention. Northern Life Log before the acquisition of Avast had a retention of about 85% on the customer side, when we merged with Avast, or brought Avast portfolio in, the aggregate portfolio dropped to 75%. And based on our initial assumptions, we felt we can improve that retention by about five good points on operational activities that we had identified at Norton LifeLock, including moving more customers to a membership level and making sure that they benefit and use all of the functionalities of the platform. After 90 days in, I think Natalie mentioned in her script that we improved Avast retention nominally, so not enough yet to make it a trend or mature, but it gives us good confidence that we're on the right path, having identified the right operational plan to improve over the next few quarters. The next big revenue synergies, it's all about cross-selling opportunities. Three quarters of our customers being more security focused, still device-centric and offering them the opportunity to grow in the identity and privacy space. In the quarter, the launch of new identity features or privacy products give us confidence that those would be well received. And I think over the next few quarters, we're going to accelerate that cross-sell, up-sell activities. One of the conditions is to have the product strategy fully defining the product integrated so we can do in-app identifications of the weaknesses for the customers and helping them being fully protected. And then the remaining other activities is between e-commerce, optimization, marketing recalibration across the business models we diverted a little bit of our marketing spend on the free-to-pay conversion so good results. So I think all in all, I would say today, I would reconfirm our $200 million estimate. The timeline does not change, but our confidence in getting there is there. We know in the short-term that we mentioned some macro level changes on global traffic and others. But when we based our the next two-year model and come in to the $3 EPS. We're confident we can rely upon a mid-single-digit growth rate to get there. Half of that growth rate is coming from those revenue synergies.

Natalie Derse:

Yes. Hi, Saket, thank you for the question. To answer your question very specifically, for the Q4 guide, we have nothing factored in there in that model beyond the mandatory debt pay down. But as you know, very, very consistent with our capital allocation priorities. We'll continue to strike the right balance across accelerated debt paydown and opportunistic share buyback as we all know, there's financial benefits to both of those as we maximize return back to our shareholders. We've stated delevering as a priority. It is. And as the cost of debt, you've heard it now a couple of times in today's call. The cost of debt for us is a major hurdle, one that's going to get worse before it gets better. So you can count on us that as we continue to generate strong cash flow and we continue to repatriate our international cash, we will be very, very active in deploying capital allocation in the most advantageous way. As we look into the long-term model, it does -- our capital allocation priorities stay very, very consistent. We s till -- we have a large amount of outstanding debt SOFR curve that anybody can see doesn't seem that it will get much better until fiscal year 2025. So as we navigate through not only Q4 but fiscal year 20024, you'll see us strike that right balance across opportunistic share buyback and accelerated debt paydown. We got to do both.

Vincent Pilette:

Yes. So, when you step back at a high level, three growth drivers. One is the revenue we get for users, which really is about adoption of some of the products or the full portfolio; the retention activities so more customers being retained satisfied with our values; and then the total customer adds not just the direct customer that we report. On ARPU growth sequential on retention, slight improvement driven by Avast, mainly and we continue to work on those behind that. Many investors ask me, okay, how do you do that? Obviously, we have a lot of operational know-how, but product innovation and membership adoption are the two very important driver there. And I think you've seen that we have a good cadence there. Then comes total membership. We look at membership as a total, including from partners, even though they're not a direct customers, they benefit from our overall membership. And so we'll continue to invest into that partnership, you've seen double-digit growth, and we're pretty happy about the performance there. We continue to work on the funnel. When it comes to direct customers with a stable retention across all lines and across regions and slightly growing ARPU. It's all about the net gross adds, so the new top of the funnel, if you want. A trend we have seen now for a couple of quarters, right? So, it's no different this quarter than it was last quarter or slightly more robustness on the identity privacy combined pillar if you want a little bit more weakness the security when you may be closer to the device. Same dynamic, whether it's Europe or Americas. And I think for us, it's all working on that marketing spend optimization as we continue to innovate the portfolio.

Vincent Pilette:

Thank you.

Vincent Pilette:

Hey Hamza.

Vincent Pilette:

Yes, I understand the question. So, actually, Q1, Q2, Q3, the trends were somewhat in sand dynamic, the same. And you're right that last quarter, it was the Norton and LifeLock lines, if you want, that were sequentially slightly more under pressure -- sorry, less under pressure versus Avast and this quarter is actually the reverse. I would not indicate that as like 1 quarter change within the proportion of what we're looking at, it's not mature enough. And I think overall, you can say about the same dynamic slightly worse in Europe and Americas, but same dynamic across the two continents and slightly worse in security closer to the device than identity and privacy. And I think when we guided back in November, we had said, hey, we don't see a change in that trend. And I think for the next few quarters as we close the fiscal year, we see similar trends and that's why we're right now really focusing on integration, product integration, increasing ARPU and retention as we continue to optimize between the different brands and business models we have.

Natalie Derse:

Hi, Hamza. Yes, from a guidance perspective, we just assume no change to currency rates. We don't guide based on projected impacts of currency fluctuations in the market.

Hamza Fodderwala:

Okay. Got it. Thank you.

Mary Lai:

Thank you, Matt and good afternoon, everyone. Welcome to Gen's first earnings call. Joining me today to review our second quarter fiscal year 2023 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 measures are non-GAAP and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release which is available on the IR website at investors.gendigital.com. 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 with 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?

Natalie Derse:

Thank you, Vincent and hello, everyone. It's a very exciting time for our company. We are thrilled to bring the Avast and NortonLifeLock businesses together and move forward as Gen. Our team is highly motivated to get started and bring our vast opportunities to market. For today's discussion, I will walk you through our Q2 results, outlook for Q3 and wrap up with details on our long-term model. I will focus on non-GAAP financials and year-over-year growth rates, unless otherwise stated. A reminder that our reported results also include a partial quarter of Avast which was acquired on September 12, 2022. Before we dive into the results, I would like to share how we evaluate and measure business performance as Gen. Gen is centered on Cyber Safety. Our product portfolio is split by consumer security, identity and information protection and our go-to-market omnichannel business lines are split by direct and partners. Direct makes up about 90% of our business with subscriptions sold directly through our e-commerce sites or third-party app stores. We have further harmonized our direct channel definitions and aligned to industry standards now including NortonLifeLock mobile app store customers and revenue in this category. Although partners only account for approximately 10% of our combined business, this channel remains an investment area for us as we further diversify our distribution models to provide multiple entry points for the consumer, including employee benefits, retailers, OEMs, telcos, service providers and small businesses. With the combined focus on Cyber Safety and go-forward portfolio identified through the integration with the Avast, we have also carved out a legacy category which includes end-of-life products or accident markets. In total, this makes up less than 3% of our overall revenue base and we expect it to phase out over the next few quarters. Going forward, our discussions will be focused on Cyber Safety growth. For more details on our reporting structure, I'd like to point you to Slide 13 in our earnings presentation. Now on to our Q2 results. Q2 results reflect our consistent execution and focus on driving long-term sustainable growth. Q2 is our 13th consecutive quarter of bookings growth, supported by a healthy and robust customer base and strong unit economics. Q2 bookings grew 11% in constant currency and was in line with our expectations. Excluding Avast, Cyber Safety bookings grew 5% in constant currency as we drove increased value through cross-sells in the Norton customer base and our key partner channels continue to scale, including identity-driven partnerships with international telcos and employee benefit partners in the U.S. Q2 non-GAAP reported revenue was $748 million, up 12% in constant currency and up 8% in USD. This includes a partial quarter of Avast which contributed $48 million or 7 points of growth in constant currency. Similar to prior quarters, our top line growth includes an unfavorable impact of 4 points as a result of increased foreign exchange headwinds of over $30 million year-over-year. We expect this currency headwind to continue with both the euro and yen depreciating further against the U.S. dollar in recent weeks. Despite volatile macroeconomic impacts, our Cyber Safety revenue, excluding Avast, continues to grow mid-single digits in constant currency, in line with expectations and, again, a reflection of our focused and consistent execution. Stepping through our other key operating metrics. Direct revenue of $660 million grew 11% in constant currency and 7% in USD supported by cross-sell and other monetization initiatives with our existing customer base. Direct customer count went from $23.3 million reported at the end of Q1 as NortonLifeLock to $38.6 million at the end of Q2 as Gen, including approximately 15 million Cyber Safety customers from Avast. Quarterly performance implied a combined decline of $252,000 quarter-over-quarter with $62,000 from NortonLifeLock and $190,000 from Avast. Both companies saw continued headwinds from lower global website traffic to our e-commerce site, impacting new online customer acquisition. But together with Avast, we now have an even larger opportunity to leverage our go-to-market efforts and further optimize our marketing investment across brands and SEO to drive up traffic and conversion. Q2 direct monthly average revenue per user, or ARPU, was USD 6.98 which reflects a blended ARPU of NortonLifeLock and Avast combined with a vast ARPU of approximately $4.30 and mobile ARPU of approximately $2.50. Specifically for NortonLifeLock results, ARPU expanded over $0.30 year-over-year adjusted for FX. We are proud of the progress we've made in the last year, increasing the value provided to our existing customers through our cross-sell and upsell efforts and are excited to drive similar improvements with the Avast customer base. Our customer base remains loyal with NortonLifeLock retention stable at 85% exiting Q2. As we merge with Avast, our overall customer retention rate moves from 85% to 75% blended. We believe the 20-point retention differential between NortonLifeLock and Avast presents a large synergy opportunity to drive growth with our existing customer base. I will expand on this more as we discuss revenue synergies shortly. For further details on our performance metrics, please refer to Slide 14 in the earnings deck. Moving on to partners. Partner revenue was $74 million, up 21% in constant currency and 16% in USD, impacted by 5 points of FX headwind. This is our eighth consecutive quarter of double-digit revenue growth in partners as we leverage this channel to extend our reach to consumers and broaden our product and geo expansion efforts. We will continue to invest in this omnichannel strategy, specifically in telco and retail partnerships that drive distribution of our expanded portfolio offerings, employee benefits were Cyber Safety and identity protection is essential to the employees' lives and through small businesses where entrepreneurs can scale their businesses with peace of mind knowing they are digitally protected. Partners will remain a key cornerstone of our investments going forward. Turning to profitability. Q2 operating income was $388 million, up 7% year-over-year with partial results from Avast. We continue to run G&A lean at roughly 4% of revenue which provides the operating leverage to invest in sales and marketing and R&D. We remain disciplined in our cost structure with margins flat year-over-year. Looking ahead as Gen, we will strike the right balance on investments across our expanded portfolio and channels and will be intentional on how we spend in order to drive the highest returns across the markets, channels and customers we serve. Q2 net income was $269 million, up 5% compared to last year. Diluted EPS was $0.45 for the quarter, up 5% year-over-year or 12% in constant currency, including $0.03 of currency headwind. Please note that this reflects partial dilution from the $94 million of Avast share issuance and higher cost of our debt. And our non-GAAP tax rate estimate was 23% which represents a blended rate before any tax restructuring efforts. Turning to our cash flow and balance sheet. Q2 operating cash flow was a use of cash of $88 million and CapEx was consistent at $2 million in the quarter. Seasonally, Q2 operating cash flow is the lowest quarter of the year due to the concentration of tax payments. This quarter also includes approximately $110 million of cash payments tied to the closing of the Avast deal and related financing transactions. Looking ahead, we have high confidence in our cash flow generation which will continue to grow with profitability. Year-to-date, we have returned over $550 million back to shareholders in the form of both buybacks and dividends. We deployed a total of $404 million towards share repurchases or over 17 million shares in the first half of this fiscal year and have approximately $1.4 billion remaining in our current buyback program. In Q2, we repurchased $104 million or 5 million shares. We also paid $73 million to shareholders in the form of our quarterly dividend of $0.125 per common share. For Q3, the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on December 14, 2022, for all shareholders of record as of the close of business on November 21, 2022. Moving to our capital structure. We had a lot of activity in Q2 related to the Avast acquisition and maturities that came due during the quarter. We now have a capital structure in place that we believe sets us up well for the long term. Our debt maturities have been extended and staggered through fiscal year 2031 with no near-term maturities due until April of 2025. We remain well positioned with $2.6 billion in liquidity and our gross leverage is 4.4x with net leverage just under 4x. You can refer to Slide 31 in the earnings deck for more details on our go-forward capital structure. Looking ahead, Gen as a combined business has predictable and highly ratable revenue, generates significant free cash flow on an annual basis and is backed by a strong liquidity position. We will drive a balanced and disciplined capital allocation approach between targeted deleveraging and opportunistic share buybacks. We feel good about where we are at and we will continue to evaluate and assess our overall debt needs and leverage profile in this ever-changing environment. Now an update on the Avast integration and expected synergies. We're pleased to report that our pre-integration planning and actions we've taken to date have successfully accelerated our integration time line from 24 months to 18 months. This is a big undertaking and we are aggressively going after this. Our integration efforts are well underway with day 1 of integration officially kicked off a week ago on November 1 and I'm pleased to share with you today that we are increasing our annual gross cost synergy estimate to over $300 million. In terms of phasing, we intend to exit fiscal year 2023 with 50% of the $300 million annual run rate achieved and exit the first half of our next fiscal year with 70% achieved. 100% completion exiting fiscal year 2024. We expect the post-synergy structure with gross margins of over 88% and OpEx reduced from approximately 35% of revenue today to 28% to 30%. This translates to an operating margin framework of approximately 60% and any leverage we drive above that creates flexibility to drive even more growth and portfolio diversification. With the addition of Avast, our complementary strengths provide increased levers to drive top line growth across the combined $500 million existing user base. We have identified approximately $200 million in revenue synergies over the next 2 years. Opportunities include Avast retention improvement, increased cross-sell and upsell, leveraging an expanded product portfolio and marketing spend optimization across brands, just to name a few. Achieving these synergies will help strengthen our mid-single-digit growth rate. We expect traction with revenue synergies to be measured directly through ARPU and retention improvements over the coming quarters to support our bookings and top line growth expectations. Now turning to our Q3 outlook. For Q3, we expect non-GAAP revenue in the range of $925 million to $940 million which reflects the first full quarter of contribution from Avast and reflects Cyber Safety mid-single-digit bookings growth. This also includes approximately $40 million of headwinds from FX. We expect Q3 non-GAAP EPS to be in the range of $0.42 to $0.45 per share. This reflects the first quarter dilutive impact from Avast. But please note, we expect Avast to be accretive in the first 12 months. Based on the continued strengthening of the U.S. dollar quarter-to-date, we anticipate the currency headwinds to persist and the interest rate conditions to remain volatile. But I want to emphasize that the underlying health of the business remains strong and durable. And given our high cash flow generation and strong liquidity, we are confident in our ability to navigate through the near-term challenges. Q3 is just the first step post-Avast towards our long-term objectives. Beyond Q3, we continue to remain focused on our long-term $3 EPS objective that we communicated during our last Investor Day. Given the meaningful macroeconomic changes since then and now that we have merged with Avast, we have looked at a revised path to achieve this. First, we recognize that the rising cost of debt and FX headwinds has created a $0.60 to $0.65 headwind. Beyond that, the building blocks and past remain largely the same as we've laid out previously at Investor Day as well as 15 months ago during the Avast deal announcement. The annual gross cost synergies of over $300 million, combined with the accretion from Avast profits, will create more capacity for reinvestment in a faster time line and will fund the diversification efforts and next Horizon Bet that helps solidify our growth targets. We expect our business to grow at mid-single digits, supported by the revenue synergies I laid out above, the complementary strengths and increased levers as a combined company and the long-term secular importance of Cyber Safety. These growth drivers are centered on product innovation and new product introductions, expanding reach and distribution through our omnichannel strategy and expansion of our trust-based services. The focus remains on customer experience at the core. Finally, we intend to use our capital to deliver incremental EPS with a disciplined approach of debt paydown and opportunistic share buyback ultimately offsetting the dilution from the Avast share issuance. This all ladders up to an annualized EPS of $3 as we exit fiscal year 2025 and in line with the time line we shared with you 18 months back. We are excited about these opportunities for growth and remain relentlessly focused on what we can control to achieve it. For more details, please refer to the whiteboard bridge in Slide 27 of the earnings presentation. In summary, we remain committed to driving EPS expansion. We are focused on accelerated integration time line, on execution against our business opportunities and driving towards our long-term objectives. We have a very robust business model with a healthy customer base and we remain focused on expanding new customer acquisition through new channels and geos, driving more value for our existing customers as well as increasing engagement with new products and services. We will provide updates and increments as we work through integration in these next few quarters. As always, thank you for your time today and I will now turn the call back to the operator to take your questions. Operator?

Saket Kalia:

Okay, great. Congrats on closing Avast. Yes, Vincent, there's a lot to go through, particularly with Avast but then maybe we can start just with the organic Gen business, if you will, right? It was great to see the churn improve versus last quarter. The net churn, the 62,000 net churn metric. I think most of us were prepared for something worse even versus last quarter, just given the trend in PC shipments. Maybe the question for you is, what do you think drove that improvement from last quarter's result despite that trend in PCs?

Saket Kalia:

Got it. That makes a lot of sense. Natalie, maybe for you. I mean, you said in the prepared remarks, just a really busy quarter for just the capital structure. I was wondering if you could just build on that and just talk about the delevering plan going forward. Obviously, a good amount of debt here to finance the acquisition. I think we said $0.40 to $0.45, just from the rising rate environment that eats into some of that EPS accretion. Maybe the question for you is, how do you think about your options here for delevering? Or maybe any other options to just generally control interest expense?

Saket Kalia:

Yes, absolutely. Well said. If I can sneak in a last one and then I'll cede the floor. Vincent, maybe for you. The $200 million in revenue synergies was great to see. I think you touched on it a little bit just in terms of retention rates, in particular. But I was wondering if you could just go one little deeper just in terms of, the building blocks of the $200 million in synergies, any thoughts on time frame in terms of when you get there and kind of how you get comfortable with that $200 million in revenue?

Operator:

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

Vincent Pilette:

Totally, let me break it down and timing, we can talk about it because I think timing is linked to the bucket but definitely at a very high level. If you separate, I would call it, there's a bucket of structural differences that you will never change. And I told you and all of you that the acquisition of Avira was a great warm up for us to understand how to manage freemium to premium business models and it gave us the confidence to merge with Avast and create this new foundation. We know it is definitely an enabler of our future growth. On that retention side, I would say there's a set of structural view such as our European business or premium business model or other things. And about, I would say, 1/3 to half would be structural. Now some of the structural things we can tackle them but back to timing, they will take longer. And then there is another set of operational differences. And that we know we've already brought to Avira and will bring to Avast in terms of improving retention, whether it's customer help service organizations, some of the feature insider product. I won't go too much into the details. But we know that we have at least 10 points here that are linked to our own operational execution. And that's what we, in the short term, are focused on. We said over 2 years because we'll do a lot of, obviously, testing and deployment. We'll be cautious on timing of revenue synergies. They always take longer but we'll accelerate the cost synergies to support the accretion on the bottom line. That's at the high level what the retention means.

Natalie Derse:

Yes, it was about 4 points of growth. It's definitely a pretty significant headwind that we've been facing into the last few quarters with the volatility.

MattHedberg:

Yes, great. And I think you said 4 points of headwind. I don't know if that's a year-on-year perspective but do you know it was like a $5 million headwind incrementally, $10 million since last guidance? Just on kind of just -- I don't know if you have that figure or we can certainly circle back on a call back.

Operator:

The next question is from the line of Fiona Hynes with Morgan Stanley.

Vincent Pilette:

And I'll take the first question. Natalie you can supplement. Definitely, in our partner business, I would continue to see that, as Natalie mentioned, an investment area. There's 4 or 5 key buckets from employee benefits to telco channels to now adding with Avast the SMB area. Now we had in our partner business in the past, as you know, also the mobile app direct customer which will move into the direct business. So that may influence a little bit. Quarter in and quarter out, I think that -- I wouldn't call it deceleration, you'll see up and down in that business, all outgrowing the direct business based on our investment profile.

Operator:

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

Operator:

This concludes the conference call. Thank you.

Mary Lai:

Thank you, Matt, and hello, everyone. Welcome to the NortonLifeLock Fiscal 2023 first quarter earnings call. Joining me today to review our Q1 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 reconciliation of non-GAAP to GAAP measures is included in our press release, which is available on our IR website at investor.nortonlifelock.com. Today's call contains statements regarding our business, financial performance and operations, including the impact on 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 with the SEC and in particular, our annual report on Form 10-K for the fiscal ended April 1, 2022. And now, I will turn the call over to our CEO. Vincent?

Natalie Derse:

Thank you, Vincent and hello everyone. For today's discussion I will start with Avast update followed by our Q1 performance details and our outlook for Q2 fiscal year 2023. I will focus on non-GAAP financials and year-over-year growth rates, unless otherwise stated. I'd like to echo Vincent's excitement about the merger with Avast. We're thrilled to have this positive outcome and look forward to closing the acquisition. We will immediately restart our pre-integration planning efforts as we prepare to scale the combined company and work to achieve the $280 million of annual gross cost synergies. Let me give you a quick refresher on the transaction financing done in conjunction with the merger which we successfully raised earlier this year. In total our financing package is comprised of $7.6 billion of Term Loan A and Term Loan B at spreads of 1.5% to 2% plus $1.5 billion revolving credit facility. This will replace our existing $1.7 billion Term Loan A facility and $1 billion revolver. While the interest rate environment has changed since we first announced the merger last year, we still feel good about the rates we were able to lock in. The acquisition financing will become funded at deal close. Once the deal is closed we will share more information on our long-term model and the timing of our $3 EPS objective. Now on to our Q1 results. Q1 was a good start to our fiscal year 2023 especially considering the macroeconomic pressures and volatile FX environment. Our business is resilient. Our customer base is healthy and we continue to execute with discipline. Our Q1 revenue was $708 million, up 6% in constant currency and up 2% in USD including a 4-point currency headwind translating to a revenue headwind of $27 million year-over-year. Similar to last quarter we saw continued currency volatility with both the euro and yen depreciating further against the US dollar reaching 20-year lows. It is the third straight quarter in which currency has been several points of headwind to our top line growth. We anticipate these headwinds will remain for a full year of compares as we plan the business at today's exchange rate with euro and USD near parity and a weaker yen. Despite these macro headwinds, we remain focused on execution against our business opportunities in driving towards our long-term objectives. Q1 bookings grew 5% in constant currency on top of a 10% constant currency bookings growth in Q1 last year and in-line with our full year projection of mid-single-digit rate of growth. We've launched new identity solutions and we've seen an increase in both geographic reach and adoption. Our expansion efforts are working as Q1 was our sixth straight quarter of high single-digit rate of growth in our identity and privacy products. Our direct revenue grew 5% in constant currency and 1% in USD impacted by 4 points of FX headwinds. Looking across our other key operating metrics. Q1 direct customer count grew by approximately 200000 year-over-year, but declined by approximately 200,000 quarter-over-quarter as we saw headwinds in select markets. Overall customer unit retention remained stable above 85% and we continue to drive incremental improvements to key cohorts including our newer customers. Our monthly average revenue per user or ARPU was $8.82. However, adjusted for FX, ARPU expanded nearly $0.30 year-over-year and expanded $0.07 sequentially, an indication of our successful cross-sell efforts. We have a very healthy resilient customer base and we remain focused on driving new customer acquisitions retaining our existing customers, as well as increasing engagement with new products and services. Turning to our partner business. Partner revenue was up 16% year-over-year in constant currency up 10% in USD and marks the seventh consecutive quarter of double-digit growth. We see traction with our identity expansion efforts through partners driving strong growth in our employee benefits channel and scaling key international partnerships like TELUS. Diversification and expansion of our go-to-market channel is a key growth tenet in our long-term plan and we will continue to invest in these areas. Turning to profitability, in Q1 we achieved gross margin of 86% roughly flat year-on-year, while at the same time expanding and adding more features to our product offerings. Our operating margin for the quarter was 54% up 250 basis points year-over-year driven by both our revenue growth and our cost discipline with overall spend down 3% year-over-year. As you've heard me say before, we are intentional with our investments and how we fund our business to drive future growth. Our G&A functions remain lean with spend at less than 4% of revenue for the second quarter in a row. With regards to R&D we continue to be disciplined and invest in new product development and innovation. With our marketing dollars we strive to balance across the portfolio and across channels. With intentional customer acquisition targeting while, focusing on long-term sustainable growth. We will continue to be disciplined with our cost structure across all functional areas as we operate in this increasingly challenging environment. Q1 net income was $265 million up 7% compared to last year. Diluted EPS was $0.45 for the quarter up 7% year-over-year, including $0.03 of currency headwinds and above based high-end of our guidance range. Adjusting for the impact of currency EPS grew more than twice the rate of revenue at 14% year-over-year. We remain committed to driving EPS expansion and achieving our long-term EPS objective of $3. Turning to our cash flow and balance sheet, Q1 operating cash flow was $215 million and free cash flow was $213 million. In Q1 we returned nearly $400 million back to shareholders. We repurchased $300 million or 12 million shares in buybacks in the quarter, and now have approximately $1.5 billion remaining in the current share buyback program. We paid approximately $73 million to shareholders in the form of a regular quarterly dividend of $0.125 per common share. For Q2 the Board of Directors has approved a regular quarterly cash dividend of $0.125 per common share to be paid on September 14th 2022 for all shareholders of record as of the close of business on August 22nd 2022, as described in the press release. Separate from the transaction financing I discussed earlier our net debt leverage was approximately 1.4 times in the quarter. We settled in cash our $400 million senior unsecured notes that matured in June. We also plan to settle in cash our 2% senior convertible note due in the middle of August and that cash settlement will hit our cash flow in fiscal Q2. As we all know the debt environment has been volatile and rapidly changing we will continue to assess our overall debt needs and leverage profile. Given our high cash flow generation and strong levels of liquidity we are confident in our ability to manage through this environment accordingly. Now turning to our Q2 outlook. Based on the continued strengthening of the U.S. dollar quarter-to-date we anticipate an even larger currency headwind. But I want to emphasize that the underlying health of our business remains strong. For Q2 we expect non-GAAP revenue in the range of $695 million to $705 million which translates to mid-single-digit rate of growth year-over-year in constant currency and reflects a projected FX headwind of four-plus points of growth or approximately $30 million. We expect Q2 non-GAAP EPS to be in the range of $0.44 to $0.46 per share which reflects $0.03 of headwind year-over-year. Our Q2 guidance assumes the Avast deal closes in early October 2022. For fiscal year 2023 we continue to expect bookings growth to be in similar ranges of mid-single digits in constant currency. Considering the close timing of the Avast merger we will not be providing an annual guidance at this time. We plan to provide more details on our overall financial model when we close the transaction. As always thank you for your time today. And I will now turn the call back to the operator to take your questions, Operator?

Vincent Pilette:

Hey, Saket.

Vincent Pilette:

Yes. So definitely, as you know, we have been investing in our partner channels. We've been saying that now for many, many quarters. It represents about -- slightly above 10% of our overall business and we believe that there is more opportunities to go to other channels and/or to partner with other solution providers to provide a combined solution to consumers. I mentioned the two channels we like. Of course, it's the mobile channel. Some of our competitors have moved that channel into a direct. It basically goes through app stores, and it's not in our direct business today because of the billing definition, doesn't go to us directly. But to be honest with you, the consumers gets on our platform and we have direct access to them and communicate and provide value. So, that has been growing. We're seeing definitely a shift towards mobile users. A few quarters ago, we crossed the Norton 360 platform to be the majority of the product sold on mobile, which is a very good sign. And you'll see us continue to move up in that channel good momentum. The second one is employee benefit. It goes through employers that offer to their employee full protection in the cyber world, identity protection privacy and device security. There too, we have the direct engagement with the customers on our LifeLock platform but the payment goes to the payroll of the company that supports that. We believe we have more to go in mid-market. We continue to invest in our direct sales partnering with the broker to penetrate that. And you'll see continued growth and focus both on the product marketing development side as well as the channel side. So, those are the direct engaged customers in our partner business then we have another set of channels that go and combine with other provider of other solutions to provide a full package. So, here like for example, the partnership with TELUS in Canada to bring cyber safety along with the TELUS solutions to Canadians has a very strong momentum. And you'll see us continue to expand. Travis Witteveen, who was the CEO of Avira, ton of experience in the environment, has become our customer acquisition chief, if you want, a few quarters ago and he's developing his team. And along with his team, they're definitely building up the funnel of new opportunities. So, you'll see us continue to invest in that. I do want to say a few words on the direct business. The direct business you mentioned the sequential slight decline and you're right on that. The metrics are very healthy. Retention rates have been very strong across all cohorts. We said a year ago, we would improve the first year retention rate and we have by a few points. Over the last 24 months, we've increased overall retention by a little more than 70 basis points. And so you see continued operational initiatives, whether it's on how the product is being downloaded, how it's being used, how the value is demonstrated to the customers, that improve customer satisfaction and then overall retention. So focus on that healthy set of customers. The gap or disappointment, if you want for the quarter, is really related to the macro level headwinds that we saw with lower traffic or global traffic on that cyber safety website, if you want. Conversion rates still holding well, but it's about the traffic. It was volatile. There were pockets of weaknesses, other pocket of areas where we continue to invest, because we're here for the long-term. And as we navigate through the volatile environment, we know we provide a product that will be needed in an area that has structural growth.

Natalie Derse:

Yes. Hi, Saket. Thanks for the question. Yes, operating margin of 54% now for two quarters and up 250 basis points year-over-year. We're proud of that. That points to what a healthy business model we have and combined with our team's commitment to operate in a disciplined manner. New acquisition is absolutely a key tenet of our overall growth strategy. We've been clear about that. But it's not the only one. We have multiple levers to help drive our growth and it's not growth at all costs and that's where the balance comes in. We've continued to invest in customer acquisition marketing. You can see that. We talked about we spent a lot of time focused on that both through our direct channels and now as well even more so in our partner channels. We're committed to the growth focus approach when it comes to sales and marketing. And honestly, we recognize what a competitive industry we operate in and that consumers have choice and we need to work really, really hard to win that choice. But in addition to investing in marketing where we've been investing more and more is in product. We've launched some really cool several new offerings. We continue to diversify the go-to-market channels. We continue to invest in our customer service offering. And I think from that combination of investment that's where that ARPU growth is really coming from both year-over-year and quarter-over-quarter and it allows us to sustain and scale our unit retention of 85%-plus both proof points of healthy acquisition that we've seen over the last 10 months -- 10 quarters excuse me. That combined with we stay committed to operating G&A as lean as possible the last two quarters being less than 4% of our revenue obviously provides us a lot of leverage for reinvestment. So as we navigate forward we'll continue to balance the growth and profit both are important. I don't think we have to pick. I'm confident we'll find a way to strike that right balance through that -- the disciplined approach that we've applied for now since we've stood up NortonLifeLock. And above and beyond all that we're just very, very excited about the additional opportunities we have as we combine with Avast.

Vincent Pilette:

Yes. Well, thanks for your question. I would be very disappointed not to have a question on Avast. I think this is a very, very exciting news. Talked to Andre yesterday. I know the Avast team is also super excited about coming together. And we know we are about to create the foundation of an even stronger company with a very broad mission of that digital freedom for digital lives. We discussed that a few quarters ago, but when we made the acquisition model or the transaction model we based the merit of this transaction on cost synergies overlapping activities to the tune of $280 million that I've talked about. And we wanted to have the value of that transaction to be based on that. We also said we would reinvest a portion to accelerate the top-line growth or transform the profile of our revenue. We did not include in our acquisition model revenue synergies for many reasons, but certainly not the reason that it will be our priority number one as soon as we close. We see the opportunity. And I see three buckets of opportunities if you want conceptually without giving any numbers. The first one is on the retention side. NortonLifeLock has developed a set of capabilities and operations and experience that drive high NPS and retain at 85% in unit. That equivalent number is 68% in Avast at least in the last reported numbers. And we know that we can bring a lot of the practices and the approaches as we bring a stronger portfolio to the consumers to improve that retention rate. There may be some mix differences by geography or product mix. But even when we compare during due diligence number we know we have opportunities there. So that's bucket number one. The second one is the cross-sell upsell capabilities. We've just introduced those capabilities in NortonLifeLock about 1.5 years ago. And we know Avast has been developing the entire business model on that, offering a basic product for free. And then delivering, showing demonstrating more value to the consumers to a point where the customer is ready to pay for that value and then growing that value offered to the consumers. We look forward for Avast to bring those operational skill sets if you want into our overall combined company, while we bolster a richer portfolio. So Identity, a Lifelock equivalent services that we started to expand internationally will be offered to Avast customers as an example. And Avast has had a focus more on privacy. When you combine the two, it will be a very rich portfolio to cross-sell and deliver more value to consumer. That's the second set of revenue synergies. And then the third one is across the complementarity of the geographical footprint whether it's US versus international from our standpoint, for their standpoint Europe versus the rest of the world. But even then they were more about emerging markets we're more about Western markets. And so I see a lot of complementarity as we bring a richer company together. Locally, we can accelerate our penetration including in the VSB or very small and small business area where Avast has already a small channel. And as you know we were not present yet some of those businesses have exactly the behavior of consumer. So the third bucket is around geographical footprint and expanding the channel as we come together. As soon as we close the acquisition, I can tell you -- we'll be -- the first task that we'll get started on that. And then as soon as we're ready and the deal is closed, we'll share more with investors what our long-term plan is in this area.

Vincent Pilette:

Thank you.

Simran Biswal:

Hey, everyone. This is Simran Biswal for Matt Hedberg. Thanks for taking our question. So we were just looking and thinking about the current macros and how security seems to be more resilient. So we were wondering, how you were thinking about the durability of these consumer security trends?

Simran Biswal:

Okay, yeah. Sounds great. And just a quick follow-up from the customer perspective. You mentioned really healthy customer metrics and cross-sell has been accelerating and great execution on that front. So how are you thinking about customer additions and up-sell in a more challenging macro over these next few quarters?

Simran Biswal:

Great. Thanks.

Fiona Hynes:

Hi, everyone. This is Fiona on for Hamza. Thank you for taking the question. It's sounding like from previous commentary on this call that going forward a big part of driving growth between Avast and NortonLifeLock is going to be the pairing of identity and privacy offerings. So I was wondering if you could give us some more tangible use cases of how consumers can use those like basically bundle those two different offerings together? And what's kind of your vision going forward for that cross-sell motion? Thank you.

Fiona Hynes:

Got it. Very helpful. Thank you. Maybe one more follow-up if I could another question touching on the macro. Obviously, we see there's some headwinds in the customer acquisition this quarter. I was curious for your review and your sense of how much of that is just traditional seasonality given it's the summer months and PC shipments are seasonally weaker around this time period? And how much of that is kind of, what you're seeing on the ground real time in terms of potentially moderating macro environment? Thank you.

Natalie Derse:

Yeah I just think – we think about – even as a consumer you feel the macroeconomic environment you feel inflation, you feel pricing pressures. I would combine that, with some of the other markers that we see across the industry with PC shipments down now double digit not that we're entirely connected to that, but it's just another marker that shows us what's happening in our industry. And it just – it honestly fuels us. We've got to be much, much more intentional. We've got to be much, much more competitive in order to win over the customer choice that's available. And then we do through a disciplined approach, we spend so much time and effort making sure that those customers are – is highly engaged as possible. We provide great customer service, and we want to be fulfilling as much of that cyber safety need, as we possibly can. So that's where we spend most of our time.

Vincent Pilette:

Thank you.

Vincent Pilette:

Thank you, Matt. Before I close the call, I would like to take a moment to thank our NortonLifeLock team for contributing to our success each and every day. As you've heard me say before, we truly have an ambitious team dedicated to the mission of the business we're building. I would also like to say a few words on the upcoming changes on our Board of Directors. On behalf of the Board and the leadership team, I want to thank Ken Hao for his contributions to the company over the last six years, helping NortonLifeLock through the successful transition to a stand-alone consumer cyber safety company, and unlocking tremendous shareholder value. Ken has been a great board member and also a trusted partner to me as the first time CEO. We wish him well and I'm sure, we will stay in touch. We have been waiting for 12 months for the approval of our deal with Avast, and we are so ready to dive in. I talked to Andre yesterday, as I mentioned, and I know that the Avast team feels exactly the same way. The company is well positioned to deliver long-term value in pursuit of our vision. So, thank you for joining and for your continued support of our company and our team.

Mary Lai:

Thank you, Jeff and good afternoon everyone. Welcome to the NortonLifeLock fiscal 2022 fourth quarter 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 Investor Relations website, along with our slides and press release. I’d like to remind everyone that during this call, all references to the final metrics are non-GAAP and all growth rates are year-over-year, unless otherwise stated. A recon of non-GAAP to GAAP measures is included in our press release, also available on our IR website at investor.nortonlifelock.com. Today’s call contains statements regarding our business, financial performance, and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which maybe considered forward-looking statements and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those 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 with the SEC and in particular, annual report on Form 10-K for the fiscal year ended April 2, 2021. And now, I will turn the call over to our CEO. Vincent?

Natalie Derse:

Thank you, Vincent, and hello, everyone. For today’s discussion, I will focus on non-GAAP financials, starting with our full year fiscal 2022 results, followed by our Q4 performance details and then provide our outlook for Q1 fiscal year 2023. Fiscal year 2022 was a strong year for our business. We met our growth expectations through consistent execution of our plans and in turn, completed a successful first year towards our long-term objectives. We finished fiscal 2022 with over $2.8 billion in revenue, growth of 10.4% in constant currency, slightly above our guidance. Our bookings further grew 8% in constant currency, our second consecutive year of high single-digit growth after years of flat to low single-digit growth. We achieved an annual operating margin of 52.7%, up 300 basis points year-over-year. On the bottom line, we delivered $1.75 in EPS over 20% growth year-over-year and at the high end of our original guidance of $1.65 to $1.75. We have scaled to over 23.5 million direct customers while maintaining our industry-leading customer retention of 85% and monthly ARPU of $8.90. As we prepare for the merger with Avast, we ended the year with approximately $1 billion in free cash flow, up 38% year-over-year.

Operator:

[Operator Instructions] First question from the line of Hamza Fodderwala of Morgan Stanley. Your line is now open.

Natalie Derse:

Yes.

Natalie Derse:

There is a disconnect, I would say, yes. And just in concept, yes, bookings 1 year will indicate where our revenue is trending the prior – the next year with the exception, of course, of any of our revenue streams that don’t get count in bookings. So yes, you are on the right track there.

Vincent Pilette:

But in short, Hamza, we do not know anything special outside of Natalie’s mentioned the late 12 months, there is no anything special that we know about. And so yes, bookings and revenue should trend.

Vincent Pilette:

Yes. And we are not immune to the macro level headwind, right. We are definitely aware of inflationary pressures. You have seen the PC shipment decline here in first calendar quarter. We definitely see marketing expense rates increasing, which is also a sign of tighter environment and everybody pushing. And so we navigate through that as we mentioned. We are not immune to that, but we do have a lot of different levers as we look at our business to drive growth. On one side, it’s all about educating consumers on our comprehensive cyber safety portfolio as we expand identity and privacy outside of the U.S. It’s something we believe we have a big opportunity. As we continue to drive initiatives on retention increasing, first year retention has been a priority for 12 months, and we have made progress in that, and we will continue to make progress. And then the third one is really about the ARPU as we expand the higher offering, especially in international. We mentioned about half of our customers are located outside of the U.S., where the ARPU is about half of that of the U.S. on average, whatever we see is on the same per country and per offering. But we do feel we have a big opportunity on all three levers to navigate through the macro level headwind. Definitely, Q1 calendar had a lot of uncertainties and volatilities as, of course, you have seen and as reported by many other companies.

Vincent Pilette:

Yes, definitely. So, digital identity for me is kind of the next element of your digital life, you want to protect, right. If you do all started about protecting new device then over time, you evolve and wanted to protect new devices, then all of your data and transactions moving to the cloud and now suddenly, the sum of your actions became like a digital identity. Every digital user, if you want has multiple identities, even a lot more on average if somebody has five to seven devices and identities, digital identities is 10 to 50 digital identities. And so protecting those may mean different things per country in the U.S., very social security numbers centric, very credit-centric, other countries, different elements. And then each countries internationally continue to mature more into this digital world. You may know the European Union is launching now the second version of a digital wallet. And all of that creates opportunity for hackers, unfortunately, and then for us to provide protection. I think it takes time to build momentum internationally. Over a year ago, we launched LifeLock in Canada in partnership with TELUS. And here in this last quarter, we have seen momentum picking up. We know it’s a multiyear effort. Similarly in Japan, we launched in a different way, different format than Canada, and we have got great traction there being the leader in this space. Just this quarter, we launched in the UK, we know that’s the market that’s more mature to adopt a similar angled service-oriented like in the U.S., then Germany, other countries are still maturing. And I think we are here for the long-term, and we know it is a long-term initiatives to build the total comprehensive digital protection for consumers outside of the U.S.

Operator:

[Operator Instructions] Our next question is from the line of Saket Kalia of Barclays. Your line is open.

Natalie Derse:

Yes. I mean the difference between bookings and revenue is bookings is what we recognize in period and then revenue is, of course, as we rolled off the balance sheet, we have got not only the in period combined with partner and then we have got the deferred revenue balance rolling off the balance sheet. The FX comes into play as the deferred balance rolls off. And so we need – we obviously need to deal with that is the FX impact as it rolls off the balance sheet. But I don’t see – we talked about in the range of mid-single digits for bookings. Just to reiterate for Q1 guide just a constant currency of 5% to 7%. I am not sure what disconnect we are talking about.

Vincent Pilette:

Second, Vincent, just to add on that, a mid-single-digit booking growth rate is somewhat in line. You can assume that full year revenue. Unless you have significant shift in trends in bookings, then that would take 12 months to catch up. And then you have, as Natalie mentioned, the currency that get always reevaluated the deferred revenue balance get reevaluate at today’s spot rate, and so that can create a slight disconnect as well.

Vincent Pilette:

Yes. So first of all, coming back on your currency, no need to apologize. Currency – outside of currency would be ahead of our plan. Currency is the major headwind we have faced and we are trying to navigate through it. We know it’s temporary, and we manage through the implication. That was also we report our numbers in constant currency, so investors can really assess the true operational momentum we have. And we have also isolated the impact of that currency on EPS. At the end of the day, it is what it is, but it’s important for investors to have full transparency on that, so no issue here. When it comes to EB now, their employee benefits and a very exciting channel, the reason it’s exciting, it’s majorly the large lock offering. So, it’s in the identity space. And many of the accounts we sign up are being sponsored by the employer. Sometimes the employees have been asked to pay a portion of it. Sometimes it’s fully subsidized. And it’s a big important channel in which we can continue to grow up the offering. The ARPU is slightly in line to our overall portfolio ARPU. And in identity, I would say it’s a channel that’s about 20% lower in terms of the channel cost, if you want, or lower ARPU in that identity. But the cost structure, as you know, for us is more a step function cost structure. It’s not a variable cost structure. And so the direct contribution of any incremental customers that would benefit from our LifeLock offering in the EB channel is at a great drop through. So, economically we feel really good about that channel that we continue to invest in.

Natalie Derse:

Yes. Thanks Saket. Share buyback, as we said on the call, and as you guys know, we haven’t been able to do any in fiscal year 2022. So, we are looking forward to in 2023 to be able to use that. We have talked about it as a key tenet of our capital allocation strategy, but we have just been restricted. So, we are really looking at as we go forward, really trying to figure out is there any opportunity in order to get back in and do opportunistic share buyback. It’s really – it’s very, very specific in terms of not only when we can do it. We have got to obviously work across the aisle with Avast and the UK takeover panel. So, the mechanics are very, very specific and there is very, very limited opportunity for us to do it. We are – we have worked with them and gained some very limited ability to do it as we look forward into 2023, but we still have to work out the mechanics on the execution.

Vincent Pilette:

Thank you.

Vincent Pilette:

Thank you, Jeff. As I reflect on our transformation plan from a year ago, I am incredibly proud of our strong results and the team’s execution. Certainly, there are some ups and downs and growing pains, but we are intensely focused on consistent execution, investing and driving for growth to scale business on a global level. I am incredibly optimistic about our future. So, thanks for joining. Thanks for your continued support of NortonLifeLock and we look forward to connecting with you very soon. Stay safe and stay well.

Mary Lai:

Thank you, Paul, and good afternoon, everyone. Welcome to the NortonLifeLock fiscal 2022 third quarter earnings call. Joining me today to review our Q3 results are Vincent Pilette, CEO; and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the Investor Relations website, along with our earnings slides, press release defining our non-GAAP metrics. I'd like to remind everyone that during this call, all references to the final metrics are non-GAAP, and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release, which is available on our IR website at investor.nortonlifelock.com. Today's call contains statements regarding our business, financial performance and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which may be considered forward-looking statements and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on our current beliefs, assumptions and expectations and speak only as of the current date. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC and, in particular, our annual report on Form 10-K for the fiscal year ended April 2, 2021. And now I will turn the call over to our CEO. Vincent?

Natalie Derse:

Thank you, Vincent, and hello, everyone. For today's discussion, I will focus on non-GAAP financials, starting with our Q3 results and then provide our outlook for fiscal year 2022. We delivered another excellent quarter. Our Q3 revenue was $704 million and at the high end of our guidance range. Revenue was up 10% in USD and up 12% in constant currency, including a two-point currency headwind as the euro and yen weakened against the U.S. dollar. Bookings growth accelerated sequentially and year-over-year, up 10% in USD and 11% in constant currency. We continue to effectively utilize the levers we have at our disposal to accelerate growth. Our total direct customer count increased to 23.4 million, adding 2.4 million customers year-over-year and adding 126,000 net new customers quarter-over-quarter. This was our ninth consecutive quarter of sequential net direct customer adds, with close to 0.5 million net new customers added already this year. We remain focused on acquiring more customers at the top of the funnel in an increasingly competitive landscape. Q3 growth was broad-based. We saw strength in both the U.S. and international regions. Our new products and services in key international markets have improved our overall global reach. While our customer mix still skews higher in the U.S., we are capturing more international opportunities as we scale. Looking at our performance in Q3 across key operating metrics, overall, unit retention was slightly above 85% in Q3, and our monthly average revenue per user, or ARPU, expanded sequentially to $8.87. Collectively, this contributed to 9% revenue growth in our direct business versus 5% growth in Q3 last year and no growth the year before. We believe this consistent growth momentum is built on the foundation of our Norton 360 platform as well as our expanding product portfolio and the increasing value we provide to our customers. Retention is a major area of focus for us. Our renewal rates remain strong across cohorts, including our newer customers, which now reflects a larger mix of our customer base. Our cross-sell/upsell efforts are also beginning to bear fruit, supported by new product velocity and expanding feature releases in global markets. While driving strong engagement throughout the customer journey and bringing more value to our customers, we, in turn, continue to increase retention and drive growth in our ARPU over time. Our partner business continued to grow double digits in Q3, with revenue up 17%, scaling in multiple channels including employee benefits and app store. Our employee benefits channel continues to grow double digits as we broaden our identity offerings to more employees in North America. Our app store channel was up double digits for the fifth consecutive quarter, driven by the success of our Norton 360 app. While our indirect business is just over 10% of our total business, we continue to dedicate more resources in this area as we focus on broadening our go-to-market reach and drive this as a key tenet of our long-term growth strategy. Turning to profitability. We continue to deliver high operating leverage. Q3 gross margin sustained at 87% and operating margin was 52.8%, up 180 basis points year-over-year. We remain diligent in our cost structure in pursuit of efficiency opportunities and to create capacity for reinvestment to drive growth. We are operating our G&A functions at approximately 4% of revenue down from 10% of revenue just two years ago. We continue to make investments in sales and marketing while navigating through the competitive advertising environment and higher ad costs. With R&D, we focused on our energy on increasing the pace of new product launches while also effectively driving efficiencies. Looking ahead with Avast, we will continue to operate with a disciplined approach in our cost management in order to drive synergies we committed and pre-integration plans are already underway. Q3 net income was $260 million, up 14% year-over-year. Diluted EPS was $0.44 for the quarter, up 16% year-over-year and at the high end of our guidance range. We remain committed to driving EPS expansion and achieving our long-term EPS objective of $3. Turning to our cash flow and balance sheet. Q3 operating cash flow was $330 million and free cash flow was $328 million. Year-to-date operating cash flow is $648 million, growing over 80% year-over-year. We continue to maintain both a strong liquidity position and a healthy balance sheet. Our net debt leverage lowered to approximately 1 point times in the quarter – 1.5 times in the quarter. But please note, this does not include any of our expected acquisition financing as that does not become funded until the deal close. In Q3, we returned approximately $73 million to shareholders in the form of a regular quarterly dividend of $0.125 per common share. For Q4, the Board of Directors has approved a regular quarterly cash dividend of $0.125 per share to be paid on March 16, 2022, for all shareholders of record as of the close of business on February 22, 2022, as described in the press release. We still have approximately $1.8 billion remaining in the current share buyback program, which is not being deployed at this time due to the pending Avast transaction. As a reminder, depending on the Avast merger shareholder elections, an incremental share buyback of up to $3 billion is possible to the extent that Avast shareholders elect for the majority stock option. Before I get into our guidance, let me give you a brief update on the Avast merger financing. As you may recall, back in August of last year, we successfully syndicated our term loan A commitments for the acquisition financing. At the start of this calendar year, we launched the syndication of our term loan B commitments to be prepared for the deal close. We received strong interest and great reception in the debt markets. In fact, the demand was notably oversubscribed. We're pleased to report that we have successfully raised all of the required financing we had planned for this merger and we'll be ready to fund at the accelerated date for the deal close. Now turning to our outlook. We have narrowed our full year fiscal 2022 non-GAAP guidance to the high end of the range. We now expect to achieve fiscal 2022 annual non-GAAP revenue in the range of $2.795 billion to $2.805 billion, assuming stable currency rates quarter-over-quarter, which translates to approximately 10% growth year-over-year in constant currency. For fiscal 2022 annual non-GAAP EPS, we expect to be in the range of $1.73 to $1.75, narrowing against that high end. Please note this guidance does not include any impact from the anticipated Avast merger close. We look forward to closing out another successful fiscal year. We remain well positioned as the leader in cybersafety. We have growing momentum, a very healthy business model and strong operating capabilities. I want to reiterate what we said last quarter. As we navigate forward, we will continue to challenge ourselves to anticipate, prioritize and meet customer needs in a growth-focused manner. Thank you for your time today, and I will now turn the call back to the operator to take your questions. Please do keep in mind, we are not able to answer any questions related to any specific M&A at this time. Operator?

Saket Kalia:

Great. Hey, Vincent. Hey, Natalie, how you’re guys doing?

Saket Kalia:

Absolutely. Thanks for taking my questions here. And great to see the results. Vincent, maybe I’ll start with you. I understand the disclaimer just on talking about specific M&A, but I think the most surprising news with the release here, in my view, is the earlier expected close for Avast on February 24. And so maybe to the extent you can, can you just share with us just some of the regulatory hurdles left, right, just to understand the time line from here to the 24th? And then also to – in as much detail as I guess you’re allowed to, what gives you the confidence in that earlier close date compared to the June time frame that we thought about earlier?

Saket Kalia:

Yes, absolutely. We’ll look forward to that. Natalie, maybe for you just to zero in on the core business. To Vincent’s point, I mean, great to see the double-digit bookings growth. You talked about a couple of the levers in your prepared remarks, the better retention, the ARPU and continued customer acquisition. Can you just go one level deeper into sort of how you’ve been able to accelerate that growth to double digits here?

Saket Kalia:

Got it, got it. That makes a lot of sense. Vincent, if I could squeeze another one in, it’s a product question. I thought the social media monitoring solution that was announced recently was very interesting. I was wondering if you could just talk a little bit about the competitive landscape there and the additional value that you can capture with a tool like that. Because I guess in the world of unfortunately, cyber bullying, I imagine that's an interesting product. So can you just dig a little deeper into that?

Saket Kalia:

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

Operator:

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

Vincent Pilette:

Yes. No, very good question. So every geography is important. But as you know, Norton came with a more U.S.-centric base, right? 70% of our business coming from there. And when we started as a company two-years ago, we say we have a big opportunity internationally, first, with the current product portfolio, and we did that. Then we realized that in many local countries, there's many features that are more free features and introducing, in our portfolio, the ability to manage a freemium model was important. We acquired Avira and we did a lot of testing and realized that actually combining in one country under the same roof at full-life cycle from freemium to premium to full cybersafety platform is actually working. And we were able to grow almost all line of all cohorts when we're doing those tests locally. So that has been, of course, a proof point that give us the confidence to say, hey, the combination with Avast would be definitely a fantastic, very powerful move to offer more innovation to these customers, including the commitment to the free, and that's number one. Number two is, we have seen it with Avira but also with Norton, as we continue to move more value up the, I can call it, value chain, when you look at the pyramid at the base, the basic security moving into your data being protected and your data inform a live, protecting your full live, that's an identity or multiple identities and protecting that. We can see both, of course, the value creation of the ARPU going up and then the retention actually going up along with the customer satisfaction. We started to launch more combined product AntiTrack starting at the basic with Dark Web Monitoring in many different countries to introduce the notion of that identity protection. And you'll see us more committed and going to drive that digital identity internationally. In Europe, as you know, digital identity has a decent meaning than in the U.S. And so having a presence in each region and understanding the – both the local market in a global framework is very important and we'll be fully committed to that. The third one, I would say, internationally that we have seen is once a customer gets more of that value that I mentioned under either Norton Identity or different single products, AntiTrack or others, we've seen retention improving. Some of the Avira retention improved internationally and we can see in the various countries. Every country has a different renewal rate, but they move up when they move up the value chain and become more a member of a cybersafety platform. So that gives you an idea, if you want, of the different levers we will have to continue to accelerate growth as we share best practices with our friend at Avast.

Vincent Pilette:

I totally agree with you. Let's be very clear. We know that to reach out the 5 billion Internet users, we can't just do it through a DTC business model. We have to continue to partner, whether it's going indirect to a simple channel or combining with other solutions to offer a better mix or a fully integrated value, combining, for example, with an insurance provider and a cybersafety offering, et cetera. So expect us to continue to develop our channels that way. I think we mentioned publicly that employee benefit was one of them. That's more U.S.-centric. We've increased our investment a year ago in that and we now see the fruition to that. There too, it's not only a channel because then we get feedback around adjustment to the product portfolio and we can add more value for the employee benefit of customers. So customers that come through that channel. We want to be – of course, we want to move fast. Of course, we want indirect channel to be bigger but we want to be very thoughtful, making sure that our brand is recognized, that we have engagement with the customers, which is not the case with every legacy indirect channels, making sure we have the ability to continue to move up the value chain of customers. Those are some of the criteria we really consider before really putting the trigger on increasing investment in one area. But a lot of opportunities there, want to be thoughtful. We're particularly excited – sorry to come back with all the time with that, but when Avast will come in, they have a VSB/SOHO Channel, so focusing on the gig economy or the home-worker person around that cybersafety, we expect to increase that channel as well. So – and we have none in our NortonLifeLock. So definitely expecting direct channel to continue to be an expanding part of our go-to-market strategy.

Operator:

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

Natalie Derse:

Yes. Thanks for the question. So look, growing our customer base has consistently been and will continue to be a key ingredient to our strategy. And we've just posted our ninth consecutive quarter of quarter-over-quarter net-ads. But we've chosen to report our customer ads to you defined as direct customers. We'll continue to invest in driving this area, very, very fruitful to acquire customers to direct acquisition. But it's not the only avenue to customer acquisition. I think you've heard us today a couple of times talk about the indirect channels. These are diverse channels that we can go to market and really expand our reach, and we're putting resources behind that. We absolutely want more customers, direct paying customers through our funnel. And that's why it's so important for us to focus on how we expand our reach globally in all different channels. The direct channel is becoming increasingly more competitive; both from a competitive spend perspective but also just add costs. And so we're trying to strike the right balance and really leverage all of the diversity of the channels that we have out there to acquire users and/or indirect customers that will over time feed into our installed base.

Unidentified Analyst:

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

Vincent Pilette:

And when it comes to gross, we balance retention, ARPU, new customer acquisitions. If your question is, can you go higher than the $9 average? The answer is yes. We still have the majority of our customers that don't have identity protection that are just on the core security. Nobody is anymore just on the AV. They have more than just security like password manager, et cetera but they haven't really made the leap yet on understanding the benefit of having identity – digital identities being protected. And I think that's really our effort, creating the innovative portfolio to really drive that increased adoption of identity protection.

Vincent Pilette:

Thank you.

Vincent Pilette:

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

Mary Lai:

Thank you, Darrell and good afternoon, everyone. Welcome to NortonLifeLock fiscal 2022 Second Quarter earnings call. Joining me today to review our Q2 results are Vincent Pilette, CEO and Nally Jersey CFO. As a reminder, there will be a replay of this call posted on the IR website along with our earnings slides, press release, and materials defining our non-GAAP metrics. I'd like to remind everyone that during this call, all references to the final metrics are non-GAAP and all growth rates are year-over-year, unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our Press release, which is available on the IR website at investor. nortonlifelock.com. In addition, we previously announced the merger of NortonLifeLock and Avast. The information shared today will be limited to what has already been disclosed in the document published on our website in connection with the deal. Today's call contains statements regarding our business, financial performance, and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which may be considered forward-looking statements and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on our current beliefs, assumptions, and expectations and speak only as of the current date. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC. And in particular, our annual report on Form 10-K for the fiscal year ended April 2nd, 2021. And now I will turn the call over to our CEO. Vincent.

Natalie Derse:

Thank you, Vincent. And hello, everyone. To all our customers, shareholders, and listeners around the world who are celebrating Diwali today, may the festival of lights bring joy and happiness to you and your families. For today's discussion, I will focus on non-GAAP financials, starting with our Q2 results and then provide our outlook for Q3 in full-year. We delivered another solid quarter, rounding out a strong first half of our fiscal year. Our Q2 revenue was $695 million, up 11%. Our growth remains broad-based across GOs and products. Booking’s growth of 7% was supported by our renewal efforts, expanded product offerings, and continued international expansion. Our total direct customer account increased to 23.3 million, adding 2.6 million customers year-over-year and adding 178,000 net new customers quarter-over-quarter. This was our eighth consecutive quarter of sequential net direct customer adds. In a quarter where there is seasonally lower demand, our strong net adds in Q2 is evidenced that there is growing demand for our products. And we feel proud to have added over 300,000 net new customers in the first half of our fiscal year. Our operational metrics remained strong with 85%-unit retention. And our monthly average revenue per user or ARPU, increased on a sequential basis to $8.85. As a result, our direct business maintained consistent growth momentum up 9% in revenue. We continue to drive higher engagement with our existing loyal customers through the accelerated pace of new product releases while scaling up our cross-sell efforts. We're also reaching more audiences with the expansion of our identity protection offerings into more international markets, providing broader cyber safety protection to newer cohorts of customers. As Vincent mentioned earlier, our partner business again posted strong results in Q2, up 25% year-over-year, with continued strength in employee benefits, as well as growth from other distribution channels. Although it accounts for approximately 10% of our total, our partner business remains a key tenant of our long-term growth strategy and will continue to be an important investment area for us, and we are encouraged by the year-to-date growth on Locks thus far. Turning to profitability, Q2 operating margin was 52%, up 200 basis points year-over-year. We operate with a growth-focused approach in our investment decisions. With sales and marketing, we are constantly evaluating the effectiveness of us spend to optimize how we reach consumers, and market our products to maximize the return on these investments for both the short-term and long-term in an increasingly competitive advertising environment. With R&D, we have focused our efforts on increasing the pace of new product launches while maintaining a robust, evolving product pipeline for our customers. And we sell [Indiscernible] are investments through productivity gains and lower infrastructure costs. Operating at 87% gross margin, and with G&A less than 5% of revenue, as we drive long-term sustainable growth. Q2 net income was $255 million up 19% year-over-year. Diluted EPS was $0.43 for the quarter, also up 19% year-over-year and at the high end of our guidance range. We remain focused on EPS expansion in achieving our long-term EPS objective of $3 that we shared back in May this year. Turning to our cash flow and balance sheet. Q2, operating cash flow was $60 million and free cash flow was $59 million, which included seasonal tax payments. Year-to-date operating cash flow was $318 million in line with our net income improvement in growth. We ended Q2 with over $1.5 billion of total cash, which includes the cash proceeds from the July sale of our Mountain View LS buildings. We remained levered at approximately 2 times net debt and maintain both a strong liquidity position and a healthy balance sheet. In Q2, we also returned approximately $73 million to shareholders in the form of our regular quarterly dividend of $0.12.5 per common share. For Q3, the Board of Directors has approved a regular quarterly cash dividend of $0.12.5 per common share to be paid on December 15th, 2021 for all shareholders of record as of the close of business on November 22nd, 2021, as described in the press release. And a reminder that while we still have approximately $1.8 billion remaining in the current share buyback program, we cannot deploy it in the short-term due to the pending Avast transaction. Now, turning to our Q3 and full-year outlook.

Natalie Derse:

We look forward to building on our growth momentum and consistent profitability in the second half of this year. And we are well-positioned to deliver on our objectives. Even with the macro impacts around inflation, foreign exchange rate fluctuations, and the evolving pandemic conditions, we have successfully navigated through and continue to hit expectations. As we look forward, we will continue to challenge ourselves to anticipate, prioritize, and meet customer needs in a growth focus manage -- manner. Thank you for your time today and I will now turn the call back to the Operator to take your questions. Please, do keep in mind we are not able to answer any questions related to any specific M&A at this time. Operator.

Vincent Pilette:

Good afternoon.

Vincent Pilette:

Yeah.

Natalie Derse:

Sure. Thanks, Saket. Look, I'm not surprised at the question around 7% bookings, I am going to focus on bookings in the response to your question. But I'm also not surprised that our Q2 results as it's in line with our models, our internal models. As you know, we don't guide bookings, but we did share that Q2 is historically, a seasonally lighter quarter. We also recognized early on that even if you look at the external search traffic metrics, either on Google metrics, analytics, etc., and you hone in on our branded and non-branded terms, we knew that search volume was lower than prior quarters in what we saw last year. And then we also saw very early on that the advertising spend being put into the market across our competitive landscape was up. The other thing I'd encourage you guys to look at is, as you know, with our recurring business model and as you know, with customer acquisition, when they get to the first-year retention and the renewal, there's a healthy step-up in terms of the bookings amount that we get as those as those customers choose to renew with us. So, you really have to date back to last year in Q1, we added 379,000 net new customers. Again, factor in the seasonality component from Q1 to Q2 last year at this time, we added about 117,000 net customers. When you factor into the model, the step-up in the renewal bookings that we get from that renewable customer base, it would point you to a 7% result for us.

Saket Kalia:

Got it. Got it. That's very helpful. Vincent, maybe for my follow-up for you, a lot of good things happening internationally. Can you just remind us how big is international currently as a percentage of the business? And what's -- I guess, how big can you see international long-term as a percentage of total? And is that more of an antivirus type of market? Is that more of an identity monitoring market? Is it a little bit of both? Curious how you see international longer-term.

Saket Kalia:

Very helpful. Thanks, guys.

Operator:

Thank you. [ Operator's Instructions] Your next question comes from the line of Q - Hamza Fodderwala from Morgan Stanley. Your line is now open.

Vincent Pilette:

Sure.

Vincent Pilette:

If you don't mind, I'll take it and I'll step back a little bit in a broader context. First, as you know, we've acquired Avira. Our number 1 objective is to scale our cyber safety platform. And you're going to see us coming to invest into the freemium model, expanding the freemium model to above security, expanding to other countries. And that's our first point of entry. We would love that the 5 billion Internet users are all fully consciously protected from cyber criminality. When it comes to then our ongoing prices, obviously, pricing, structure, and how do you up-set and move to a premium model, have different structure. First, your price, as you know, as a promotion to get in, the first time you get in, and then you have the renewal price at the normal MSRP that we have set. And then with tracking, the dynamic of cost, inflation, competition in every country. It is a dynamic environment. It is a competitive environment, and so our pricing philosophy follows the value we provide to the members as we continue to add new product and new value to that membership, then customers up to higher level of membership. And that is the whole business model the way I'm describing it.

Operator:

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

Operator:

Sure. [Operator Instructions].

Operator:

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

Mary Lai:

Thank you, Chino, and good afternoon, everyone. Welcome to the NortonLifeLock's fiscal 2022 first quarter earnings call. Joining me today to review our Q1 results are Vincent Pilette, CEO; and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on our IR website, along with our earnings slides, press release and supplemental materials, defining our non-GAAP metrics. I'd like to remind everyone that during this call all references to the final metrics are non-GAAP and all growth rates are year-over-year, unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release, which is available on our IR website at investors.nortonlifelock.com. Today's call contains statements regarding our business, financial performance and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which may be considered forward-looking statements, and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on 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 filing with the SEC and in particular our annual report on Form 10-K for the fiscal year ended April 2, 2021. And now, I will turn the call over to our CEO. Vincent?

Natalie Derse:

Thank you, Vincent, and hello, everyone. For today's discussion, I will focus on non-GAAP financials, starting with our Q1 results and then provide our outlook for Q2 and full year. Fiscal year 2022 is off to a strong start. Our Q1 revenue was $691 million, up 13% year-over-year on an as-reported basis, delivering above the high end of our guidance range. We grew bookings by 12% in the quarter. Our growth was driven by broad-based strength across all geos and products and included a 2-point positive impact from FX. Our total direct customer count increased to over 23.1 million, adding 2.6 million customers year-over-year and adding 150,000 net new customers quarter-over-quarter. This was our 7th consecutive quarter of sequential net customer adds, a testament to our growing value proposition. Our customer retention rate, a unit retention metric, remains stable at 85%. Our monthly average revenue per user, or ARPU, is up on a sequential basis to $8.84. Our growing customer base, combined with our strong retention rate and expanding ARPU, accelerated the revenue growth of our direct business to 11% year-over-year. We continue to add more in-demand products and features into the portfolio to assist our cross-sell and upsell efforts, keeping loyal customers engaged through their life cycle. As we continue to grow our customer base, it is important to note that our first year ARPU and retention rate for newly acquired customers is generally lower than our total average. But our growing product portfolio and customer-centric mindset make us well positioned to foster growth with these customers while expanding our reach to new audiences. Our partner business is a key tenet of our go-to-market strategy and once again posted strong results in Q1, up 29% year-over-year, including Avira and with broad-based growth across our distribution channels. Our employee benefits channel continues to post double-digit growth with an expanded pipeline. More small and mid-market employers are discovering that our identity theft protection solutions help mitigate the rapidly evolving cybersafety threats, including recent concerns related to unemployment and tax fraud. We're proud of the progress we've made so far and are excited about the upcoming expansion efforts in this channel. We also drove double-digit retail growth in key European countries as we continue to adapt to the market conditions in each country and focus on building the strategic partnerships needed to achieve our long-term goals. Turning to profitability. We remain focused on executing to achieve our long-term strategy and consistently drive sustainable growth with operational discipline. As I shared at our Investor Day, we continue to drive the core business at or above a 50% margin rate with Q1 operating at 51%, up 410 basis points year-over-year. In the quarter, we invested in performance marketing and product innovation. With our marketing investments, we operate with a disciplined approach in new customer acquisition, measuring and ensuring effectiveness along the way while adapting to consumer behavior shifts in the market and newer media offerings. We keep our eyes on the marketplace and continue to evolve our marketing spend mix to expand our reach in a relevant and efficient manner. With R&D, we continue to accelerate the pace of product introductions, investing to expand our product portfolio and provide an increasingly differentiated value proposition for consumers, all the while focused on operational excellence and funding additional investment capacity through G&A efficiencies. Q1 net income was $248 million, up 32% year-over-year. Diluted EPS was $0.42 for the quarter, up 35% year-over-year and at the high end of our guidance range. We continue to prioritize sustainable growth and maintain strong operational discipline to deliver EPS expansion in line with our long-term strategy. Turning to our cash flow and balance sheet. Q1 operating cash flow was $258 million, and free cash flow was $257 million. We ended Q1 with over $1.2 billion of total cash and $1 billion of undrawn revolver capacity. Please note, this does not reflect the cash proceeds from the sale of our Mountain View Ellis buildings, which closed in mid-July, for total cash proceeds of approximately $358 million. We continue to have a strong liquidity position, healthy balance sheet and are levered at approximately 2x net debt. Now, let me spend a few minutes specifically on capital allocation. In Q1, we returned approximately $74 million to shareholders in the form of our regular quarterly dividend of $0.125 per common share. At the end of Q1, there was approximately $1.8 billion remaining in the current share buyback program, which we intend to deploy opportunistically. As described in the press release, for Q2, the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on September 15, 2021, for all shareholders of record as of the close of business on August 23, 2021. Now turning to our Q2 and full year outlook. We expect Q2 non-GAAP revenue in the range of $690 million to $700 million, which translates to 10% to 12% growth year-over-year. We expect non-GAAP EPS to be in the range of $0.41 to $0.43 per share, assuming stable currency rates. We also reiterate our full year non-GAAP guidance presented in May at Investor Day, which is revenue growth of 8% to 10% plus year-over-year and EPS in the range of $1.65 to $1.75. Q1 was a great start to the year, and we look forward to building on this growth momentum with our scalable foundation. We're excited about the tremendous opportunities ahead. Thank you for your time today, and I will now turn the call back to the operator to take your questions. But please do keep in mind, we are not able to answer any questions related to any specific M&As at this time. Operator?

SaketKalia:

Maybe to start out with you, Natalie, just on the core business. I was wondering if you could talk a little bit about how you think about the seasonality of net adds in a typical year? And perhaps any color that you could give on retention rates in the quarter. Does that make sense?

SaketKalia:

Got it. Very helpful. Maybe for my follow-up for you, Vincent. Understanding, we don't want to ask anything about sort of the headlines out there, maybe I can ask a broader question about capital allocation. Maybe outside of M&A broadly, how do you think about the priorities for capital allocation sort of going forward?

Operator:

Next one on the queue is Jonathan Ruykhaver from Baird.

VincentPilette:

So to be very clear, right, so we are under strict rules, we cannot talk about specific case and I want to make sure we follow all the rules, including the UK rules considering the -- one of the cases I think, as you know. So I'll remind you what we said in May in terms of the broad business, we talked about our long-term aspirational view and we said that we have multiple levers at a high level split between business growth, efficiencies and then use of capital. And use of capital, we talk about just the capital allocation model, which has two-prong, the buyback and the M&A. And we said that the way we manage the business in the long term, all of those levers should be contributors to our long-term aspiration. When we think about more tactical capital or capital structure, we look at again, thereto at all levers, all possible with our long-term ambition goal in mind to make sure we achieve those. And I'll leave it at that, and hopefully, you understand that we are under strict rules we intend to respectfully.

VincentPilette:

100%. So Symantec kind of almost owned the majority of those channels in the past decade ago or 5, 6, 7 years ago. Those relationships had long tail, and we still have a little bit of those into our business today. As you know, the economic on a long-term basis take a 7-year or 10-year view, requires more investment upfront and then profitability over time as your total customer value has a long tail 6, 7 years. So that's how it works. When Symantec decided to really focus on maximizing the profit of the consumer division to fund their enterprise turnaround, they made certain decisions. When we became NortonLifeLock, 100% focused on consumers, really maximizing the protection for digital lives of every consumers connected to the Internet. We said, and I'll confirm that today, we look at always to reach the customers, all go-to-market channels. It's just they have to make sense financially in the short, mid or long-term view and we'll go and develop the best, most diversified distribution channel for reaching all those consumers, creating the awareness and fulfilling the demand. As part of that, I also said we don't have anything that we want to exclude from and obviously, relationship with PC manufacturers, although we are focused on the user experience and the Internet and the cloud, digital lives is one of the ways that could be favorable. And so the relationship we announced with Lenovo or the few remaining relationship we have in our current distribution channel are important, and we'll continue to look at creating capacity in our P&L to go and develop all channels, if you want, to go to consumers.

MatthewHedberg:

Vincent, I wanted to follow up on Saket's question on retention. Obviously, it's clear that it remains strong, overall, 85%. I guess I'm wondering if you could provide a little bit more color on -- obviously, you noted the strong sub add quarter, last year due to COVID, how some of those initial COVID subs are doing from a retention? And also Avira.

MatthewHedberg:

And then something else that's kind of stood out to me, ARPU grew sequentially. And it hadn't been growing for a while. I think we always thought with Norton 360, there would be an upward bias to ARPU. I know it was a subtle increase sequentially, but it was up. Anything to call out there in terms of trends or anything that you noticed?

Operator:

[Operator Instructions]. Next question on the line is Hamza Fodderwala from Morgan Stanley.

VincentPilette:

So I just want to be clear when you call dip and every time and see that, I want to be sure we qualify it correctly. Last year -- yes, last year, we grew sequentially between 100,000 net new customers to 400,000 net new customer depending on the quarter. We also know that Q1 and Q2 had a seasonally low quarter on a sequential basis, and then Q3 is more security driven and Q4 is a tax identity-driven quarter. And so growing 150,000 a quarter, while it's less than Q4, of course, of last quarter, it is a very strong performance in a first seasonally low quarter sequential net customer adds. So it's right on our plan. It's right on our short-term and long-term commitments. Do we -- would we want to have a higher awareness and penetrate faster? Of course, but we feel pretty good about that plan. What is the impact of the COVID or post COVID market opening versus the normal effect of more people being in summertime on vacation, they’re mounting on the beach and less on their digital life? That we cannot say. And I think it will always be a business that in the winter is a bit more dominant than it is in the summer.

VincentPilette:

Yes. And for those of you from NortonLifeLock that are listening, I want to thank you for driving a spirit of growth. I can tell you since we became NortonLifeLock, we told everyone, look, the opportunity also we committed to a mid-single-digit is much bigger than that. Look at the underpenetrated market. It is a business that had not been invested enough in the past as they shifted from partnership, the OEM mainly into direct-to-customer and build a very strong direct-to-consumer engine. We said it will be much more diversified and go in every area. There is no one salesperson within our go-to-market that doesn't come during our weekly or monthly reviews and say I have a new idea, should we invest in that. And Natalie and I are going through the review, look at the investment and decide to invest. We have increased our sales capacity in a few of the channels. I mentioned a quarter or 2 quarters ago, our employee benefit channel that has been growing double-digit and we continue to build that up. Mentioned, of course, the OEM is still small, but we can do more. We have our xSP business that continue to grow. And then Natalie mentioned that between online and physical retail balancing it and really strategically moving through the different opportunities by local market has always been an effort. Recently, a few months ago, we also started a country-by-country strategy that look at all of our different channels, if you want, in trying to balance our investment in a coordinated way at the local level, and that also is bearing its fruits. You should see us continue to invest in our GTM organization.

SaketKalia:

Thanks for letting me back in queue here. Vincent, you mentioned the Avira acquisition earlier. I was wondering if you could just comment a little bit about what you're seeing in sort of their end markets in Europe specifically? What are you seeing in that market -- maybe just to expand, what are you seeing in terms of Europe around market share in core antivirus as well as perhaps the opportunity to cross-sell your identity monitoring products in that geo?

Operator:

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

Operator:

This concludes the conference call. Thank you.

Mary Lai:

Thank you, Ann, and good afternoon, everyone. Welcome to the NortonLifeLock fiscal 2021 third quarter earnings call. Joining me today to review our Q2 results are Vincent Pilette, CEO; and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the IRwebsite along with our earnings slides, press release and supplemental materials defining our non-GAAP metrics. I’d like to remind everyone that during this call all references to the final metrics are non-GAAP and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release which is available on our IR website at investor.nortonlifelock.com. Today’s call contains statements regarding our business, financial performance and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry, which may be considered forward-looking statements and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on current beliefs, assumptions and expectations, and speak only as of the current date. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC and in particular our annual report on Form 10-K for the fiscal year ended April 3, 2020, and recently filed quarterly reports on Form 10-Q. And now, I will turn the call over to our CEO, Vincent.

Natalie Derse:

Thank you, Vincent, and hello, everyone. For today’s discussion, I will focus on non-GAAP financials starting with our Q3 results and then provide our outlook for Q4. We delivered strong performance in Q3, with growth year-over-year and quarter-over-quarter across our key metrics. Our Q3 revenue was $639 million, up 6% year-over-year and above the high end of our guidance. We accelerated reported billings growth to 10%, including a 2-point positive impact from FX in our ending contract liability balance. Our growth momentum was driven by broad base strength across all geos and products, as well as a successful holiday season. Our total direct customer count increased to 21 million, adding 334,000 customers quarter-over-quarter and 876,000 customers year-over-year. This was our fifth consecutive quarter of net customer adds sequential. Our customer retention rate, an unit retention metric remained stable at 85%. Our monthly average revenue per user or ARPU was over $9 this quarter, up 1% year-over-year and stable quarter-over-quarter. As we continue to grow our customer base, it is important to note that our first year ARPU and retention rate for newly acquired customers is generally lower than our total average. As we explore new business models and add more customers globally, ARPU can vary as our mix changes. We will look for opportunities to improve ARPU and first year retention as we continue to grow and diversify our business. We are still in the early innings, but our go-to-market efforts are beginning to take hold. We are leveraging our distribution channels to reach more customers globally. We accelerated growth and our direct business in Q3, driven by our growing renewable base. As we continue to add new customers, we are seeing positive data points and retention directly correlated with our Norton 360 membership suite. As we have accelerated the pace of our innovation and launched new in-demand products and features, we are beginning to see improvements in our cross-sell and upsell efforts. And we have the opportunity to accelerate further, as we expand our reach to new audiences and continue to foster growth in our loyal customer base. In our partner business, Q3 revenue grew 15% year-over-year. We continue to make strides internationally signing new partnerships that we expect will scale over the long-term. As we have noted in previous conversations, these partners’ sales cycles are longer, taking one year to two years or more to realize. We continue to invest in these partnerships for the long-term as they are strategically important for us to expand our reach. Next, Q3 operating margin was 51%. We’ve remained focused on driving operational discipline and prioritizing investments in product innovation and diversified marketing. With R&D, we continue to accelerate the pace of product introductions, growing and expanding our product portfolio, and providing an increasingly differentiated value proposition for consumers. With marketing we continue to invest to drive new customer acquisition, as well as diversify our spend into more digital and international channels to help widen our audience. Measuring and ensuring effectiveness along the way. We are disciplined in our approach and we will continue to invest in sustainable growth. Q3 net income was $229 million, up 44% year-over-year. Diluted EPS was $0.38 for the quarter, up 52% year-over-year and at the high end of our guidance range. We are now operating above the $50 annualized EPS level and have established a strong foundation to build upon. As we look to the future, we will continue to prioritize EPS expansion, while taking advantage of the sustainable growth opportunities. Turning to our cash flow and balance sheet, Q3 operating cash flow was $293 million and free cash flow was $291 million. For a few quarters now we have been generating more than $900 million in annual free cash flow, excluding stranded costs. We ended Q3 with over a $1 billion of total cash and a $1 billion of undrawn revolver capacity. We continue to have a strong liquidity position and are levered at approximately 2 times net debt. Now a quick update on our real estate assets held for sale. We see a lot of activity and interest in each of our properties and recently agreed to terms for the sale of one of our buildings in Mountain View. The buyers are expected to complete their due diligence in our fourth quarter. While we’ve seen a lot of interest and continue to be an active discussions on all properties, we remain focused on achieving fair market value for the remaining assets for sale in Mountain View, Dublin and Tucson. Let me spend a few minutes specifically on capital allocation. In Q3, we returned approximately $207 million to shareholders in the form of our regular quarterly dividend and share repurchase. In the quarter, we paid a dividend of $12.5 per common share. Despite the limited open trading window, we were active in the last month of the quarter and deployed $133 million and purchased 7 million shares. As of the end of Q3, there was approximately $420 million remaining in our $1.6 billion share buyback authorization, which we expect to continue to deploy opportunistically. As described in the press release, the Board of Directors approved a regular quarterly cash dividend of $12.5 per common share to be paid on March 17, 2021 for all shareholders of record as of the close of business on February 22, 2021. Before I move on to our Q4 outlook, let me provide an update on Avira. As you heard from Vincent, we closed the acquisition of Avira in January, which falls in our fiscal fourth quarter. While it is early, the integration process is well underway and on track to plan. As a reminder, we expect to add approximately 3 points of growth to our total revenue and be financially accretive in the first year, targeting to achieve 50% operating margin post-synergies within six months. Now turning to our Q4 outlook. We expect Q4 revenue in the range of $655 million to $665 million, which translates to high single-digit growth year-over-year. We expect non-GAAP EPS to be in the range of $0.37 per share to $0.39 per share, assuming stable currency rates and share count dilution from Q3 buybacks. Our q4 outlook includes the partial impact of Avira. As we enter the last quarter of our fiscal year 2021, we are proud to have achieved all of the long-term commitments we set when we stood up NortonLifeLock, including revenue growth of mid-single digits, operating margin at 50%, generating annualized free cash flow of more than $900 million and an annualized EPS of $1.50. Achieving all of those is a true testament to our renewed focus on execution and building a consistent and sustainable track record. We look forward to closing out the fiscal year strong with accelerating momentum and a scalable foundation and we’re excited about the tremendous opportunities ahead. Thank you for your time today and I will now turn the call back to the Operator to take your question. Operator?

Gregg Moskowitz:

All right. Thank you very much. Good afternoon, guys. Congratulations on a good Q3.

Gregg Moskowitz:

So, Vincent, you’ve invested a lot more in marketing over the last 12 months and it seems pretty clear, inclusive of these results, that you’re -- that you’ve already seen a really good yield on those investments. So looking forward, how much more room for improvement do you see with regard to driving traffic to the site and increasing monetization?

Gregg Moskowitz:

All right. Perfect. And then you mentioned in your prepared remarks that you’re seeing early improvements with newer customer cohorts and that’s interesting, because typically that first year renewal rate is, of course -- the first year renewals, of course, the most challenging. So my question is, your retention has been extremely stable at 85%. And I know it’s early, but given some of the improvements that you’re seeing, is there potential to get that retention higher?

Gregg Moskowitz:

All right. Terrific. Thanks. Maybe just one quick one for Natalie. So the billings growth of 10% reported 8% constant currency. I just wanted to confirm that none of that includes Avira, and then also, how much of Avira is sitting in deferred revenue as of Jan 31st? Thank you.

Gregg Moskowitz:

Okay. Even though it was closed at the at the end of January, it’s not fitting in on the balance sheet at all, is that right?

Gregg Moskowitz:

Okay. Fantastic. Thanks for the clarification. Nice job.

Operator:

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

Vincent Pilette:

Thanks, Saket.

Vincent Pilette:

Yeah. Let me zoom out even one more. We definitely see more and more consumer moving the activities online, the pandemic has only accelerated that movement and I think a lot is here to stay. Along with that, as you know, cybercriminals are adapting and we’ve seen an increase in activity there’s. And the awareness from a consumer standpoint to have a cyber safety protection is more relevant than ever. We feel good about where we are as a company both investing as we discussed organically and in organically. We have a platform, the cyber safety integrated platform we’ve launched, Nolan 360, covering three pillars security, privacy, and identity protection and restoration. And then along with that, we said, we’re going to continue and accelerate the growth by doing three things. One is, accelerating our penetration of international markets. The second one was to, while we doubled on a direct-to-consumer go-to-market model, explore new go-to-market models, partner with companies like terrorists [ph] to penetrate Canada or explore new business models. Obviously, a membership plan was the first in the market for cyber safety. We’ll continue to build on that. And the third one is adding new functionalities. We came with some title, et cetera. When I think those three dimensions Avira plays in all three, expanding internationally, obviously, they are very strong in Europe. We were number three market share in Germany with Avira, we moved to number one and we accelerate our growth across Western Europe. And Avira to penetrate internationally, many markets will be different in asset. The second one, which you mentioned, which is the free model, going to market in different ways is very important. We have the direct-to-consumer premium model. We are doing B2B to C activities and trying to bring combined solutions to consumers. The free model for us is just one more tool in our toolbox. As functionalities could become more commoditized, we can have an offer first access for all consumers to cyber safety using some of those in a freemium model and then using the muscle of cross-selling and upselling and converting to the full portfolio over time. So it’s a way of acquiring those eyeballs, if you want an experience of on cyber safety to then later on demonstrated that -- that’s a value without spending more in marketing. And the third element is they had a few nuggets in their technology. They have very nimble and creative engineering teams and there’s some functionalities, like we mentioned, the gaming booster functioning from Bulgaria. We can integrate into our gaming additions of Norton 360. So we’ll continue to look at their capabilities from a portfolio perspective to enrich our overall experience. So that’s how Avira plays into our growth moving forward.

Natalie Derse:

Yeah. Thanks for the question. So look we’ve seen consistent customer adds with five quarters in a row. If I take a look -- if I step back and take a look at just this fiscal year, 600,000 net new ads in the first-half, now 300,000 in Q3, with growth across the Board, across geos, across product lines and positive contribution from holiday. Now to answer your question around renewal and conversion. Yes, we are seeing early improvements in our renewal rates related to our new customer cohorts. And now look it’s early, but I would say the Norton 360 platform is definitely helping us. It’s gaining good traction with now nearly 60% of our base. And so all in all of that’s helping us to sustain that strong 85% overall retention.

Natalie Derse:

Thank you.

Operator:

Our next question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.

Brad Zelnick:

Great. Thank you so much. Hey, Vincent. Congratulations on a great quarter.

Brad Zelnick:

And to the team as well. I wanted to just touch on international a bit more. It’s nice to hear about the success that you’re having in Japan. And I was hoping you can just better -- help us to better understand the international opportunity broadly away from the freemium asset that you get with Avira, obviously that gives you a lot more reach. In which theaters does the value prop translate best, where might there be just too much competition and how should we think about the cost of reaching these markets?

Brad Zelnick:

Thank you. That makes a lot of sense. And maybe just a follow-up for Natalie, specific to the Avira deal. Can you share with us when exactly in January did it close, just so we can understand how much of a contribution it might have this in Q4 and going forward? And as well, what’s assumed in guidance in terms of contribution and if you can speak to the deferred write-down, like, what’s the mix of duration in their portfolio? Thanks.

Brad Zelnick:

Okay. Thank you.

Natalie Derse:

Hey, Fatima.

Operator:

Ms. Boolani, your line is open.

Vincent Pilette:

Yes. And the great news with our business -- digital business, we can run a lot of experiments. So we are not concluding yet from a brand perspective. But definitely there is a way to get new consumer or address consumers on the freemium model, which has certain functionalities, mainly commoditized, provided value with commoditized. And then it’s about adding the past for upselling and cross-selling the different functionalities that today are either differentiators or offered at a premium to the market. And as we discussed, our long-term success is based on that pace of innovation, introducing new functionality all the time. As cyber criminality is evolving, we continue to increase the overall level of protection for consumers, from dark web monitoring to restoration services, focus on privacy identity, all the next level. We obviously have a very rich funnel of new ideas that we working on. And so the freemium is one way, if you want to get the first access to then see more closely the value of the overall portfolio. For the short-term as you mentioned, we’re going to keep Avira separate as one brand and Norton on the other side, but obviously we testing different way in terms of branding.

Natalie Derse:

Yeah. Thanks. So from a partnership perspective, it’s pretty diverse. We’ve got a lot of different channels within the partnership business. Overall, we grew 15% year-over-year and we saw relatively broad-based strengths across all of those different channels. The one that we are really very excited about and really plays to our strengths is employee benefits. Employee benefit is really -- is a great distribution channel that widens our audience, but brings users very close to our book of business as we have the direct relationship with those users or those customers and so we’re really, really excited about that. But overall for the quarter, just overall -- just generally speaking broad stroke growth across the partner side.

Operator:

Our next question comes from the line of Matt Hedberg from RBC Capital. Your line is open.

Vincent Pilette:

Hey, Matt.

Natalie Derse:

Yeah. I would say, I hear you on the timing in terms, of course we’ve got to figure out from an employee benefits calendar. Most people really get started understanding what partners they’re going to do business with, et cetera, as those annual enrollments come later in the year. So we are definitely working hard. The employee benefits channel for us has been pretty consistent. We have been really working across the employee benefits channel to gain more partners and to really get our Norton 360 value proposition out there and really get the education and the audiences widened through the employee benefits channel. And then as we look forward, again, just to reiterate, we love this channel and we want to make sure that we are working with the partners in the right way. There’s a lot of different size and types of partners that we can go after from a growth perspective and we’re just really excited to take advantage of the opportunity. But you’re right, the time is now. I mean -- and you really have to pay attention to when those employee benefits annual enrollments are. So we’re trying to get after it for sure.

Matt Logan:

That’s really helpful. And then Vincent, obviously, maybe not the first security company when you’re thinking about your core customer base as far as impact from Sunburst, but when a major breach like that is front page news all over the place. What do you think that does for the demand environment? Just in terms of kind of mind share and awareness being front and center for consumers around security and breaches?

Matt Logan:

Thank you for the time.

Keith Weiss:

Excellent. Thank you guys for taking the questions. I think most of my questions have been answered, just a couple of clarification questions, if you will. In terms of ARPU, is there any significant differentiation between like the international average ARPUs and the U.S. that we should be keeping in mind on a go forward basis?

Keith Weiss:

Okay.

Keith Weiss:

Got it. That makes sense. And then on Avira for Q4 explicitly, is it 3 percentage points of growth in Q4 or did you not give an explicit number for the Q4 contribution as of yet?

Keith Weiss:

Okay.

Keith Weiss:

How should we think about Q4 in particular in terms of your contribution?

Keith Weiss:

Okay. Got it. That helps. Great quarter, guys. Thank you very much.

Operator:

Our next question comes from the line of Walter Pritchard from Citi. Your line is open.

Vincent Pilette:

Hi, Walter.

Vincent Pilette:

Good.

Vincent Pilette:

Yeah. Let me take the product first. Forgot the question. What is the question again on product?

Walter Pritchard:

On mobile.

Natalie Derse:

Yeah. I was just going to add, look, from a customer acquisition perspective. We don’t necessarily plan to the eyes of just LifeLock versus Norton. And I would say, it’s about reach, it’s about expanding audiences, it’s about doing it in an effective way, in an efficient way. So from our channel reach perspective we focused in the last year, really trying to diversify. Of course, historically, we’ve been more on the long form TV and radio. We’ve been diversifying into online digital channels so that we can get really relevant and interesting content out there. We can diversify the users that are coming to our platform. We’ve got really, really strong brand awareness. We’ve got brand strengths that we will continue to leverage and strengthen in the market as we diversify and really try and attract new customer acquisition, as well as get the word out there on all of our product innovation or product introductions as we build and strengthen the Norton 360 suite.

Operator:

Next question is coming from the line of Yi Fu Lee with Oppenheimer.

Natalie Derse:

Yeah. Thanks for the question. I’ll take it. Our capital allocation strategy remains relatively unchanged. And what I mean by that is, we have said, we are -- we’ve been -- for the last couple of quarters been on track to generate $900 million of analyzed cash flow. And from a capital allocation perspective, we’ve talked about three main tenants, the first one being the dividend, which we paid the regular dividend in the quarter. And then as we progress, we said we would strike the right balance to approach as it pertain this opportunistic share buyback and acquisition. And so the actions in Q3, I think speak for themselves, in terms of, if you look back and you think back to approximately November, and all things considered, now you guys know why we didn’t necessarily, we had the acquisition activity going on. As soon as our trading window was open, we opportunistically bought the share buyback to the extent of $133 million. And so, as you take that into account high say-do ratio in terms of leveraging and maximizing the value of our capital allocation tenants. And you look forward, I would -- it’s going -- our strategy remains unchanged. We will continue with the quarterly dividend and then strike that right balance on opportunistic share buyback. But we’ve not been shy to say that we are interested in M&A activity, especially as we look forward and look for those sustainable growth opportunities.

Vincent Pilette:

Yeah. Well, it all started with a vision, right? We want to both protect and empower, everyone that’s connected to the internet to live their digital life safely. That’s our vision and that gives us a wide range of opportunities to fulfill that we have not fulfilled yet. And so when you look at our overall strategy, I would say, number one is continue to scale up the cyber safety platform, three pillars today, security, privacy, and identity, and building that up. As we continue to do that, adding digital services that address the vision is very important and we’ll continue to do it increasing into the gaming verticals with new functionalities not integrating some of the bull guard functionalities that are really interesting. And so we have a long list if you want of opportunities that we are working with our engineers and our product people. And then the third element of course is to continue to expand outside of the U.S. to be a truly global in reach out everyone, if I’ve been connected to the internet that have digitalized on line.

Vincent Pilette:

Yeah.

Gregg Moskowitz:

Okay. Great. Thank you for that follow-up. And first of all apologies for earlier of your billings related question, so many simultaneous earnings calls, so many January ending quarters. So got thrown for a moment there. But I did have a follow-up for Natalie. So I know that you’re a data-driven executive just given your background and now that you’ve been in this seat for several months. I guess I’m wondering, are there opportunities to leverage data in a way that you think is translating or potentially could translate into more business for Norton LifeLock?

Gregg Moskowitz:

Right. That’s great, Natalie. Thanks very much.

Operator:

And that question will be coming from the line of Shaul Eyal with Oppenheimer. Your line is open.

Vincent Pilette:

Yeah. So we have -- as LifeLock had a mix of integrated third-party technologies and own algorithm that builds on top. So it’s a mix of the two and we’ll continue to build upon that to offer it not only in Japan, but across all countries. Someone was asking, hey, if you launch it in Japan, why don’t you launch in all countries internationally, exactly for that reason, because you want to adapt your data architecture, your sensors and your approach to the country and the data that’s relevant in each country. And so, we taking a country by country approach to build-up and the solution.

Vincent Pilette:

Thank you.

Vincent Pilette:

Thank you, Ann. The overlap between the physical world and the digital world continues to grow. More and more activities are moving online from shopping to socializing, almost every aspect of our life has a digital component. Unfortunately, many of those activities are left unprotected or weakly protected at best leaving many doors open for cyber criminals. Our vision is to protect and empower people to live their digital life safely. And while we have already accomplished a lot, since we launched Norton LifeLock over a year ago, we’re just getting started. We plan to leverage our leading technologies and integrated product portfolio, our relentless focus on customer experience, our trusted global brand, our unmatched scale in direct distribution, as well as a growth focus financial model. If I have to summarize it in four words, I would say, our future is bright. Thank you for joining and for your support, and we look forward to connecting with you very soon.

Mary Lai:

Thank you, Paul and good afternoon everyone. Welcome to the NortonLifeLock fiscal 2021 second quarter earnings call. Joining me today to review our Q2 results are Vincent Pilette, CEO; and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the Investor Relations website along with our earnings slides, press release and supplemental materials to finding our non-GAAP metrics. I'd like to remind everyone that during this call all references to the final metrics are non-GAAP and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release which is available on our IR website at Investor.NortonLifeLock.com. Today's call contains statements regarding our business, financial performance and operations, including the impact of the ongoing COVID-19 pandemic on our business and industry which may be considered forward-looking statements and such statements involve risks and uncertainties that may cause actual results to differ materially from our 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 with the SEC and in particular our annual report on Form 10-K for the fiscal year ended April 3, 2020, and recently filed quarterly reports on Form 10-Q. And now I will turn the call over to our CEO, Vincent.

Natalie Derse:

Thank you, Vincent and hello everyone. For today's discussion, I will focus on non-GAAP financials starting with our Q2 results and then provide our outlook for Q3. Q2 performance was better than expected. We delivered growth year-over-year and quarter-over-quarter on many key metrics. Our Q2 revenue was $626 million, up 5% year-over-year excluding ID Analytics. Q2 reported billings was up 7% year-over-year, including a two point positive impact from FX in our ending contract liability balance. We continue to gain momentum in both our direct and partner business. This was our 5th consecutive quarter of mid-single-digit billings growth another step in building our consistent and sustainable track record as a standalone company. We increased our total direct customer count to $20.7 million adding 117,000 customers sequentially quarter-over-quarter and adding a 608,000 customers year-over-year. We saw customer expansion across our regions and key product categories within security and identity. Overall, our customer count growth is highly correlated with our go-to-market efforts including our increased marketing investment. Our priority is to invest for sustainable growth and we have seen record customer acquisition these past couple of quarters. We are still in the early innings of evaluating changes in our customer cohort dynamics, but we remain committed to our marketing investments, so long as we continue to see the opportunity for growth. We will not take our foot off the gas pedal. We will continue to invest in developing our product offering portfolio and drive awareness and demand efficiency through our marketing and sales channels. In our partner business, revenue grew 7% year-over-year, largely driven by the continued momentum in our employee benefits channel that Vincent alluded to earlier. We are also continued to make progress on some of our more recently announced partnerships. For example, TELUS is starting to roll out our solutions nationally across Canada expanding beyond the provinces of Alberta and British Columbia. Remember, these partner sales cycles are much longer taking one to two years or more to realize. These relationships are ones that we foster over the long-term with the potential to scale meaningfully as we grow with our partners. Q2 total company operating margin from continuing operations was 50% including approximately $10 million of stranded costs. Excluding stranded cost the consumer business, margin was above 51% and Q2 head count was below 2500. While we have been operating at 50% excluding stranded costs since the divestiture, this quarter marked the first time we have met our long-term target of 50% margin on a total company basis. We will continue to operate in a disciplined manner and expect to maintain similar levels going forward. We are pleased to report that at the end of Q2, we have fully eliminated all stranded costs. Since the divestiture, we have eliminated a $1 billion of costs and right-size the company. This quarter we have also closed out all outstanding payments and claims with Broadcom, including TSA activities and as Vincent mentioned we entered into a licensing agreement with Broadcom. Looking forward, our financials will be clean of stranded cost and transition related items. Q2 net income was $215 million, up almost $100 million, and up 85% year-over-year. Diluted EPS of $0.36 was better than expected, up 100% year-over-year driven by solid execution on top line growth, the removal of our final stranded costs and favorable FX. Before turning to cash flow, let me give you an update on the remaining sale of underutilized assets. We remain confident in our efforts to reach our goal of $1.5 billion total cash proceeds, which is up from the initial $800 million target. So far, we have realized approximately $875 million of total cash proceeds including the sale of our Culver City real estate in July for $120 million. Our remaining underutilized assets are comprised of our real estate assets in Tucson, Dublin, and Mountain View. We continue to be in active discussion with interested parties for those properties and will remain disciplined in our approach to achieve fair value. Net operating cash usage was $113 million in the quarter. Impacting cash flow this quarter were the last of the stranded costs, the close out of transition related items, the licensing agreement with Broadcom and the timing of certain tax payments. Adjusting for these non-recurring items, the business continues to operate at a level of $900 million in free cash flow on an annualized basis. Turning to our balance sheet, we continue to have a strong liquidity position. We ended the second quarter with over $2 billion in total liquidity with a cash balance of approximately $1 billion and another $1 billion of undrawn revolver capacity. Let me spend a few minutes on capital allocation. In Q2, we returned approximately $80 million to shareholders, predominantly in the form of our regular quarterly dividend. We have $573 million remaining of our $1.6 billion share buyback authorization, which we will deploy opportunistically. In addition, as described in the press release, the Board of Directors approved a regular quarterly cash dividend of $12.5 per common share to be paid on December 16, 2020 for all shareholders of record as of the close of business on November 23, 2020. Looking ahead, our commitment to deliver long-term shareholder value remains unchanged. Our resilient and highly recurring business model will afford us the flexibility to be nimble, when it comes to investing for growth. We are continuously evaluating opportunities to drive profitable and sustainable growth, whether it's through product or technology innovation. entering adjacent markets, geographic and channel expansion or consolidation. We will have a disciplined and strategic approach with our capital allocation as well as with our investments. Now turning to our Q3 outlook. We expect Q3 non-GAAP revenue in the range of $625 to $635 million, which translates to approximately 4% to 5% growth after normalizing for the ID Analytics divestiture. We anticipate the non-GAAP operating margin to be approximately 50% and expect non-GAAP EPS to be in the range of $0.36 to $0.38 per share assuming stable currency rates and share count sequentially. I will now turn the call back to the operator to take your questions. Operator?

Saket Kalia:

Natalie maybe just to start with you, I think next quarter is going to be the first time that we start to see growing cohorts of subscribers up for renewals. And so the question is can you just talk about what you are expecting in terms of churn rates and perhaps ARPU impact even qualitatively, as we start to see that really for the first time?

Saket Kalia:

Vincent for my follow-up for you, with the McAfee being a public company now. Now I think we all see their performance in competing consumer business and the growth is indeed faster than what Unlock and of course Unlock has accelerated growth, but it is faster. And so I'm curious if you can just talk about what you think Unlock, can do to help bridge that gap on growth. Does that makes sense?

Operator:

[Operator Instructions] The next question is from Gregg Moskowitz with Mizuho. Your line is open.

Vincent Pilette:

No, absolutely, I think the opportunity again to address all of the challenges linked to the fact that our large move online, it's not just the number of devices, is not just the basic activities of shopping, it's not as I mentioned and as you recognize the whole set of education. It's about gaming, it's about socializing, all of those activities are moving on creating new opportunities for cyber criminals to take advantage of your data and your virtual assets. So that's a huge growing opportunity. We always had that as the investment thesis as you recall a year ago when we sold the enterprise business, which it is a huge opportunity to focus solely on the consumer aspect. We're building our capabilities, we're increasing the velocity of innovation, you've seen us launching new products at the more frequent rate, some are good learnings, although we doubled on investments, and we continue to tweak our portfolio to address those opportunities. I think in the long run, we feel really, really confident, we move from frankly a division that was focused on maximizing cash to now focusing on growth. We returned to mid-single digit growth. Let's build a sustainable machine if you want to then be able to really provide again - I'll repeat it cyber safety to everyone rights, billion of people connected to the Internet. On the 100 million people paying for standalone cyber safety.

Vincent Pilette:

Yes. And it's sort of combined. And I would also say the introduction of Norton 360 the first integrated platform making cyber safety as kind of one umbrella protection a reality. Look, if you step back a year ago, we said we're going to grow mid-single-digit, and is going to be a balanced approach, is going to come from new subscribers, improve retention and then the cross-sell and up-sell opportunities and you've seen a very balanced results if you want, turning positive new customer - more new customer coming then those leaving improved retention rate now on the unit basis reaching 85% and then ARPU that continue to be solid and growing. I think achieving that structurally mid-single-digit growth rate in our mind was always a balanced view. Last quarter, we definitely had a boost from COVID-19, but the underlying structural change in everybody's life moving more and more of activities online is a reality that fear too last, and as you know, cyber criminals adapt fast and we'll find new opportunities to steal your assets, steak your data, and I think people need to realize they need to be protected when they’re online.

Fatima Boolani:

Just my first one for you Natalie, with respect to the guidance, I'm wondering if you can walk us through any seasonality considerations that we should be mindful of either headwinds or tailwinds that you're considering, and I have a quick follow-up on the ARPU metric?

Fatima Boolani:

And just on the ARPU side, I just - excuse me, wanted to parse through the strength there. I continue to be impressed with the sequential in year-over-year growth in spite of the fact that you've introduced some lower ASP products into the mix to Ignite subscriber growth. So I'm wondering if you can kind of parse through SG what's really creating that upward tension on ARPU again in spite of the introduction of some of the lower ASP feature functionality that you've rolled into the NortonLifeLock family and that's it from me. Thank you.

Operator:

[Operator Instructions] Our next question is from Walter Pritchard with Citi. Your line is open.

Vincent Pilette:

I'll pass it to Natalie on marketing, but I do want to say that we also rolling Norton 360 the first integrated platform across all countries. We've launched dark web monitoring in Japan and in Australia. We definitely very active as we feel we are under-penetrated in those markets. Yet the need for cyber safety our global needs and so definitely international is a huge opportunity. Natalie?

Walter Pritchard:

And then just a follow-up on that question on international, what's the update on LifeLock and being able to deploy that type of a service internationally. And do you expect as you do drive international subscribers and have seen a lower ARPU just given you don't have that offering in many of your markets?

Operator:

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

Operator:

This concludes the conference call. Thank you for joining.

Soohwan Kim:

Thank you. I'm pleased to welcome you to our call to discuss our first quarter fiscal '21 earnings results. We posted the earnings materials and slides to our Investor Relations events webpage. Speakers on today's call are Vincent Pilette, NortonLifeLock's Chief Executive Officer; Natalie Derse, Chief Financial Officer. This call will be available for replay via webcast on our website. I'd like to remind everyone that all references to final metrics are non-GAAP, unless otherwise stated. Please refer to the supplemental materials posted on the Investor Relations website for further definitions of our non-GAAP metrics. Please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials posted on our website. We believe our presentation of non-GAAP financial measures, when taken together with corresponding GAAP financial measures provide meaningful supplemental information regarding our operating performance for reasons discussed below. Our management team uses these non-GAAP financial measures in assessing our operating results as well as when planning and forecasting future periods. We believe our non-GAAP financial measures also facilitate comparisons of our performance to prior periods and that investors benefit from understanding our non-GAAP financial measures. Non-GAAP financial measures are supplemental and should not be considered as a substitute for financial information presented in accordance with GAAP. Today's call contains forward-looking statements based on conditions we currently see. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date, and as such, involve risks and uncertainties that may cause actual results to differ materially from our current expectations. In particular, our statements regarding the impact of the ongoing COVID-19 pandemic on our business and industry, our sale of our Enterprise Security assets to Broadcom, any anticipated benefits from such sale and cost reductions associated with this transaction are subject to a variety of risks. Please refer to the cautionary statement in our press release for more information. You will also find a detailed discussion of our risk factors in our filings with the SEC and in particular, our annual report on Form 10-K for the fiscal year ended April 3rd, 2020 and recently filed quarterly reports on Form 10-Q. Let me now turn the call over to Vincent.

Natalie Derse:

Thanks Vincent. Before I dive into our results, let me first say how excited I am to join NortonLifeLock. I'm inspired by our mission to bring cyber safety to consumers worldwide and I'm energized to help drive that mission in my new role. Over the course of my career I've chosen to join companies where the mission and the brand are focused on helping people in their everyday lives. From GE to Black & Decker to eBay and now NortonLifeLock albeit leaders in different industries. These brands were all built on establishing trust with and delivering intrinsic value to their customers. Here at NortonLifeLock we must continue to deliver on our commitment to keeping consumer safe and then control their digital lives. This commitment combined with our incredible business model, an opportunity to drive accelerating growth is what drew me to NortonLifeLock. I look forward to working with our team to achieve our strategic aspirations. Now let me share our Q1 performance focusing on non-GAAP results. Q1 revenue was better-than-expected at $614 million, up 4% year-over-year. Q1 reported billings was up 9% year-over-year with the two point positive impact from FX in our ending contract liability balance. Billings growth was supported by customer -- growth in customer count increasing approximately 400,000 both quarter-over-quarter and year-over-year. This was our third consecutive quarter of net customer adds and our first quarter of year-over-year growth in customer count in over five years. Diluted EPS was $0.31, up 48% year-over-year and exceeded our guidance range driven by strong execution on top line growth and removal of stranded cost. For the quarter total company operating margin from continuing operations was 47% burdened by approximately $30 million of stranded costs. Therefore excluding stranded costs, the business is operating at over 51% operating margin with headcount below 2,500. With approximately 95% of total stranded costs were moved through Q1, we are lowering our estimate for cumulative cash stranded cost to $650 million down from our $750 million projection last quarter. Q2 will be the last quarter with notable transition related costs in our non-GAAP financials. When the company first started this process eight months ago, we said cash sales proceeds will fund cash stranded costs. With strong execution on both cost and asset sales we are now projecting to deliver over $1 billion more cash than initially forecasted. As for the remaining sale of underutilized assets, we remain confident in our ability to reach our goal of $1.5 billion total cash proceeds. We are pleased to announce the recent sale of our Culver City real estate, which closed on July 27th for $120 million. As for our remaining underutilized assets, we remain focused yet patient on monetizing and realizing fair market value. We had another strong quarter of operating cash flow. We generated $170 million of cash flow from operations and spent only $1 million in CapEx. Cash flow was burdened by some one-time items this quarter most significantly about $100 million of stranded cash costs, which were partially offset by the timing of certain tax payments. Adjusting for these non-recurring items, the business is generating approximately $900 million of free cash flow on an annualized basis. We believe we are well capitalized with our Q1 ending cash balance at $1.1 billion and another $1 billion in our undrawn revolver. With our strong balance sheet and cash flow, we continue to return cash to shareholders this quarter. We cash settled the principal and conversion rates of our $625 million convertible note, which lowered our debt to $3.625 billion and reduced diluted share count by over 30 million shares based on our Q1 average stock price. As a reminder we still have approximately $600 million left of our $1.6 billion share buyback authorization and we'll continue to use it opportunistically. Now turning to our Q2 outlook. We expect Q2 non-GAAP revenue in the range of $615 to $625 million representing 3% to 5% growth after normalizing for the ID Analytics divestiture. We expect Q2 non-GAAP EPS to be in the range of $0.31 per share to $0.35 per share with the business operating at approximately 50% profit margin when excluding stranded cost. Finally, I would like to thank Matt Brown for his leadership through the interim period and thank the entire team for their execution over the past eight months. I look forward to building on the strong financial foundation we have and delivering consistent results for our shareholders. Now let me turn the call back to Vincent for closing comments.

Operator:

[Operator Instructions] Your first question comes from the line of Keith Weiss.

Vincent Pilette:

Yes, and as I do that, we have to go back to where we are coming from, right. When we broke out and decided to focus slowly on the consumer business how tedious has been that cyber safety will become more and more important for everyone as we move more and more of our activities online. And cyber safety doesn't just mean security, security for your device, security for you data. It also means privacy, protecting your identity, and including services to restore when it can't be prevented. So it's a overall rollout we know we have -- we are building in the long-term. There are a lot of applications and fields that we still need to fill in that portfolio and build up the category. So we believe the thesis if you want is long structural one. So that's number one. Number two is the division at the time under Symantec had not invested in marketing as we discussed in the past and we re-accelerated marketing as a way to communicate our message to consumers. We raised our marketing envelope by $100 million on an annual basis. We also said that the efficacy of that marketing investment, if you want, has to show up over time as we consistently deliver and spend in market. And then we started to tweak that marketing investment, moving to new channels of marketing, moving to new regions and starting to market in Europe, for example, where we had not marketed in the past. So those are our contributors, if you want, for the return to growth. And we said, hey, the most important is product. In April '19 we launched the first version of Norton 360 an integrated platform addressing four pillars security, privacy, identity protection and restoration and the entire family and homes if you want and we still are in the process of rolling that out. I believe it's very attractive for consumer to adopt that overall umbrella for membership fee having access to all of those areas and having a peace of mind. And then the last one is then COVID-19 happened and definitely it change the way people operate online. Is it a peak change or is it a step function. I don't know but we believe in the long-term view of building up our portfolio and creating awareness to drive growth.

Natalie Derse:

Yes, Keith. This is Natalie, I'll take that one. We have few assets held for sale on our balance sheet including the three campuses that we have here in Mountain View as well as one in Dublin. We have active discussions with interested parties and albeit it's very hard to predict the timing of the sales especially given current conditions. Please note we are focused on striking the right balance between value, price and timing of those sales.

Vincent Pilette:

Yes. Absolutely. So before the pace, I want to say, we put a business model out there and we say, hey, we're going to grow at mid single-digit and operate the business at 50% operating margin and I don't have to remind you that eight months ago I think the majority of people were doubters. We delivered on that business model at least a quarter ahead of plan. I think we've proven we can operate at these levels. We reduced the headcount from the Symantec company 12,000 people, today where our business model should be around 2500. And for the first time in a long time, we shifted from restructuring to hiring talent where it makes sense. And I can tell you, it's definitely energizing for the entire company to talk about hiring the right talent, the right skill set. We are hiring engineers in Dublin where we are trying to create a prototype over there and we are hiring in threat analytics. So we definitely are building up the functions. We have a few new leaders. I mentioned Gagan and his passion around machine learning. Robert came in and has a passion around the customer life cycle. Both of them are coming up with proposal for investment to accelerate the growth. And I can tell you I'm super happy to have Natalie here. So I found my match in term of CFO skill set and she and I will partner trying to prioritize those investment to accelerate our performance.

Fatima Boolani:

Thank you for taking the questions, and welcome Natalie look forward to working with you. Maybe just to start if I can drill in onto the strength on the indirect side. You specifically called out strength from the employee benefits vertical. I'm wondering what were some of the steps you took to actually revitalize that channel and what investments or mechanisms or programs you have in place to sort of have this continue to sustainably help drive subscriber growth and then I have a couple of follow-ups.

Fatima Boolani:

And then just on the subscriber count growth both sequentially. I mean year-over-year. I wanted to get a better understanding of the demographic in terms of the age potentially socioeconomic backdrop and how that factors into your retention rate assumptions as we move forward provided that a lot of these more subs are very new to the Norton family. So I just wanted to get a better understanding of this profile of the new subscriber that's coming into the Norton ecosystem relative to the subscribers you had in the past outside some of the comments you made with strength from the international front and that's it from me. Thank you.

Operator:

And your next question comes from the line of Saket Kalia from Barclays. Please go ahead.

Vincent Pilette:

Yes, we're still refining our program, but I would say over the last couple of quarters. Specific last quarter mature countries in Asia, Japan, Australia and New Zealand in Europe, Germany, France, U.K. where high performance for us. We definitely pushing one message when it's come to marketing awareness, and it's under Norton 360. The ability and unique competitive advantage to offer a cyber safety blanket full consumers is our main value prop. This is our way to build that vision to ensure that everyone can get that digital lives pace. There are some cases where we lead with specific standalone products and that's market specific. We can go into more details, but overall we charge was Norton 360.

Vincent Pilette:

Yes. So I'm not upset by market share especially because today market the way they are defined are by pillars, you have the security traditional security pillar then you have the identity pillar, you have still forming once waste privacy. Privacy is the new frontier of security or own standalone set of market. Frankly, we really working, as we said about acquiring new customers and delighting those that we have and you've seen that we've done somewhat of a good job with our retention of 85%, but we continue to improve there and that's our major focus. If we continue to focus on innovation building up the portfolio and trying to build that cyber safety vision. I think that's the ways we want to run.

Walter Pritchard:

Hi, Vincent, and good to talk to you for the first time here Natalie. On the international, can you help us understand your marketing effectiveness. How you're -- what you're seeing in terms of measurement and marketing effectiveness internationally versus domestically. In other words I assume it still lags. How much does that lag relative to what the sort of effective as you've seen in the U.S.?

Walter Pritchard:

And how are you thinking about from a higher level, you've achieved the goal. I mean as you noticed earlier in terms of getting to the, you know, the mid single-digit growth at 50% margin. How are you thinking about the next step? Is it to push harder on the growth? Is it to preserve that margin? Is that's the optimal sort of marginal cost? I just curious how you're thinking about just philosophically the next step.

Operator:

And your next question comes from the line Yi Fu Lee from Oppenheimer. Please go ahead.

Vincent Pilette:

Well, I think, we are global leaders. I have to invest in developing the portfolio and developing the marketing and sales channel. I have to invest indirect digital media and building up on the opportunity in the employee programs and with Natalie's help and I can tell you, she has a growth mindset, but very analytical. So when you use data to prioritize those investments. Canada is a huge opportunity penetrating the identity space internationally where digital identity and I would say [technical difficulty] are growing very fast all huge opportunity for us.

Vincent Pilette:

Sure. I'll give you main target. Look, we've earned the credibility of looking at also growth inorganically or organically. So our process really start with the portfolio and the market to build up cyber safety. What are the gaps in the other applications we can build on. And then we have real-time assessment on organic capabilities or time to market needs versus what already exists, whether it's a prototype of product or fully developed business. And then at the end of the day all matches it becomes a financial decisions. I think we've earned the credibility. We have the operational chart on the whole management team, leadership team and company including the Board is focused on growth from all sites.

Soohwan Kim:

Thank you. I'm pleased to welcome you to our call to discuss our fourth quarter fiscal 2020 earnings results. We posted the earnings materials and slides to our Investor Relations events web page. Speakers on today's call are Vincent Pilette, NortonLifeLock's CEO; Samir Kapuria, President; and Matt Brown, Interim CFO. This call will be available for replay via webcast on our website. As a reminder, in connection with the sale of certain assets of our Enterprise Security business to Broadcom on November 4, 2019, we changed our corporate name from Symantec to NortonLifeLock. The results of our Enterprise Security business were classified as discontinued operations in our condensed consolidated statements of operations and thus, excluded from both continuing operations and segment results for all periods presented. Starting in the second quarter of fiscal 2020, we operate in one reportable segment. Revenues and associated cost of our ID Analytics solutions, which were formally included in the Enterprise Security segment, are now included in our remaining reportable segment. On January 31, 2020, we completed the sale of our ID Analytics solutions. I'd like to remind everyone that all references to financial metrics are non-GAAP unless otherwise stated. Please refer to the supplemental materials posted on the Investor Relations website for further definitions of our non-GAAP metrics. Please note, non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials posted on our website. We believe our presentation of non-GAAP financial measures, when taken together with the corresponding GAAP financial measures provide meaningful supplemental information regarding our operating performance for reasons discussed below. Our management team uses these non-GAAP financial measures in assessing our operating results as well as planning and forecasting future periods. We believe our non-GAAP financial measures also facilitate comparisons of our performance to prior periods and that investors benefit from understanding our non-GAAP financial measures. Non-GAAP financial measures are supplemental and should not be considered as a substitute for financial information presented in accordance with GAAP. Today's call contains forward-looking statements based on conditions we currently see. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date and as such, involve risks and uncertainties that may cause actual results to differ materially from our current expectations. In particular, our statements regarding the impact with the ongoing COVID-19 pandemic on our business and industry or our sale of our Enterprise Security assets to Broadcom and the anticipated benefits from such sale and cost reductions associated with this transaction are subject to a variety of risks. Please refer to the cautionary statement in our press release for more information. You will also find a detailed discussion about our risk factors in our filings with the SEC and in particular, in our annual report on Form 10-K for the fiscal year ended March 29, 2019, and recently filed quarterly reports on Form 10-Q. Let me now turn the call over to Vincent.

Samir Kapuria:

Thank you, Vincent. We are living through a generational event. A moment in history that I would say is bringing the world closer together, despite the fact we have to stay physically apart. We have quickly evolved to a common focus of focusing on health and safety for our families, our friends and our communities. As cyber safety is at the forefront of this tidal wave of change, we're clearly seeing a rise in attackers taking advantage of the stay at home mode of life. We've seen new attacks focused on leveraging COVID-19 as a means to enable fraud and identity theft through tailored malware, phishing messages, online commerce scams and more. Hackers are preying on people's emotions, fear, panic, to get them to click impulsively on various malicious links. We are seeing fake offers for masks and vaccines. We're seeing phishing emails reportedly coming from organizations like World Health Organization and Centers for Disease Control. Hackers are also targeting recipients of stimulus checks from various governments around the world. Instead of getting the help they're looking for, many consumers end up giving away personal identifiable information or downloading malware on their devices. Our mission is to keep customers aware as cyber safety has become more important than ever. As all households now spend more hours online, whether for school, work or in the community protecting the home and family in a simple way is even more of a need. That's why we’ve strengthened offering here. Norton Family brings the protection and security of our products to every member of the family across multiple-devices and platforms. On top of that, we recently extended our time management capability for Windows to include iOS and Android devices. With many kids spending more of their day on technology, the time management capability enables parents to easily manage the duration of their children are on the internet, akin to an online time allowance. When kids reach their allowance limits, they have the ability to simply request additional time. For example, to finish an online learning activity and parents can add more time to their balance. Time extension is part of our continued commitment to go beyond supervision and blocking to also provide tools, which help parents keep the online safety conversation going on with their children, which leads to a deeper understanding of how to be safe online. In adaptation to being a stand-alone product, Norton families also included as parental control and our Norton 360 membership. Norton 360 is our full cyber-safety platform, bringing together end-to-end security, privacy, indent, home and family capabilities to provide the best safety coverage available to our members. Norton 360 is now available in 43 countries as we completed its global rollout during Q4. This had been a major undertaking and I would like to thank all of our team for accomplishing this transformative goal with precision in execution time. We can now focus on adding new areas of value to our memberships and delighting our customers in new ways. No other safety company has the reach and scale of Norton 360 to help as many consumers as we do. Rounding out our cyber safety portfolio with the other three pillars; privacy, security and identity, here's a quick update on each of these. Our privacy offering has become even more relevant in the current environment as people are exchanging more sensitive information through digital channels via personal healthcare information to enable telehealth or financial information for personal accounting or even shopping for food, a VPN or Virtual Private Network has become even more crucial. A VPN uses inscription to help block hackers from stealing personal information over the internet. VPN is included in most tears of our Norton 360 membership and were encouraging our members to use it more frequently to help prevent hackers from eavesdropping on their internet activity. While Norton is our flagship brand with end-to-end capabilities and premium positioning, we also started marketing another brand called SurfEasy to extend our reach into the value segment of the privacy market. SurfEasy provides VPN protection for five devices, unlimited bandwidth and ad tracker blocking technology for a very competitive price. We're currently marketing SurfEasy in the U.S., UK and India. As Vincent said earlier, growing our customer count is the number one goal for our company, and we believe SurfEasy will be another way to bring in new customers within our product family security. Security is an integral part of the value we deliver for our members and we have maintained consistent leadership in device security. During the quarter we received three awards from the AV-TEST Institute for our device protection solutions. These included the windows home user best protection and best performance awards as well as the award for best android protection. This represents NortonLifeLock’s fifth consecutive best protection win for Norton Security. We’re committed to building innovative technology that helps protect consumer’s devices from ever evolving cyber threat. As people spend more time online to work and play in this environment, we believe securing devices is the foundation for security and will be more important than ever. Identity cause a major milestone this last quarter with our first full-fledged LifeLock identity restoration suite to a country outside of the United States. Last agreement we mentioned that we signed a partnership agreement with a large international telecom service provider, that partner is Telus, the second largest telecom company in Canada creating a safer, friendlier world online is one of Telus’s pillars, aligning our two companies together very closely. Similar to the social security number of the United States, Canada has the social insurance number, which is the government's unique identifier for Canadian residents. It is used as a proof of identity for any and all types of credit, health insurance and education amongst other things. It is considered the most important piece of personal identifiable information in Cana and Cana and therefore highly targeted by hackers. Telus launched our Norton 360 with LifeLock in April and we're looking forward to bringing the same level of protection and restoration capabilities to Canadians that our American customers have enjoyed for over a decade. Canada is a nascent market where identity theft protection products have not existed before. Currently the market has been limited to just credit scores and alerts, which are small features of an overall protection plan. We believe that Canada will grow to be an important market for us over time, akin to the U.S. years ago. It will take some time to educate the market about the benefits of identity protection. Partners like telcos, employee benefits, retailers and e-tailers are all an important part of our go-to-market strategy, and we continue to work to bring our products to more and more partners and their customers. Working with our partners helps broaden our audience, combine our capabilities and reach consumers closer to where they need cyber safety. Look out for more from us in this area in the near future. In the fourth quarter, average revenue per user or ARPU increased to $9.07 per month, up 1% sequentially and up 3% year-over-year. We also had another quarter of customer increase adding 46,000 in the quarter. For the whole year our retention rate was stable at 85%. These metrics demonstrate that customers appreciate the value we are providing. We have more enhancements with our membership programs for the future and we looked forward to updating you in coming quarters about our robust R&D pipeline of products. Let me now turn the call over to Matt to discuss the Q4 actual results in more detail.

Vincent Pilette:

Thanks, Matt. Let me not our provide our Q1 outlook and also discuss a long-term growth strategy for NortonLifeLock? March trends continued into April. Quarter-to-date, we generated slightly positive customer net adds and almost mid-single-digit booking growth overall. Direct to consumers booking grew high-single digits in April, as people continue to adapt to life working from home. This growth was partially offset by decline in our retail sales, impacting our overall indirect partner sales. Maintaining this net positive trend, we expect revenue in the range of $590 million to $605 million or zero to 2% growth when normalizing for IDA and the extra week in Q1 fiscal year 2020. This revenue outlook is supported by bookings growth in the low-to-mid single digit range. We expect Q1 non-GAAP EPS to be in the range of $0.18 to $0.22 per share with a business operating at approximately 50% profit margin, when excluding the stranded cost. Our stranded activities, I expect it to be fully eliminated by August, although we will write-off additional assets in Q1 with the goal to be over 90% done by the end of June. In fiscal year 2020, we return to previous marketing investment levels, primary targeted that direct acquisition programs, and we will continue to invest in our distribution and product roadmap for long-term impact. While these initiatives take time to generate revenue, we are very encouraged to see three consecutive quarter of low-to-mid single digit bookings growth year-over-year. I also said that while we have a fantastic opportunity to define a simple and reliable path to cyber safety, it won't be a linear road by any means. Certainly, no one could have anticipated the work to going to a full lockdown only a month after we last gave guidance. Well, we will be cautious and agile in managing our business; our mission to protect and safely enable customer digital lives is more relevant. And with that Matt, Samir and I are now happy to take any question. Operator?

Vincent Pilette:

Hi, Keith.

Vincent Pilette:

Yes. So let me first go back at the core, as we developed the cyber safety membership, Norton 360, we have underlying growth drivers, which is that more and more consumers are driving the operations, they live online and they want to do that in a safe environment. We have since we became NortonLifeLock in November, reinvested in marketing to make our products known, out there we had launched Norton 360 at the beginning of this fiscal year, as you know, and we pushed that rollout through. We were on a steady path if you want, turning a situation where we had a declining customer count into bringing more and more new customers; it was the path-through-the-quarter. We saw in the month of March, more demand and slow conversion or realization of that increased demand. We saw that through the month of April and obviously you can understand that all of the activities from working from home, not wanting to go into the shopping malls and all of those things have only increased the need for a better protection online. As you mentioned, that was offset partially by the fact that at physical stores, we couldn't go and buy a token or one of our products, but that was a mile offset. So we encouraged by the trends, it will be a long-term trends. We believe that will continue which is more people will work from home, will live their life online and, and we'll need our products.

Vincent Pilette:

So we have reduced our headcount to what our long-term model structure is for the consumer business about 2,500. And with that, we've vacated the buildings that are not needed anymore. We put them for sale and we them off our put them for sale and hold them off our P&L, put them on our balance sheet, teed up for sales. We’ve had multiple offers with each one of those buildings and then through the outbreak, as you imagine those discussions, slow down some drop, some try to do an accelerated [indiscernible] coming back into the offers around, if you want. And it will – our expectation is that it will take a bit more time. We have not revised our value down. We not press for cash as you know, and we have multiple options, including in the short-term, one of the buyer came back with a short-term lease while they were figuring out they need. So from that perspective, I don't see any impact in our operational business, and it's about time to cash in term of realizing this underutilized assets.

Saket Kalia:

Okay. Great. Thanks guys for taking my questions here.

Saket Kalia:

First, hey – first maybe for you Vincent, nice couple quarters and positive subscriber additions. And I guess as that renewal base kind of grows here in fiscal 2021, how are you thinking about the importance of sort of retention rate versus sort of top of funnel? I know we're not guiding to fiscal 2021, yet. And obviously you've invested a lot more in marketing to improve that top of funnel. Is there anything that you could sort of do on the retention rate as well as you look forward to year?

Saket Kalia:

Got it. That makes sense. For my follow-up, maybe for you, Matt, can you just talk a little bit about the EPS guide here in Q1 and perhaps the pace of stranded cost removal? It sounds like a lot of the TSA expenses are sort of wrapping up; to Vincent's point we're down to sort of the headcount that we were planning on. So how do you think about that sequential downtick in EPS in Q1?

Operator:

And our next question is from one of Fatima Boolani with UBS. Fatima, your line is open.

Vincent Pilette:

Yes, absolutely. So as you imagine at the beginning days of the COVID-19 outbreak, went back to a lot of scenarios. We also went back to what happened in 2008, look at the retention rate during that time. And actually there was pretty resilient and sustainable even then. Now every environment or every crisis is unique and this one brings something that is very different. It changes the way we operate our lives. It changed the way we work? It changes the way we interact? The way we shop? And I think there is a underlying acceleration of the need for more privacy, more security online that's why you see companies like Logitech selling more video conferencing systems and us with that selling more security products. And I think the trends of having more awareness of few lives moving online is a structural trend. Now it may be impacting in the short-term here and there by different economic headwind. But I think we're well positioned from that. And we have the perfect solution launching last year, the Norton 360 membership. We saw an acceleration of the adoption rate through the last two quarters, and we're very pleased by that.

Samir Kapuria:

Thanks, Fatima. Yes. As we look at the international expansion, for the most part we're entering cohorts and markets where the needs have increased dramatically and so our security, our privacy and even the identity solutions that we have designed for certain international markets allow us to hit those markets with a premium offering, and that's allowed us to maintain our ARPU. I think to the comments that Vincent just shared, with a lot more at risk in today's environment, given the masses of people that now are doing the digital equivalent of what their physical lives were there is an appreciation for making sure that is also safe and secure. And we're seeing that trend continue both in our expansion in Europe and in Asia.

Gregg Moskowitz:

Okay. Yes. Thank you very much. Hi guys nice to chat with you. So it's good to hear that 25% of your install base is on Norton 360, although you do have a few different SKUs, some but not all of which include LifeLock. And so I was wondering if you were able to share the percentage of the Norton install base that has converted to LifeLock membership, as well as just how this conversion rate has been trending.

Gregg Moskowitz:

Okay. Thanks, Vincent. And then maybe a follow-up for Samir, I think you talked about Norton Family, and I think one can make a clear argument that the need for something like Norton Family in a household is stronger than ever before. I think, your six month free trial for that product has been in play for around six weeks now, what have you seen in terms of sign ups?

Gregg Moskowitz:

That’s great. Thank you.

Vincent Pilette:

Hey Brad,

Vincent Pilette:

A very good question, as you mentioned early March we saw a drop in marketing rates. We were already trying to shift or doing shifting between long-form TV ads into more social and dynamic advertising. So we're in the process of improving the productivity of our recently increased marketing spent. I think we discussed in the last call that you first raise your marketing level and then you maintain that level for a consistent periods to improve over time. We've seen a low-double digit improvement in our CAC, Customer Acquisition Costs to the quarter. And we plan to leverage that, balance it between profitability and/or reinvestment as we see gross momentum mainly international.

Operator:

And our next question is Walter Pritchard with Citi. Walter?

Vincent Pilette:

So as you know, right, for the last two quarter – three quarter, we increased our marketing spent, it really shifted for the last two quarter with over $100,000 new customer acquired. Our retention rates have been very stable around 85% and it’s really about increasing the productivity and the return from our marketing investment, so it's net new coming from direct consumer acquisition programs.

Samir Kapuria:

Yes, Walter, the Family free is something that we've decided to contribute. We are not looking at it as a business as much as it is a contribution to the situation at hand. But, we do hope to deliver value and more awareness around the overarching cyber safety needs based on that and we'll see what happens in the future. Hopefully we get out of this current pandemic in a short amount of time and we can reevaluate that.

Operator:

Our next question is from the line of Phil Winslow with Wells Fargo. Phil, your line is open.

Vincent Pilette:

Yes, I think we’ve mentioned it, right. So as we raised our marketing investment, two things we're doing. We’re doing more social and pay search or search paid that goes into more quick returns than the long-form TV. And then it's moving more of our marketing dollars internationally. In the past, and certainly in fiscal year 2019 the marketing investment were solid [indiscernible] U.S. and so we've expanded that internationally as we roll out our Norton 360 now more than 43 countries and as we can maintain this investment at certain level. We should see a continuous improvement of our CAC as we progress through fiscal year 2021.

Operator:

And our next question is from the line of Matt Hedberg with RBC Capital Markets. Matt?

Vincent Pilette:

So we actually saw very solid trends of retention in the month of March and April. We are not forecasting, if you want dramatic change in retention, we've seen increased engagement from customers moving to Norton 360 platform and that increased the retention and then that has to be offset with bringing new customers and continuously growing our customer base with the first year retention being lower than the average we mentioned. And we have of course a program trying to improve the retention rate of the first year cohort. So as I mentioned, it's a balance between ARPU retention and new customer counts. And our number one objective is to grow customer count sustainably for the long-term.

Operator:

And our next question is line of Shaul Eyal with Oppenheimer. Shaul, your line is open.

Vincent Pilette:

No, I don't think that one. The comment we made was regarding our time management capability within Norton Family that was originally Windows and in the interest of expanding that to help parents at home we've now added that to iOS and Android as well. So that's the comment we were making.

Operator:

And ladies and gentlemen, I would now like to turn it back to the CEO for final summary.

Operator:

Ladies and gentlemen, this does conclude today's conference call. We thank you greatly for your participation. You may now disconnect.

Soohwan Kim:

Thank you. I'm pleased to welcome you to our call to discuss our third quarter fiscal year 2020 earnings results. We posted the earnings material and slides to our Investor Relations events web page. Speakers on today's call are Vincent Pilette, NortonLifeLock CEO; Samir Kapuria President; and Matt Brown Interim CFO. This call will be available for replay via webcast on our website. As a reminder, in connection with the sale of certain assets of our Enterprise Security business to Broadcom in November 4, 2019. We changed our corporate and interest from Symantec NortonLifeLock. The results of our Enterprise Security business were classified as discontinued operations in our condensed consolidated statements of operations and thus excluded from both continuing operations and segment results for all periods presented. Starting in the second quarter of fiscal 2020, we operate in one reportable segment. Revenues and associated costs of our ID Analytics solutions, which were formerly included in the Enterprise Security segment are now included in our remaining reportable segment. On January 31, 2020, we completed the sale of our ID Analytics solutions. I'd like to remind everyone that all references to financial metrics are non-GAAP, unless otherwise stated. Please refer to the supplemental materials posted on the Investor Relations website for further that finished definitions of our non-GAAP metrics. Please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials posted on our website. We believe our presentation of non-GAAP financial measures, when taken together with the corresponding GAAP financial measures provide meaningful supplemental information regarding our operating performance for reasons discussed below our management team uses these non-GAAP financial measures in assessing our operating results as well as planning and forecasting future periods. We believe our non-GAAP financial measures also facilitate comparisons of our performance to prior periods and that investors benefit from understanding our non-GAAP financial measures. Non-GAAP financial measures are supplemental and should not be considered as a substitute for financial information presented in accordance with GAAP. Today's call contains forward-looking statements based on conditions we currently see. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date, and as such, involve risks and uncertainties that may cause actual results to differ materially from our current expectations. In particular, our statements regarding our sale of our Enterprise Security assets to Broadcom and any anticipated benefits from such sale and cost reductions associated with this transaction are subject to a variety of risks. Please refer to the cautionary statement in our press release for more information. You will also find a detailed discussion about our risk factors in our filings with the SEC and in particular in our annual report on Form 10-K for the fiscal year ended March 29, 2019, and recently filed quarterly reports on Form 10-Q. Let me now turn the call over to Vincent.

Samir Kapuria:

Thank you, Vincent. Our momentum and launching Norton 360 memberships worldwide continues. In the third quarter, we expanded our membership offerings in EMEA, Asia Pacific and Latin America, including Ireland, South Africa, Australia and Mexico. We remain focused on our strategy to deliver increasing value to NortonLifeLock members by offering a broad set of cyber-safety solutions. In the third quarter, average revenue per user or ARPU increased to $8.99 per month, up 1.2% sequentially and up 2.7% year-over-year. More importantly, we saw continued stabilization of our direct customer count. We grew customer count sequentially this quarter for the first time in more than two years. We had new customers at the top of the funnel, while maintaining our high retention rates. Our service safety message is resonating with customers. We believe the growth in customers directly results from our strategy to invest and drive consumer awareness of the value of our offering. In addition to our direct customers, we also protect millions of customers through indirect relationships we've established through partnerships around the world, including telcos, employee benefits, retailers and e-tailers. One example is a recent partnership agreement we signed with a large telecom service provider who will be bundling our new membership product powered by LifeLock. This will be the first time will be launching the full version of LifeLock, which includes identity restoration outside of the United States. We're starting to see more and more of these organizations understand how much value cyber safety can bring both their businesses and their customers. These relationships contribute to our foundation for growth in the future. We are continuing to invest in our product capabilities to address cyber threats that are evolving at a fast pace. Let me highlight two examples of identity offerings that we launched in the quarter. In December, we launched home title alert. This additional feature is available to our U.S. members who subscribe to the highest level of identity protection. For many Americans, their home is their most valuable asset and we're helping protect it from fraud. We're now monitoring for changes to their home title and tax records at the county recorder's office. With this service, members are alerted when potential scammers use victim's identities to take out fraudulent loans or place liens on a victim's home for financial benefit. This is one of many examples of our continued focus on innovation to deliver additional protection to our members across security, privacy, identity and home. We also expanded our identity theft offering outside the U.S. with the launch of our dark web monitoring service powered by LifeLock in Japan. The dark web is an unindexed part of the Internet, and it is a hotbed of criminal activity where criminals can buy and sell stolen information. When we detect our members' information in the dark web, we alert our members, so they can take action. This product has seen good adoption in that market and we are working hard to deliver it to consumers around the globe. Those are just two examples of leading innovation, but we have a robust R&D pipeline of products that we believe will help keep our customers cyber safe. Let me turn the call over to Matt to discuss Q3 actual results in more detail.

Vincent Pilette:

Thanks Matt. Very clear. Let me now provide our Q4 outlook and also discuss a long-term growth strategy for NortonLifeLock. In the fourth quarter, we expect revenue in the range of $595 million to $605 million, excluding ID Analytics, which closed in January. We will continue to drive the business for growth, which is expected to continue to yield low single digit bookings growth in Q4, ultimately delivering revenue growth in later quarters. We expect Q4 non-GAAP EPS to be in the range of $0.15 to $0.20 per share based on assumptions of flat share count, with the business operating approximately, sorry 50% profit margin when excluding the stranded costs. As we exit our transition period, upon elimination of the stranded cost, and with the full benefit from share buybacks, we expect the operating margin to reach 50% and annualized EPS to come to approximately $1.50. Fiscal year 2020. So as we turn to previous marketing investment levels, primarily targeted at direct acquisition programs in the U.S. and worldwide. We will continue to invest in our distribution and product roadmap. While these initiatives take time to generate revenue. We are encouraged to see two consecutive quarters of 4% billings growth year-over-year. We believe NortonLifeLock is well positioned to continue our market leadership by offering a simple reliable path to cyber safety. Our mission to protect our customers' digital and connected lives is reflected in our commitment to make the world safer. Our transformation is well underway. We've become much more nimble and customer focused, and we are on track to achieve our near-term goals to remove stranded cost and lay the foundation for growth. For our mid to long-term goals, we're excited by the opportunity to deliver innovative solutions to protect consumers and produce sustained revenue and earnings growth, with strong cash flow generation for our shareholders. As I told all of our employees, it will not be a linear path. There will be challenges along the way, but the opportunity is tremendous. And our focus is on protecting and delighting consumers with innovative solutions. And with that, Matt, Samir and I are now happy to take your questions.

Fatima Boolani:

Samir, maybe I'll start with you, just to get a progress update on the membership bundles conversion of the install base. You have about a year a data points here, as you move the base to the membership model. So I was wondering if you could sort of update us as to how you're tracking along that path? And maybe if you can give us a little bit more color as to how the conversions are landing, whether they're in sort of the low bucket or the very premium bucket, that would be really helpful. And then I have a follow-up for Matt?

Fatima Boolani:

And Matt for you, very helpful color around the go forward or normalized capital structure, if you will. But I'm wondering just kind of given the mechanics around the convertible notes on the balance sheet with respect to the dilution that's come online as a result of those notes, and the buyback that you have in place. I'm wondering if you can kind of step us through how we should be thinking about a share count and share count dilution mechanics going forward? Thank you.

Operator:

And our next question is from the line of Saket Kalia from Barclays. Saket?

Vincent Pilette:

Yes so, as we mentioned in prior quarters, right? We've increased our marketing investment to go back to prior levels. There're really three sets of actions we've done with those investment. The first one was really to move from long-form marketing to social media and other new areas in which we had not been marketing in the past so, that's one initiative. The second one was to really move from mainly being U.S. centric to be more international. We've been growing in Europe. We've been growing Asia-Pacific, and that of course is to support new product launch. So those are important factor. And then we've aligned our marketing investment to the rollout of Norton 360 our membership structure, making our customer aware of the incremental value we provide them through the membership. When you raised the noise level, if you want in the market or the awareness level in the market, you have a long way to go in terms of improving the productivity of those marketing investments. So I do believe that, while we've raised it here in fiscal year 2020, we have opportunity to gain productivity from those investments going into fiscal year 2021.

Matthew Brown:

Sure. So our transition services agreement began right after the close of the transaction on November 4. And those continue for about six months. So expect those to continue until about May 4. The costs of those transition services agreements are included down in other income and expense, but so are the offsetting reimbursements from Broadcom, which offset the expenses that are down in other income and expense. So, those will continue all the way through May 4, at which point we will exit. And those amounts will then come out of other income and expense going forward.

Matthew Brown:

Yes, and Saket you asked a specific question around amounts. It was - as we've indicated in the investor relations deck at $65 million, is included down in other income and expense, and that is offset by the income that we're getting.

Brad Zelnick:

My first question for you, I'd like to drill down into the marketing investments a bit, if you can help us better understand which channels, you're seeing the best conversion from, and perhaps the demographics of the incremental customers that you're adding?

Samir Kapuria:

Yes just dovetailing and that we're focused on moment of truth marketing to grow our customer base, first and foremost. And although TV and radio are important parts of our funnel, we've added the investment into new digital media. So as Vincent shared social, but also search engine optimization and mobile. And while our focus on investing is in those channels, it's also investing in international performance marketing including Europe and in Asia. And as you know with the NortonLifeLock and our Checkmark, we have a very powerful brand. So most of our marketing investments is, to take that trust brand and channel it so that people are more aware around our cyber safety solutions and drive customer growth from that.

Matthew Brown:

So, I don't want to commit to getting faster than what we've already done, but I'm happy that we were able to accelerate the elimination of those stranded costs. And so what we've seen as we've pulled forward some of those actions earlier than had been expected. And as a result now, we've been able to lower the amount, the cumulative amounts post transition to just under $1 billion. But I think that's where we'll leave it for now.

Walter Pritchard:

Vincent couple questions, one around our growth renewals or the inverse with churn any commentary there and - if you saw any changes? And then, I'm curious how you're thinking about the OEM channel, the PC OEM channel, going forward as an avenue for acquiring customers.

Operator:

And our next question is from the line of Gregg Moskowitz from Mizuho Securities. Gregg?

Vincent Pilette:

Yes so, a couple of comments. The first one, if you right, is the first one sees Q2, 2018, when there was a breach with Equifax, if you remember. So I would say, it's the first coin, a very, very long time that we are growing sequentially, structurally without a specific event being driven in the market, which I think is very, very encouraging. Now, I would still call it also it grew 66,000 sequentially. I would still call it like kind of stabilization mode, and the early sign of success has been mainly of raising the marketing investment to then review where we are marketing our products, and making consumers aware of the need and the product. So moving into new channels that we discussed and moving internationally. And then afterwards because we are a product company obviously continuously of launching new products and Samir talked about the new functionalities, Norton 360, a new concept for a membership fee. You can access to all of the functionality on our portfolio and that got really good reception.