Good afternoon, everyone. Thank you for standing by. My name is Matt and I will be your conference operator today. I would like to welcome everyone to the NortonLifeLock Fiscal 2023 First Quarter Earnings Call. Today's call is being recorded and all lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time for opening remarks, I would like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Miss, you may begin.

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?

Thank you, Mary, and welcome, everyone, to our call. After a very lengthy process in the UK, we are pleased to have received provisional approval from the Competition and Markets Authority for the acquisition of Avast. Our hard work has paid off and we are excited to start the process of bringing the two companies together with a great purpose and mission of bringing digitalized protection and empowerment to everyone. As I have shared before, our two companies share a similar vision and both have common values and complementary strength. As soon as we can bring us together, we will get started on delivering all the benefits of our new company to consumers, shareholders and other stakeholders. Together, we will serve about 500 million users globally, sell premium products to consumers for more than $3.5 billion in revenue and have around 4,000 employees dedicated to the mission of protecting and empowering people to live their digital life safely. Advanced strength in privacy and NortonLifeLock's strength in identity, supported by our combined AI capabilities, creates a broad and complementary product portfolio beyond core security and towards adjacent trust-based solutions. On top of that, the merger will broaden our geographic diversification, increase our presence in multiple channels and also serve very small businesses. We will have the opportunity to empower millions of consumers around the world, with our complementary product portfolio and culture of innovation. And while the world is in a different place than when we started this journey over a year ago, one thing is for sure people want to continue to enjoy the advantages of a digital world without compromising their security, privacy and identity and our sole mission is to bring that and more to everyone. Our combined financial profile is substantially enhanced through increased scale, long-term growth…

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…

Thank you. [Operator Instructions] The first question is from the line of Saket Kalia with Barclays. Your line is now open.

Hey, Saket.

Hey, guys. Hey, Vincent. Hey Natalie. Thanks for taking my questions here and congrats on the news from CMA. Vincent maybe before we talk about Avast, I was wondering if you could just touch on some of the dynamics between your partner business and the direct business. It just feels like there's been a little bit of a shift between those two routes to market. And so maybe the question is, is that intentional? And can you just walk us through what's happening there especially given the decline -- the sequential decline in direct subs this quarter?

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…

Got it. Got it. That's very helpful. Natalie, maybe for you. The operating margin here continues to really outperform and be higher than expected. Can you just talk about how you're balancing investing in new customer acquisition versus managing for profitability? How do you think about that?

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.

Got it. Got it. That makes a lot of sense. If I can squeeze a third one in. Vincent maybe for you. We can't go on without asking a question on Avast. And I know that we can't talk too much about specifics until the deal is closed. But maybe philosophically as you've gotten to know Avast's business more and study this market more, I guess how do you think about potential revenue synergies with the combination of NLock and Avast? I mean, certainly you're clear about the expense side. Just as you spend more and more time with really both companies how do you think about the revenue synergies between the two?

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…

Okay, great. Looking forward to it. Thanks again.

Thank you.

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

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?

Yeah. And when we talk about security we really talk about for us cyber safety, which is not only your device security but it's also the protection of your digital identities all the way to the restoration and insurance you could have when something is breached from your device or from any transaction that can be processed into the cloud. We know that cybercriminals continue to increase. I was reading a report earlier on that it was like up 7% in the first half just in Europe. And so we'll continue to see pressure from that. We know consumer penetration in terms of full protection is not yet at the level of other protection industries such as insurance industries or others. And so we have more room. We feel really good about the long-term structural growth opportunity that our markets offer and that together with Avast we will address and continue to expand. Now it does not mean, of course, that in the short-term, you still have volatility, you have inflationary pressures, you have consumer sentiment and people will look at some of those costs and may see this as a discretionary spend. So we definitely have pressure. We saw it in our global traffic this quarter. But at the same time we have a lot of levers to drive and deliver the value. 85% of the business is coming from the renewal base and one the consumer is in we've seen very stable retention rates through the last quarter. But frankly also as I studied the business when I came in two years ago, it was similar behavior in 2008 or 2009. So you see a lot of resilience into people who already know they need security on or in the digital world even though volatility may put pressure on new customer acquisition in the short-term.

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?

Yeah. Thank you. Well, the good news once a customer is in and has a basic protection is that we can also make them aware of the moment of truth that we call insight, which is a moment at which you connect to the Internet when you are at a coffee shop or a moment you transfer data on the web and ensuring and monitor that you fully protect it. At which point in time, we can then raise the value to you of being fully protected versus partially protected. And so constant assessment and finding the right moment give us the opportunity to continue to cross-sell. We still have the vast majority of our customer and customer base to be in the first part of the lower value part of our total value curve if you want from basic device security all the way to like full protection. So we still have a lot of room to continue to educate and drive and demonstrate the value as the consumers move up the value chain.

Great. Thanks.

Thank you for your question. The next question is from the line of Fiona Hynes with Morgan Stanley. Your line is now open.

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.

Yes. Yes. So we'll talk about cross-sell, upsell revenue synergies when the deal is closed. But conceptually it's all about completing the value of all of the use case you protect the consumer for and refining how you communicate in the app or on the platform all of the risk the consumer face is an important one. It's a fine balance too. You want to do it respectfully and demonstrating the value at the same time. We know that the entire identity protection or theft protection restorations and insurance is something Avast does not have and we can really offer, as we combine that with security. Avast started to move from security to privacy. They have BreachGuard other views. And so combining the product portfolio working on the integrated platform they have Avast One we have Norton 360, we'll have to figure that out. And then leaving product value that customer can step in once they have basic -- as I mentioned, most of our customers are in the basic platform have basic benefit to see how they move to the next one. The practices are about the same. At the end of the day as the product portfolio become richer it's all about the ease of use, ease of downloading how you use that. And we've made a lot of effort on our product to do that and expect us to continue as we come together.

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.

Yeah. No, definitely, we historically had a Q3 quarter, which is fiscal Q3 for us which is a December quarter being stronger more on the security side and April quarter our Q4 quarter being strong on the identity side linked to some events such as tax and other things. To be honest with you, over the last two years, whether it's because of COVID or other macro level as well as the fact that we more and more provide one combined value of full total protection we've seen less seasonality. But you're right that in the moderate seasonal effect, if you want the June quarter, would be a low quarter. So from that perspective, our expectation was in line to a lower seasonality. With that said we did see some headwinds what we call pocket of weaknesses, where we continue to invest at the same rate, because we know we're here for the long term and it's a portion of our investment that goes towards education, but we saw lower traffic. And so we're really monitoring and flipping across the set of channels we have here to try to improve the return on our marketing spend. Do you want to add anything Natalie?

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.

Got it. Very helpful. Thank you all for the time.

Thank you.

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

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.

This concludes the conference call. Thank you.