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 Gen's Second Quarter Fiscal Year 2023 Earnings Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks, I would like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Miss, you may begin.

Thank you, 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?

Thank you, Mary and welcome, everyone, to our first earnings call at Gen Digital. In many ways, we are a new company, better positioned as a leader in Cyber Safety and with an expanded purpose of powering Digital Freedom for everyone. Our mission is to create technology solutions for people to take full advantage of the digital world safely, privately and confidently. Let me tell you a little bit about why we created Gen. Generations today are normally associated with age, such as Gen X, Gen Y or Gen Z but all generations, no matter what your age, are connected by one thing. We are all digital, generation digital. We shop, bank, learn, socialize online. And that is just today. We have reimagined what the future will bring and what we can bring to Generation D. Digital technology and innovation bring tremendous benefits to consumers in ways we could never have imagined but they also make our world more complex, more demanding, more exposed. They have created new threats and challenges. Hacking has become a profession. The dark web is a black market used by bad actors and the challenges are not limited to hacking, scamming or phishing. Our personal data is exposed everywhere and algorithms are influencing our reasoning. Safety, of course, remains an absolute requisite for protecting our digital lives and fully benefiting from the digital world we live in. Protecting online security is how we got started 30 years ago and it's still at the heart of what we do today but that's not enough anymore. At Gen, we are committing to bring our credibility, our passion, our innovation to step up and boldly tackle new challenges, powering digital freedom for everyone. Gen is now the leader that consumers trust to deliver comprehensive digital protection and empowerment…

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,…

[Operator Instructions] The first question is from the line of Saket Kalia with Barclays.

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?

Yes. So I mean, as you guys know, we're not directly related to PCs. I think the PC is a good indicator of the pressure on the overall consumer spend and a lot of PC where bought and where onetime purchase during the COVID period, we obviously are more of a subscription business post device. People still spend time online, as you know. That is a growing metric. People still are exposed to risks in the digital world and that's also a growing scary metric. So the need for our product is still there. We said it for now 2 quarters that those macro level trends are impacting our global traffic and our ability to grow faster, our new customers coming from our direct marketing investments. But we continue to really foster their installed base, making sure we deliver the best value possible and it showed up into continued growing ARPU and high retention rates. Quarter in, quarter out, I don't think there is like something to conclude. We now have 39 direct million customers, 65 million total customers. And the trend would be -- although it's slightly negative, I would call them like flat plus or minus a percentage point. And I think you're going to continue to see that trend for probably a couple of quarters for as far as we can see. But we are really focusing on the opportunities we have within our current installed base and growing bookings through cross-pollination of all of the best practices both companies bring together.

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?

Yes. Saket, thanks for the question. So I would start with -- our capital allocation tenants are largely the same pre and post-Avast deal. I think the first and a very critical component of that is for us to get on to our annual free cash flow target of generating $1.5 billion. That's going to really bring to light the execution of the internal leadership team, really executing on all of these opportunities, both revenue and cost synergies and really generate that free cash flow. Beyond that, as a reminder, what we've said is our key tenants are we want to get -- we're going to stay committed to our dividend, so take -- put that aside. And then we're going to find the right balance across our leverage ratio and our opportunistic share buyback. Of course, with the Avast financing and with the dramatic shift in the rates and the debt environment, we're about 1 point higher on our net debt leverage than we expected. And we're obviously facing into that. It's not the only component of our capital allocation and I don't think we can look at deleveraging in isolation. If you looked at it in isolation, I mean, obviously, the cost of debt is about 3x what we thought it was going to be even, I don't know, call it, 7 to 9 months ago. But when you also take a look at the dilution that came with the deal. We've talked about the Avast share issuance. So we're facing into that. We're also facing into what the -- when you look at our share price and really think about opportunistic share buybacks, the balance is incredibly key. And I think it's not only a balance of 1 lever or the next, there's also a timing component to that, too. And so by no means is it easy to strike that right balance but we are super clear eyed about it and we're trying to find and find how we actually balance across all these different factors, especially as the dynamics change so rapidly in the market.

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?

Yes, absolutely. And so we have about 6 initiatives identified. It's important to note that they are not dependent on new product innovations. It's really about leveraging the strength of both organizations to offer more value to our customers, retention rates supported by our service organization coming into this deal will hugely benefit on the Avast side. You know that they have pressure on the retention rate, about 65% and we've identified a set of operational initiatives here to move that up. Cross-selling identity and privacy more complete, comprehensive plan is an important one as well. Avast has a lot of focused technology and features and products. On the privacy side, we bring our identity protection expertise. And I think the cross-selling is the second one. The third one is really the move and upselling to the platform approach. I mentioned that about 60% of our customers had adopted before the acquisition, that platform view. We see higher satisfaction, higher usage. Avast has just launched Avast One. And I think now we're going to leverage that expertise to offer to the 15 million customers coming from Avast, the opportunity to benefit from it. And then you have a set of go-to-market efficiency improvements. One is the e-commerce side and the operational capabilities we have developed. We know we can benefit from rebalancing a very significant performance marketing budget across all lines and leveraging our freemium to premium scope of business model will be the fifth initiative. And the sixth one is expanding in a few various channels that we did not have, one of them being the very small and small businesses. So those are the 6 initiatives. We put them over 24 months. Make no mistakes. We are treating that as the priority day 1 immediately. We know we'll integrate, we know we'll deliver the cost synergies, obviously, driving value for our customers is our overall priority for us.

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

Congrats from me as well on the deal. Vincent, for you. The 66% Avast retention certainly seems like an opportunity from the cost synergy or from the revenue synergy perspective, you talked about. I'm wondering how much of that is just due to European exposure versus something maybe structurally with Avast? Just sort of wondering like how quickly we could see that Avast retention look more like sort of let NortonLifeLock?

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.

That's super, super great. That's super helpful. And then Natalie, it looks like apples-to-apples versus your revenue guide, it looks like kind of core NortonLifeLock was about $700 million which is a little below the low end of the range. I'm wondering how much of that was due to currency headwinds that transpired since your last guidance? In other words, what was the incremental currency headwind since you reported your Q1 results to revenue?

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.

If I can complement to that answer. I would say, Matt. Matt, one sec. I would say that the growth -- you broke it down pretty well which is basically our core business is marching towards what we had said our guidance was and growing at mid-single digits. And we see these trends to continue. The difference, of course, are the macro level, currency being the number one factor hitting us.

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.

No, we have it. So we're facing into about $30 million of currency headwind. From a quarter-over-quarter perspective, it was about $3 million to $4 million. Worse.

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

Congrats on closing Avast. And I'm covering for Hamza. So I appreciate all of the color on the updated reporting structure that you walked through in the prepared remarks. I wanted to follow up a little bit on the partner channel. It looks like the sequential growth there was a little bit lighter this quarter, even including the $5 million of contribution from Avast. So wanted to get any updated commentary on what drove that performance in the quarter? And then kind of your view of the ability of the partner channel to contribute on a go-forward basis. Where do you see that overall mix and contribution of revenue growing over the midterm?

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.

Yes, I just would supplement that, right? So from a partner perspective, it's about 10% of our business. So we're going to continue to invest. We've seen strong quarters, very consistent double-digit rate of growth. It continues to help. It's more important in the expansion into different markets and different channels and different customer cohorts. That's the value that we really get out of it. Of course, double-digit rate of growth in our -- in 10% of our revenue isn't bad. That's helpful as well. It's a diversification channel for us.

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

Thank you. So Gen's opportunity ahead is massive. Even with the near-term macro headwinds, we're still in early stages of long-term secular needs. And as we start this new chapter as Gen, let me recap how I feel. Our purpose is broad, meaningful and inspirational. The market is vast and full of opportunities. We are a house of trusted consumer brands. We have scale and a diversified go-to-market and we have great products, technology and technologists. And above all, we have a passionate and skilled team that thinks big and plays to win. So thank you for your support and I look forward to talking to you soon.

This concludes the conference call. Thank you.