LifeLock CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: LifeLock, Inc. (LOCK)

LifeLock (NYSE:LOCK)

Q4 2012 Results Earnings Call

February 20, 2013 5:00 p.m. ET


Greg Kleiner - Investor Relations

Todd Davis - Chairman and CEO

Chris Power - CFO


Greg Dunham - Goldman Sachs

Kash Rangan - Merrill Lynch

Tom Ernst - Deutsche Bank

Robert Breza - RBC Capital Markets

Richard Davis - Canaccord

Scott Zeller - Needham & Company


Good day ladies and gentlemen, and welcome to the fourth quarter 2012 LifeLock Incorporated earnings conference call. [Operator instructions.] I would now like to turn the presentation over to your host for today’s call, Mr. Greg Kleiner from investor relations. Please proceed, sir.

Greg Kleiner

Thank you, operator. Good afternoon everyone and welcome to LifeLock’s 2012 fourth quarter and year end earnings conference call. Joining me today to discuss our 2012 fourth quarter and year end results are Todd Davis, LifeLock’s chairman and CEO, and Chris Power, LifeLock’s chief financial officer.

Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release.

At times in responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics.

The primary purpose of today’s call is to provide you with information regarding our 2012 fourth quarter and year end performance in addition to our financial outlook for our first quarter and full year 2013.

Some of our discussion in responses to your questions may contain forward looking statements. These statements are subject to risks, uncertainties, and assumptions. Discussion of these risks and uncertainties related to our business is continued within our filings with the Securities and Exchange Commission including our registration statement on form S-1 and our form 10-Q for the quarter ended September 30, 2012.

Should any of these risks or uncertainties materialize, or should our assumptions, as outlined in our earnings release and the documents referred to in that release, prove to be incorrect, actual company results could differ materially from these forward looking statements.

I encourage you to visit our investor relations website at to access our fourth quarter press release, period SEC reports, a webcast replay of today’s call, or to learn more about LifeLock. With that, let me turn the call over to Todd.

Todd Davis

Thanks, Greg, and thank you to everybody. Welcome to everyone joining us today. I’m pleased to report that LifeLock continued to perform at a high level during the quarter, resulting in revenue and profitability that exceeded the high end of our guidance.

In addition, the trends in the market, and the momentum we have built bode well for our continued growth as we enter into 2013. This is evidenced by the guidance that Chris will outline later in the call, which calls for strong top line growth, profitability, and cash flow generation.

At a high level, our results were strong, as we delivered total revenue of $78.8 million for the fourth quarter, an increase of 49% over the comparable quarter last year, including an organic increase of 34% for our consumer business.

The underlying components of our business were solid as well. We added nearly 200,000 gross new members, despite the fact that the fourth quarter has historically been a seasonally slow period for our business. We ended the year at nearly 2.5 million members, up 20% from the end of 2011.

In addition to expanding our customer base, another important growth lever for LifeLock is increasing our monthly average revenue per member, which was up 12% from $8.67 for the fourth quarter of 2011 to $9.68 for the fourth quarter of this past year.

The combination of these factors contributed to the fourth quarter, representing the 31st consecutive quarter of sequential growth in revenue and cumulative ending members for our company. This is a strong statement to the consistency and predictability of our business, along with the uniqueness of our solutions.

We generated significant profits during the quarter as well, with adjusted EBITDA of $11.1 million. Our scale, growth, profitability, and cash flow generation makes for a powerful combination and places LifeLock in a strong position when looking across a broad universe of software as a service, internet, and security companies.

Chris will review our financial results and guidance in more detail later in the call, but first I wanted to discuss the trends we’re seeing in our business and in the market in general. Overall, our business is benefitting from the combination of increased awareness of the issue of identity theft, the power of our brand, and the leverage we’re getting out of our unique IP.

The problem of identity theft remains top of mind and our market leading, proactive approach continues to differentiate us from our competitors and a reactive approach to the problem. Javelin Research released their annual ID Fraud Survey report earlier today, and the results showed once again that incidents of identity fraud continue to increase. 12.6 million adults in the U.S. were victims of identity fraud in 2012, up from 11.6 million in 2011, an almost 9% increase.

This count has now risen to more than 5% of the adult population, and clearly shows the threat of identity theft is a real and growing problem. More importantly, the reports show that criminals have continued to shift their tactics. New account fraud, where criminals open new accounts using stolen identity information, jumped 50% last year, with the resulting total fraud loss doubling year over year to just under $10 billion.

Our LifeLock Ultimate solution is uniquely suited to combat the rising threat of identity theft, as the level of visibility we gain from our enterprise data flow allows us to proactively monitor account creation rather than the reactive approach of monitoring credit reports for incidents after they have already occurred.

While having nearly 2.5 million members is a sizable number, we have still barely scratched the surface of our 78 million member addressable market opportunity. A major focus of ours is continuing to raise the awareness of identity theft as well as how to best defend against it.

The educational programs we mentioned last quarter involving former New York City mayor Rudy Giuliani have just launched, and are focused on spreading awareness about online security and protecting consumers against identity theft. In addition, we’ve moved to engage a broader, more diverse audience with our sponsorship of “Identity Thief,” a new all-star comedy movie that recently opened number one at the box office.

We’re also gaining higher visibility through our efforts in social media. For example, with the new Facebook application we launched in November, LifeLock for Life is a Facebook application enabling fans to explore different life stages and events to test their security knowledge in an effort to win prizes. Along the way, we hope to further educate consumers about the threat of identity theft.

Finally, as evidenced by our first-place ranking in the Javelin Strategy and Research Identity Protection Service Awards, and our strong financial results, the power and uniqueness of our proactive identity theft protection offerings is increasingly becoming apparent. Reactive solutions like traditional credit monitoring are no substitute for the proactive alerts enabled by our technology platform and both consumers and enterprises are taking notice.

I mentioned earlier that we added nearly 200,000 gross new members in the fourth quarter. This type of Q4 performance is particularly gratifying as consumers are usually preoccupied with holiday shopping during this time period.

The targeted investments that we are making on the marketing side continue to pay off as consumers are increasing acknowledging the superiority of our service offering. Our LifeLock Ultimate service continues be successful with new and existing customers and was a large driver of the increase in our monthly average revenue per member during this quarter.

LifeLock Ultimate accounted for more than one-third of our gross new member additions during the quarter and continues to grow as a percentage of our member base. Our customer retention rates improved again this quarter, climbing to 87.1%, and marking the 10th consecutive quarter of sequential improvement in this metric.

This compares to 82.7% in the year ago period, and 85.9% in Q3. This strong performance was once again due to the combination of our world-class customer service organization, operational efficiencies, and product superiority. On the enterprise side of our business, we continue to see growth in the number of transactions processed as the tally grew to 64.3 million transactions, compared to 56.4 million in last year’s Q4 and 57.3 million in Q3.

Beyond the strength of this business itself, the increasing value that it brings to our overall offering is evident in the growing awareness of the uniqueness of our services. As I’ve mentioned before, the visibility we gain from our enterprise business is key to the differentiated nature of our consumer service offering. It is the core of our ability to provide proactive alerting systems that help stop identity theft before it happens, versus some of our competitors’ reactive solutions on the market that only alert members after the damage has been done.

We will continue to leverage our proprietary enterprise data as we move forward in an effort to further our lead in identity theft protection for consumers and broad protection services for enterprise. Overall, we were very happy with our performance in the quarter.

Before I had the call over to Chris, I wanted to take a step back and review the past 12 months. I am very pleased with the year we had in 2012. In the year as a whole, we reported $276.4 million in revenue, up 43% from 2011. The growth rate of our consumer business accelerated to 31% versus the 20% we posted in 2011.

We completed the acquisition of ID Analytics, allowing us to enter the enterprise business and furthering the competitive advantage and product superiority that we enjoy to this day. We added more than 760,000 gross new members. We increased our monthly average revenue per member in Q4 by $1.01, or 12% year over year. We improved our retention rates by 440 basis points. We added to our executive team with the addition of Hilary Schneider as our president. We grew our cash flow and profits substantially, and entered the public markets.

In summary, I’m incredibly proud of our team and all the hard work they’ve put into LifeLock over the years. Identity theft remains the number one reported consumer complaint in the U.S. and as individuals continue to expose more and more of their personal data online, the threat continues to grow. It’s becoming increasingly clear that the traditional credit monitoring solutions can’t match the visibility and the level of protection provided by our unique solutions.

That being said, we have just begun to capitalize on this multibillion dollar market and are confident that the combination of our leading brand, superior service offerings, and unique data repositories will continue to propel us into the future.

With that, let me turn it over to Chris for more detail on the financials.

Chris Power

Thanks, Todd. To echo your comments from earlier, our performance was exceptional across the top and bottom lines this past quarter. Total revenue for the quarter was $78.8 million, up 49% from $53 million in the fourth quarter of last year and up 9% sequentially from $72.1 million in Q3. This compares to our prior guidance of $73 million to $74 million.

Once again, this was driven by strong growth in both our member count and monthly average revenue per member, along with an increase in our retention rate. For the quarter, gross new member adds were nearly 200,000, putting our ending member count just shy of 2.5 million, up 20% from the year ago period.

Q4 has historically been a slower, seasonal period for us, but we were able to effectively target our investments this quarter, producing excellent results. These results, along with the 12% year over year increase in our monthly average revenue per member and the increase in our retention rate to 87.1%, produced consumer revenue of $70.8 million for Q4.

Enterprise revenue was $8 million, up from $6.5 million sequentially. As a reminder, since this business was acquired early in 2012, there is no comparable figure in our financial statements for Q4 of 2011.

Gross margins in the quarter were 72%, up from 70% in the year ago period. Once again, this increase was driven by the inclusion of the enterprise business in this year’s results, along with the continued leverage we’re getting from our member services organization. Sales and marketing expenses came in at $31.6 million, compared to $21 million in the year ago period.

As a reminder, this combines our consumer and enterprise sales and marketing spending. By taking the consumer portion of sales and marketing and dividing it by the number of gross new members added, our cost of acquisition for new members in our consumer business came in at $142 this quarter. This is up from last year’s Q4 results of $103, but down from Q3’s $147.

One item of note when comparing this quarter’s results to previous periods, in Q4 of 2011 a strong marketing push by AOL had significant impact on our gross new member adds, as they launched an aggressive campaign to sign up their subscribers to LifeLock.

As a result, the cost of acquisition calculation was skewed lower in Q4 of 2011, as the cost of acquiring these wholesale, embedded members is significantly lower than for a typical member acquired through our other channels.

While we have historically seen a sequential dip in sales and marketing expenses in Q4, this year’s spending was impacted by a couple of unique factors. First, as we mentioned last quarter, approximately $2 million of the marketing spend pushed from Q3 to Q4, due to the launch timing of a few programs.

Second, we reinvested some of the upside we delivered in both Q3 and Q4 into some additional targeting marketing programs in the period. We were quite pleased with the results of these efforts.

Technology and development expenses were $8.6 million in the quarter, compared to $4.4 million in the fourth quarter of 2011. This was driven largely by the inclusion of ID Analytics results in this year’s Q4, along with investments we’re making to grow the business and further our lead in the market.

G&A expenses came in at $8.8 million compared to $4.4 million in Q4 of 2011. The increases here were largely driven by the cost of being a public company, some end of year accruals, and an increase in noncash stock compensation expense.

GAAP operating income was $5.7 million in the quarter, which was better than our expectations, but was down from $7 million in the previous year’s Q4, largely as a result of the increased operating expenses items mentioned a moment ago.

Excluding the amortization of acquired intangible assets related to our acquisition of ID Analytics of $2 million, and share-based compensation expense of $2.8 million, our Q4 2012 operating income would have been $10.4 million. This compares to an adjusted operating income of $7.9 million in the year ago period, which excludes $900,000 of share-based compensation expense.

One item of note in the other income line, during the fourth quarter, we paid off the debt we had incurred as part of the ID Analytics acquisition back in March of 2012. As part of closing this loan, we accelerated the amortization of the debt issuance costs related to the initial transaction. This resulted in a one-time noncash charge of approximately $1.4 million that hit other income in the fourth quarter.

Adjusted net income was $8.9 million from the first quarter of 2012, up from $7.8 million in the fourth quarter of last year. Adjusted net income per share was $0.10 from the first quarter of 2012, based on 92.2 million weighted average shares outstanding, compared to $0.15 per share based on 53.1 million weighted average shares outstanding in the year ago period. This was ahead of our guidance of $0.06 to $0.07.

Adjusted EBITDA was $11.4 million in the fourth quarter of 2012, ahead of our guidance of $9 million to $10 million, and up from $8.9 million in last year’s Q4. Cash flow from operations for the quarter was $7.7 million, leading to free cash flow of $3.7 million after taking into account approximately $4 million in capital expenditures as we continue to invest in our technology infrastructure to support our subscriber growth.

For the full year 2012, we generated $40.9 million in free cash flow compared to our guidance of $39 million to $40 million, resulting in a free cash flow margin of 15%. This is up 83% from the $22.3 million of free cash flow we generated in 2011.

We ended the year debt-free, with cash and cash equivalents of $134.2 million, this compares to $76.7 million in cash at the end of Q3. As a reminder, we generated approximately $126 million in net proceeds from our IPO that occurred early in Q4 and used $62.6 million to pay off the remaining debt from our ID Analytics acquisition, as well as a $10.7 million payment toward former holders of our preferred stock.

Now, moving on to guidance. We are initiating guidance for both the first quarter and full year 2013. For the full year 2013, total revenue is expected to be in the range of $335 million to $345 million, or growth of 21-25% on a year over year basis.

Adjusted net income per share is expected to be in the range of $0.30 to $0.35 based on approximately 99 million weighted average shares outstanding.

Adjusted EBITDA is expected to be in the range of $37 million to $42 million, and free cash flow is expected to be in the range of $42 million to $47 million.

Overall, we plan to continue reinvesting in our business when we have the opportunity to do so. We have demonstrated the scalability in our business model, and our goal is to drive growth and continued market share gains within what we believe is a significantly underpenetrated market opportunity.

Turning now to the March quarter, total revenue is expected to be in the range of $79 million to $81 million, or growth of 37-41% on a year over year basis. Adjusted net income per share is expected to be in the range of a loss of $0.02 to breakeven, based on approximately 97 million weighted average shares outstanding.

Adjusted EBITDA is expected to be in the range of negative $500,000 to positive $1.5 million. There are three things to consider when analyzing our guidance for Q1. First, our Q1 is typically a quarter of investment as we launch several new initiatives to set up the year.

Second, as you compare these figures to Q4 of 2012, please keep in mind that our enterprise business is seasonal, and peaks in the fourth quarter as a result of the increased transaction levels driven by holiday spending. While we’re not guiding to the specific mix of consumer and enterprise revenues as a practice, we will note that our enterprise business typically declines approximately 15-20% in the first quarter from a seasonal peak in the fourth quarter.

Third, as you compare this guidance to the March quarter of 2012, please keep in mind that we had a positive legal settlement of approximately $2.6 million in that period, which reduced our G&A expense and will not reoccur this year.

In summary, we ended 2012 with excellent results and have solid momentum heading into 2013. Our top and bottom line results exceeded our guidance, and we delivered strong performance across all of our key metrics.

We remain excited about the opportunity in front of us, as our unique, market-leading offerings have us well-positioned to take advantage of our significant market opportunity. And now, we’d be happy to take your questions.

Question-and-Answer Session


[Operator instructions.] And our first question comes from the line of Greg Dunham with Goldman Sachs. Please go ahead.

Greg Dunham - Goldman Sachs

I guess first off, on the customer acquisition cost, it was better than I had expected, especially given the sequential growth in the sales and marketing spend, and some of the headwinds you mentioned, like the $2 million and the add-in programs. I guess the question is, were there any anomalies that you saw, or what do you see from a customer acquisition standpoint that led to kind of such outperformance in a Q4?

Chris Power

I think we had strong performance, really, across all of our channels. And typically, Q4 you do see that cost of acquisition slide down a little bit as we spend maybe a little less on brand than we might spend earlier in the year. But in general, we were pleased with the performance and there was some strength across all the channels.

Greg Dunham - Goldman Sachs

So it wasn’t a mix issue, it was more of an awareness dynamic?

Chris Power


Greg Dunham - Goldman Sachs

And then a follow up question, we’ve seen the RPU growth continue to accelerate. When you look to your outlook for 2013, are you embedding this trend to continue? Or how should we think about RPU as you look forward within your guidance?

Chris Power

A couple of things. One is we are not going to break down the specific submetrics that kind of go into our guidance. But I think you can expect sort of the continued dual growth in terms of continued growth in our member count and continued growth in our revenue per member. And just a reminder, this past quarter we had over one-third of the members selecting Ultimate. We’re still in the early innings of Ultimate penetrating the overall base. So we think there’s a lot of runway still left on that front.

Greg Dunham - Goldman Sachs

And final question. I think we’ve talked about before some investments in digital marketing. Can you maybe address that as a channel? And some of the investments you’re doing on that front? And then I’ll let others ask.

Todd Davis

Certainly, as the example of the Facebook that we gave on this call is just one small example of the places that we still see as opportunity on the digital front. So with the addition of Hilary Schneider, which, as everyone knows, was previously the EVP of the Americas for Yahoo! With her experience and expertise that she can bring into our marketing organization and allow us, both within the marketing segmentation research that we do, but also in looking at the platforms and the communication tools, I think there’s still a lot of room for us to continue to develop on the digital front.

And some of the examples that we gave on this particular call are just a sampling of what that might look like. I would expect to see the continued investment on that front will test many of the mediums, but you’ll see that digital as an opportunity for us that we think is still fairly untapped.


And our next question comes from the line of Kash Rangan with Merrill Lynch. Please proceed.

Kash Rangan - Merrill Lynch

I’m sorry if this question has already been asked, but I was wondering, at a high level, when you look at the 2013 guidance, how much of the increase relative to our expectations is coming from better outlook for retention, better ASPs, and units. So if you could just rank order where you think the strength in your guidance is, that would be great.

Todd Davis

I’ll just remind you, we really won’t provide guidance to any of the specific metrics, but I think if you look historically, what you’ve seen is member growth being a very important piece of the puzzle, RPU certainly kind of being critical to that growth, and retention rate obviously helping the net member growth over time. So I think we’re pretty pleased with the results across all three of those metrics, and we’re going to remain focused going forward.

Todd Davis

And Kash, as we think about where we’re going to focus the efforts, I will say an over 87% annualized retention rate on a consumer subscription business, that’s getting pretty high up there. And best of breed. We’ll continue to focus those efforts, but the movements we can make there only get tougher and tougher as you get higher into the performance or that. Some of the other mediums, again, we’ll keep attacking. How do we go edge gate to consumers, how do we reach those? How do we reach those demographics that haven’t been exposed or educated yet to the threat, the problem, or our unique solution?

Kash Rangan - Merrill Lynch

And also, in your 2013 forecast, are you assuming a material pickup in Ultimate as a percentage of subscriber mix? Or not?

Todd Davis

I think over the last couple of quarters we’ve seen Ultimate kind of being right around that one-third level, and continue to make penetration into the base. So we’re not going to necessarily report exact Ultimate percentage of the base. We reported last quarter that we passed into the double digit territory, past 10%. So we feel that while there’s going to be variability to that mix, based on channel, that we’re going to continue to expect to see strong performance of ultimate within our new members coming in the door.


And our next question comes from the line of Tom Ernst with Deutsche Bank. Please proceed.

Tom Ernst - Deutsche Bank

Todd, first question for you. It seems pretty clear to me that you’ve created a service separation from the competition. And kind of core to our thinking on your ability to penetrate at high growth is your ability to educate the customers on the differentiation. So I think I saw some of this in the way you changed your advertising as the year closed out last year. But I’m curious, what are you doing to drive the consumer education on how different the service is? And as a follow up to that, do you have any way to measure that either existing customers or the potential customers, the general market, awareness is getting the picture of the differentiated service [unintelligible]. Is there data to support it?

Todd Davis

We still see a significant opportunity in educating the base that, again, reactive, limited visibility solutions that may have been available before in the form of credit monitoring or others, that consumers are beginning to really understand there’s more. What are my options available? And you see it, as I mentioned earlier on the call, with for example the spokesmen, with former New York City Mayor Rudy Giuliani, his ability to come out and really articulate just the threat of the crime.

I’m sure we’ll reference things like this Javelin report that came out today. Again, the awareness of that 50% increase, and them doing new account openings. That kind of information, the educating of the consumers, that hey, by the way, the more of you that use smartphones or social media, that you increase your probabilities that you could become a victim.

And so using someone who is certainly respected, knows the security field, has been in it for quite a long time, with a significant and stellar track record, like a Mayor Giuliani, where we can use that in formats that we may not typically have used historically. That, along with the fact that we will be doing these marketing segmentation studies, we will be doing the research, we do look at unaided brand awareness and brand awareness to understand how we’re reaching those folks who had not heard about us before, what is the brand sentiment.

Now, we’re not going to share the details of those in the quarterly calls, but we are very cognizant, very aware, and make the investments to go make sure we have that understanding, where we can identify the areas that we can continue to go either educate or improve that brand awareness, unaided and aided, and how we can leverage that in those untapped markets in our addressable market.

Tom Ernst - Deutsche Bank

Let me shift to a quick data question. Chris, it looks like capex was up quite a bit in the most recent quarter. Can you remind me what that was this quarter, and what do you expect for a capex run rate as you look forward?

Chris Power

We continue to invest in our infrastructure to really support the growth of the business. And as you can see, the business accelerated in 2012, and our outlook for growth for 2013 is that we’re going to continue to grow. So as it related to capex, we’re putting money into the infrastructure to stay ahead of that investment curve. And we’re not going to get into specific guidance on what’s embedded in our free cash flow statements, but we would expect the capex amounts to increase in 2013.


And our next question comes from the line of Robert Breza with RBC Capital Markets. Please proceed.

Robert Breza - RBC Capital Markets

Maybe, Chris, just as you think about your guidance for next year, the fiscal year, we haven’t really talked too much about ID Analytics. How do you see that business growing into next year? And do you expect it to be a bigger percentage of the revenue pie for next year?

Chris Power

I think as we look at 2013 we’d expect that that kind of mix of sort of 90-10, we’d expect that to sort of stay in that same range. Now, it’s going to vary from quarter to quarter, but we certainly have opportunities on both sides of the business, so we’d expect those to grow at similar rates.

Robert Breza - RBC Capital Markets

Is there additional partnerships there that you see, that can kind of move that number higher? How are you thinking about that business going forward?

Todd Davis

Yeah, I think what we’re looking at is always the opportunities on how we expand on the network effect of this kind of unique ecosystem we’ve built. So, as we can get more enterprises and partnerships with those enterprises that are feeding those unique data elements, especially those real-time data elements, into our infrastructure, that allows us to alert the consumer, it really reinforces the value proposition of both sides of our equation. It makes our consumer offering more comprehensive, and it allows us to have more data going into our applied analytics, allowing those results to continue to improve in the performance.

So we’re investing, we have dedicated efforts to go look for those additional partnerships or new enterprise customers, that can come into the network. And you’ll see that as an extremely high priority as an organization, how do we drive incremental transactions and add more people to the network.


And our next question comes from the line of Richard Davis with Canaccord. Please proceed.

Richard Davis - Canaccord

Two questions. One, do you have a sense yet if the Ultimate product has a different level of retention, or is it too early? And then the second question is, does the guidance that you guys have provided include anything material from either kind of new products or services or any kind of customer types? In other words, is the guidance more or less good execution, steady as she goes, from what you have, but then if something else happens, there’s, in theory, potential upside to the numbers?

Chris Power

In terms of the retention, it really is a little bit early, since we really kind of soft launched the product in Q4 of 2011. So we had a relatively small number of members on the product at the end of Q4 last year, which is really kind of just cycling around right now from a retention perspective.

But I think what we’ve seen in the past is that our Command Center product, which is now the mid-tier product, but was the high-end product, did have slightly higher churn associated with it. But obviously, with the higher revenue, had very strong lifetime value. So I think we would anticipate similar activities, but it really is fairly early in terms of kind of getting the kind of volume read on those Ultimate retentions. And we’ll provide those kind of updates as we move forward.

Todd Davis

And then as far as the guidance we’re providing on some of the upside for additional distribution partners or others that may come onboard, certainly as we’re looking at this it is continued execution. There is great predictability in the business.

While certainly we’re always looking for the upside, looking for those opportunities where we can accelerate, whether those are incremental partnerships, investment opportunities, whatever that may look like, we’re going to build in, and have built in, to the guidance, this [XQ], be able to deliver upon the numbers that we have, as we’ve done now in this second quarterly review. So I will tell you that it doesn’t count on something dramatically out of the ordinary occurring.


And the last question comes from the line of Scott Zeller with Needham & Company. Please proceed.

Scott Zeller - Needham & Company

Going back again to the customer acquisition number, which was very good, and the fact that the sales and marketing was dialed down as you’d guided previously, how do you explain the overage in customer acquisition? Is it refined targeting of prospects? Is there any color you can offer on why that was better than expected?

Chris Power

Again, I’m just going to remind folks that that number is going to move from quarter to quarter based on a number of factors, in terms of kind of the mix by channel and the mix by product that we see coming in. And historically, we do see that cost of acquisition come down in the fourth quarter. But you know, think of it as if you look back over time we’ve kind of been in that sort of $140-170 cost of acquisition range. So we’re kind of still in the range that we’ve seen over time.

And the other thing to kind of keep in mind is it will move around, because we’re managing the business to lifetime value. So when we see opportunities, we may see that number move up. If we are continuing to see the level of retention, the level of penetration of Ultimate product, that’s going to continue to drive our lifetime value over time. So it’s a strong quarter, but there’s a lot of moving parts, and we’ll keep driving the business based on lifetime value going forward.

Scott Zeller - Needham & Company

Sorry, I may have mumbled a bit there in my question. That’s helpful color, but also about the gross new member adds, and how that was a very good number considering that the sales and marketing was dialed down.

Chris Power

Right. So I think some of that is we actually did still spend a little more that we historically had in the fourth quarter. We tried a couple of new campaigns. Historically, we kind of avoided that whole kind of Black Friday shopping activities, and this year we decided to kind of take it on head-on. And it was a test. It was a sizable test, but we were pleased with the results, because based on our enterprise transaction volume, you can see a lot of folks are dialing up new credit cards, new other activities that are driving enterprise transactions. So we kind of did some tests, they’ve worked out well, and they’ll inform our spending into 2013.

Scott Zeller - Needham & Company

And the last question I have, there was a previous question about the percentage of total user base now in Ultimate, and you mentioned that it had surpassed double digits previously. Do you have any broad color about what you might expect it to look like, perhaps by the end of calendar ’13, without giving specific guidance? Any color you can add to that?

Chris Power

Not specific color, but what I will tell you is it’s been plus or minus based on channel mix. It’s been right around that one-third number in terms of gross new members coming in the door since we launched that product. So certainly one could see, over time, ultimately the base getting to those type of levels over time. But certainly not going to happen in the next quarter or two, but we’re continuing to see success with that product and are really, really pleased with the market acceptance of it.


Ladies and gentlemen, this concludes today’s question and answer session. I would now like to turn the conference over to Mr. Todd Davis for closing remarks.

Todd Davis

Again, I want to thank everybody for participating in today’s call. Your questions. I want to thank my team for a great job of execution. And again, I’d encourage everybody to visit our investor relations website at investor. to access our fourth quarter press release and our periodic SEC reports, a replay of today’s call, or to learn more about LifeLock. Thank you very much.

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