LifeLock (LOCK) Hilary A. Schneider on Q2 2016 Results - Earnings Call Transcript

| About: LifeLock, Inc. (LOCK)

LifeLock, Inc. (NYSE:LOCK)

Q2 2016 Earnings Call

August 02, 2016 5:00 pm ET

Executives

Jamison K. Manwaring - Vice President-Investor Relations

Hilary A. Schneider - President and Chief Executive Officer-elect

Christopher G. Power - Chief Financial Officer

Analysts

David E. Hynes - Canaccord Genuity, Inc.

Scott Zeller - Needham & Co. LLC

Scott Shih Yau Shiao - Bank of America Merrill Lynch

Daniel Bergstrom - RBC Capital Markets LLC

Joe Maxa - Dougherty & Co. LLC

Operator

Greetings and welcome to the LifeLock Second Quarter 2016 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

I'd now like to turn the conference over to your host, Jamison Manwaring, VP of IR for LifeLock. Thank you. You may now begin.

Jamison K. Manwaring - Vice President-Investor Relations

Thank you. Good afternoon and welcome to LifeLock's 2016 second quarter earnings conference call. Joining me are Hilary Schneider, LifeLock's CEO; Chris Power, LifeLock's Chief Financial Officer; and Doug Jeffries, LifeLock's Chief Administrative Officer. The primary purpose of today's call is to provide you with information regarding our 2016 second quarter in addition to our financial outlook for our third quarter and full year 2016.

During our remarks, we will be making forward-looking statements about LifeLock's business, strategies and performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties, so please refer to the Risk Factors section of our most recent Form 10-Q on file with the Securities and Exchange Commission for a more detailed explanation of the inherent limitations in our forward-looking statements.

In addition, we will be discussing financial information that includes non-GAAP financial measures. This financial information excludes those items that affect comparability. For the most directly comparable GAAP financial measures along with the reconciliations to the non-GAAP financial measures discussed, please refer to our earnings press release posted to our website.

I encourage you to visit our Investor Relations website at investor.lifelock.com to access our 2016 second quarter earnings press release, periodic SEC reports, a webcast replay of today's call or to learn more about LifeLock.

And with that, let me turn the call over to Hilary.

Hilary A. Schneider - President and Chief Executive Officer-elect

Good afternoon, everyone, and thank you for joining us today. This quarter marks the 45th consecutive quarter of LifeLock's sequential growth in both revenue and cumulative ending members. The combination of new member acquisition, increased adoption of our premium products and strength in our enterprise business resulted in revenue of $164.4 million, above the high end of our guidance. With over 300,000 gross new member additions, we now have 4.4 million members and an annual retention rate of 85.6%, which is one of the strongest among consumer subscription businesses.

While we are pleased with the revenue and profitability results in the quarter, the recovery of the co-marketing channel has been slower than expected in the wake of FTC matters and due to our strategic shift to focus our sales efforts on larger opportunities. These larger co-marketing relationships have the potential to materially accelerate our growth in this channel. However, they do tend to have longer sales cycles.

As a result, the FTC matters and the shift in our sales focus, we now anticipate the co-marketing channel will not contribute materially to our growth until 2017. This panel tends to deliver a higher proportion of prepaid annual members and a high take rate of premium products. Consequently, the weakness in this channel is a headwind to our 2016 growth, as well as impacting our cash flow performance.

While the co-marketing channel weakness makes achieving some of our 2016 objectives more challenging, we remain optimistic about the long-term prospects for our business. We continue to be the largest pure play identity theft protection provider in our market and the key differentiators that have enabled our consistent track record of growth and profitability continue to set us apart.

First, LifeLock has unique visibility to high-risk new account opening data, with the ability to rapidly alert enterprises and our members of suspicious or fraudulent activity. ID Analytics has built a contributory data model with over 400 enterprises contributing data across multiple industries. We then apply our patented methodology to this data to identify consumer behavior that is outside of normal pattern. IDA customers includes four out of the top five wireless carriers, credit card issuers, and retail card issuers, and our database can score virtually 100% of the U.S. adult population.

One industry where IDA has recently grown its transaction visibility is in the alternative finance or payday loan space. So far this year, we have seen a five times increase in transaction visibility from this industry, which is often not visible to credit monitoring services. Because of this increased visibility, LifeLock has been able to prevent an average of five subsequent fraudulent applications for each member who notified us with a Not Me response to alerts from these enterprises. These fraudulent transactions were prevented because of the power of our IDA Network. This protection is only available to LifeLock customers.

Second, LifeLock continues to have four times the brand awareness versus the next time closest identity theft protection competitor. Similar to iconic brands like Google, which is now a verb, and Netflix, which is synonymous with video streaming, LifeLock is synonymous with identify theft protection.

Third, high customer satisfaction is a critical aspect of our business because unlike other businesses with multi-year contracts and restrictive terms, our members can cancel at any time. Our high retention reflects a strong level of customer satisfaction with LifeLock services. It is also reflected in the positive feedback our members give our member service agents. So far this year, over 92% of members surveyed have rated our member service agents with an 8 or 9 out of a 0 to 9 scale.

Fourth, we have consistently been a leading innovator in our industry. Today, we announced new enhanced protection called Stolen Funds Replacement. This enhanced benefit offers our members three levels of dollar-for-dollar reimbursement up to a $1 million at the top tier for our Ultimate Plus product in addition to our existing service guarantee. From our research we know that consumers are looking for the highest levels of protection for their financial assets and we believe this enhanced protection feature will be well received.

We understand the growing needs in the world of digitized personal information and, as the pioneer in identity protection, we will continue leading the industry with new innovation to protect consumers. These key differentiators position us for continued leadership in a large market.

Identity theft is an enormous problem. In 2015 alone, there was 736 million records exposed due to data breaches. Meanwhile, the average number of digital devices per person in the U.S. has grown to 4.3, up from 3.3 in 2014. And the portion of adults who access social networking sites from their smartphone each week has grown to 66%, up from 52% in 2014. Our identities are increasingly digitized and porous as we use apps, congratulate friends on their birthdays, announce the birth of children, and update our profiles with new jobs. This proliferation makes it easier for bad actors to amass personally identifiable information, or PII, and to hone their vectors of attack.

Shifting now to an update on our security, legal and regulatory affairs. Continually enhancing our information security remains a top priority at LifeLock, and I'm happy that our progress in these key areas is getting noticed. During the quarter, we were named one of the top 10 companies of approximately 1,000 other sites that the Online Trust Alliance assessed as part of their 2016 Honor Roll, making us the highest-scoring identity theft protection company. Other top 10 sites were Pinterest, The White House and Instagram.

As it relates to the FTC and consumer class action matters, the settlement approval process is progressing as planned with the objection period over and the settlement pending final court approval. We continue to expect payments to the class members beginning in late Q3 or Q4 of this year as we outlined previously. During the quarter, we also settled the lead plaintiff shareholder derivative lawsuit, received preliminary approval from the court and are awaiting the final ruling. We are pleased with our progress in these areas and look forward to putting this behind us.

Moving now to the progress we are making with our product and technology investments. As we mentioned last quarter, we have built a new data platform that will integrate all member alerting and analytics in a unified, scalable and extensible architecture. This is an important strategic shift in the way we engage with our members. During the second quarter, we migrated credit alerting and we expect all consumer alerting to be fully transitioned in the coming months.

With our new data platform, we are improving the quality of our alerts and we have accelerated our ability to ingest large data sets, facilitating the expansion of our data partnerships. And ultimately the most valuable aspect of the new data platform is the flexibility and scalability it provides as we expand the rates of services we make available to our members, an important advantage in the marketplace. With our new data platform, we have the ability to not only provide consumers with near real-time alerts from ID Analytics but to add a layer of analytics across all our alerting with the potential to make these alerts even more customized and valuable to our members.

ID Analytics continues to innovate and we are pleased with the uptake in one of our newest products, ID Connect. ID Connect creates a frictionless new account enrollment experience, whether in person, online or via a call center, driving higher conversion rates while mitigating fraud risk. One of the largest wireless carriers has now rolled out ID Connect to 4,000 stores. We believe this product is broadly applicable across a variety of industries and are pleased to have also launched the product with a specialty finance provider during the quarter.

Feedback about the product has been very positive and some customers have shared the early impact. For example, one customer has seen meaningful reduction in new account opening times while another has improved new account conversion by nearly 10% since they implemented the project.

Finally, fundamental to our long term success and ultimately my primary responsibility is getting the right leadership in place and operating effectively. In this regard, I believe we have made significant progress across the company at all levels and I feel confident about the team we now have in place to help us achieve continued growth.

First, we are pleased with the progress we have seen at ID Analytics and as a result, I am happy to announce that Scott Carter, the CEO of IDA has been promoted to EVP of Enterprise and CEO of IDA and will join my management team. This promotion recognizes the tremendous contribution that Scott brings to LifeLock and to IDA, as well as the strategic importance of the IDA business. Our CMO, Ty Shay, has built out his team, increased the analytical rigor in member acquisition and is working to improve our unit economics.

I hope you have all had a chance to see our new advertising campaign which highlights with some humor, the differences between credit monitoring and broad based identity theft protection services. The campaign has been performing well and it has proven our ability to build on our already strong brand as our brand awareness levels continue to improve.

Marketing effectiveness is a continuous focus area that we regularly review and adapt to changes in consumer behavior and the performance of our marketing channels. Mike Dean, who leads our partner efforts, further strengthened the partner team with the addition of Terry Green, (14:17) as General Manager of our Employee Benefits team, to help us build this exciting part of our business. Terry (14:25) brings significant experience in the benefits space, including serving as the EVP of Employee Benefits with Hubs International, one of the top ten benefit brokers, and previously SVP and Employee Benefits Executive with Bank of America.

A recent survey by Willis Towers Watson estimates that by 2018 up to 70% of employers surveyed will offer identity theft protection services. ITPS is projected the fastest-growing voluntary benefit, and as the brand leader, we're very optimistic about the large growth opportunity we see in the employee benefit channel over the next several years. As a reminder, the EB channel is seasonal, with the significant majority of enrollments taking place during the fourth quarter open enrollment periods.

Finn Faldi has joined us as SVP to lead our co-marketing partner channel. Finn brings meaningful partnership and operations experience from companies including Yahoo!, Oracle and AppThis. With the talent of this team, we are refocusing on the largest opportunities, and are pleased with the quantity and quality of dialogues we are having as we build our pipeline. As we noted above, we are seeing that our strategic shift to focus on the largest of opportunities is extending the length of the sales cycle. While this is having some impact to member growth in the short term, we are confident that this approach will yield strong results in 2017 and beyond.

Sharon Segev, who joined as General Counsel earlier this year, has also been an excellent addition to the team. Her deep understanding and expertise in all aspects of her work has been invaluable, particularly as we work to turn the page on the FTC and related litigation and continually focus on raising the compliance bar.

Finally, bringing more than 25 years of senior leadership in finance and operations, with the last 15 in the technology industry, Doug Jeffries joined us more recently in the position of Chief Administrative Officer. He will assume the CFO role in addition to his other operating responsibilities in August.

In summary, I remain confident we are laying the foundation for further growth and the continuous generation of shareholder value. Our category-defining brands, coupled with our proprietary data and analytics, will continue to drive our lead in the industry. Our investments in technology and development are beginning to pay off and will help us expand the competitive moat we have around our business. In the near term, we are taking the right steps to grow our co-marketing channel. I remain optimistic about the large opportunity for growth in the employee benefits space and expect to see our direct-to-consumer business continue to grow. We have the right people in place to execute on the next phase of growth and maturity for this company.

Before I turn the call over to Chris, I want to extend a heartfelt thank you to him for all of his outstanding work and numerous contributions as CFO of LifeLock in helping lead the company through an exceptional period of growth and profitability.

Now, let me turn the call over to Chris to walk you through the financials.

Christopher G. Power - Chief Financial Officer

Thanks, Hilary. It has been a pleasure being a part of the LifeLock team for the last five and a half years. I am very proud that during my time we've been able to extend LifeLock's brand leadership, grow its unique data assets, and pull together a team of world-class talent. The company is in excellent financial shape with a bright future and a clear path to continue to scale moving forward. I'm confident that Doug is the right choice to help the company further capitalize on our large market opportunity.

Turning to the quarter, total revenue was $164.4 million, above the high end of our guidance of $162 million to $164 million, and up 13% compared to the second quarter of 2015. Our consumer business grew 13% year-over-year to $156.7 million. We added 304,000 gross new members in the quarter compared to 317,000 gross new members in the second quarter of last year. GNMs in our direct-to-consumer channel grew year-over-year and helped drive a premium take rate that was well over 40% and up slightly sequentially.

Our partner gross new members continued to be impacted by the lower contribution from the co-marketing channel, as Hilary discussed. We also had a large employer paid employee benefit win during Q2 of 2015, which impacted our year-over-year comparison. In addition, we continue to see more employers electing to introduce this benefit in Q4 to align with their annual benefit election cycle. We now expect roughly two-thirds of our full year employee benefit enrollments to come through the employer open enrollment periods in Q4. We remain confident in our EB customer pipeline and note that the number of companies who have already committed to offer LifeLock as an employee benefit puts us well on track to deliver our full year forecast.

We ended the quarter with approximately 4.4 million members, up 9% from Q2 of last year. The monthly average revenue per member for the period was $11.97, up 2.5% compared to the second quarter of last year and up 1% from the prior quarter. Slowing member growth, in particular the co-marketing channel, impacted the monthly revenue per member.

Our annual retention rate of 85.6% dipped slightly on a sequential basis and was down 1.5 percentage points from 87.1% in Q2 of 2015. Last quarter, we discussed the four factors driving the year-over-year decline and each of these factors continued to impact our Q2 annual retention rate. These included the annual renewal timing associated with the record number of members signed up in the wake of the Anthem breach in the first half of 2015. In addition, there were a large number of first half cancellations in the oil and gas vertical in our EB channel. As a reminder, we report an annual retention rate and, as a result, these two factors will continue to impact our annual retention rate for a few more quarters.

The third factor was the increase in cancellations in the second half of 2015 related to the negative press associated with the FTC matters, an item that continues to impact the annual retention rate in 2016. And finally, we continue to see the ongoing shift of our base to premium products and monthly billing payment plans. Both of these cohorts tend to have slightly higher cancellation rates than that experienced in our standard product and annual payment plans, and we expect this trend to continue.

In addition, we saw higher cancellations in the quarter due to the expiration of a large number of breach channel contracts and a higher number of cancellations within our affiliate channel. As Hilary mentioned, our expectations remain that redress checks will be sent to members for the FTC and related class action suit settlements in late Q3 or early Q4, which we believe will have an impact on our retention rate.

Revenue from the enterprise segment was $7.8 million, up 17% year-over-year, as ID Analytics continues to make progress, expanding the breadth and depth of its network, helping to drive growth of the enterprise transactions by 29% to over $93 million in the quarter. We are very pleased with the traction we are gaining at IDA. For example, one of the nation's leading automotive lenders contracted to use Credit Optics, which will provide 100% visibility to all auto loan applications for this customer. In addition, a leading retail card issuer implemented ID Score on 100% of their new applications.

Now before I move further down the income statement, I want to preface my comments by stating that, unless otherwise indicated, they will be focused on non-GAAP results, which for the quarter exclude a total of $8.2 million of share-based compensation expense, $3.3 million of the amortization of acquired intangible assets and $7.1 million in litigation expense associated with the FTC and derivative settlement.

Adjusted gross margins were 73.7% in the quarter, compared with 76.2% in Q2 of last year. As expected, gross margins declined during the second quarter due to approximately $6 million in costs associated with the migration of credit services for all premium members. We continue to expect an offsetting reduction in expenses spread throughout the rest of the year, leaving the full year 2016 cost in this area roughly equivalent to our previous profile. Normalized gross margins adjusting for these credit migration cost would have been 77.1%, or a roughly 1% improvement from last year. This is a continuation of the multi-year trend of consistent gross margin improvements, and we expect our new data platform will improve gross margins by 1% over the long term.

Adjusted sales and marketing expenses were $80.9 million in the period compared to $68.3 million in the second quarter of 2015. Our cost of acquisition in the quarter increased to $260, up from $210 in Q2 of last year and $250 in the prior quarter. As reflected in our prior guidance, COA levels were elevated in the first half of the year as the partner channel contribution remained under pressure. As a result, the higher COA direct-to-consumer channel contributed a larger share of the gross new member additions.

In addition, building on our first quarter efforts, we increased investments in brand advertising during the quarter and saw continued gains in our industry-leading brand awareness levels, both year-over-year and since last quarter. We also had a large employee benefit win in Q2 of 2015 with a very low COA, which also impacted our year-over-year comparison.

Our expectation remains that our COA will decline later in the year as we see a benefit from the increased brand investments in the first half of the year and as fourth quarter member growth in the lower COA employee benefit channel reduces our average COA. With our industry-leading retention rate and the continued market acceptance of our premium products, the lifetime value of our members remains healthy and validates the investment at these COA levels.

Adjusted technology and development expenses were $17.4 million in the quarter, up from $14.7 million in the year-ago period due to ongoing investments in talent, product enhancements, security and infrastructure. As we have discussed, you should expect us to continue on this path of investment.

Adjusted G&A expenses were $16.7 million in the quarter compared to $17.5 million in the year-ago period. Legal expenses were down significantly, but were partially offset by increases in compliance and risk initiatives. As a reminder, we began adjusting FTC-related expenses when we entered the litigation phase in Q3 of 2015.

Adjusted EBITDA was $9.2 million in Q2 compared to $12.5 million in the second quarter of 2015. The quarter's year-over-year performance was negatively impacted by the previously discussed timing of an additional $6 million in expenses related to the migration of premium members' credit data. We expect this will be offset by lower expenses in this area in the second half of the year. The combination of stronger revenue and the delay in timing of some marketing expenses contributed to our over-performance relative to our guidance of $5 million to $6 million.

Overall, adjusted net income was $6.3 million in the quarter compared to adjusted net income of $10 million in Q2 of last year. Adjusted net income per share in the second quarter was $0.07 based on 96 million shares, beating our guidance of $0.03 to $0.04 and down compared to $0.10 based on 100.3 million shares in the year-ago period.

Cash flow from operations for the quarter was $9.8 million, down from $34.4 million in the second quarter of last year. Total capital expenditures were $4.5 million, up from $2.2 million last year. A majority of the increase was related to the development of our enhanced data platform.

Adding back expenses related to the FTC litigation of $2.3 million, free cash flow was $7.6 million compared to $32.2 million in the year-ago period. The decrease was due to $6 million in data services associated with the transition to our new data platform, the shift to a higher proportion of media that requires advance payment, along with the timing of other net working capital items.

We ended the second quarter with $155.9 million in cash and marketable securities compared to $201.8 million at the end of the prior quarter. The decline was predominantly the result of the roughly $48 million paid under the recently completed share buyback program, which resulted in 3.2 million shares returned to the company. We have now fulfilled the $100 million stock repurchase program well in advance of our year-end planning, returning a total of 7.5 million shares. Our board regularly evaluates our capital structure, and we will continue to look at buybacks as an option going forward.

Now, turning to our guidance. For the third quarter, we are initiating guidance as follows. Total revenue is expected to be in the range of $167 million to $169 million. Adjusted net income per share is expected to be in the range of $0.34 to $0.35, based on approximately 95 million fully diluted weighted average shares outstanding. Adjusted EBITDA is expected to be in the range of $35 million to $36 million.

For the full year 2016, we are updating guidance as follows. We are reiterating total revenue guidance, which is expected to be in the range of $662 million to $670 million. Overall, we continue to expect our direct-to-consumer channels to perform well, and anticipate strong fourth quarter member additions in the employee benefits channel. While we are pleased with the addition of talent to the co-marketing team and are making progress building pipelines, we don't believe it will meaningfully contribute to growth in 2016. As discussed, we also expect some headwinds to the retention rate in late Q3 or early Q4, when checks are sent to consumers as part of our FTC and related class action settlement.

Adjusted EBITDA is expected to be in the range of $84 million to $88 million, unchanged from our prior guidance. We continue to expect the seasonality to be more pronounced in 2016 based on the timing of sales and marketing investments, which are more heavily weighted towards the front half of the year, and the transition to our new platform.

Adjusted net income per diluted share is expected to be in the range of $0.74 to $0.78, based on approximately 98 million fully diluted weighted average shares outstanding, an increase from the previous range of $0.73 to $0.77. This guidance assumes a 3% cash tax rate. Our per-share profitability is benefiting from the accelerated buyback activities which have taken share count down.

Free cash flow is expected to be in the range of $83 million to $88 million, down from our prior guidance of $93 million to $98 million. This is driven by the weakness in our co-marketing channel, which typically has a high proportion of prepaid annual members.

In summary, the weakness in the co-marketing channel, as well as the shift in our member base due to our ongoing success in the employee benefit channel where our subscription fees are deducted directly from paychecks, will alter the cash flow profile of the business. The underlying profitability, however, remains strong, and we expect to see healthy growth and scale across our business. We remain confident that our brand, unique technology and strong team will continue to drive penetration of our large and growing market. We are focused on executing against our goals of driving new member growth and delivering best-in-class products to our members.

And with that, we'd like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from David Hynes from Canaccord.

David E. Hynes - Canaccord Genuity, Inc.

Hey. Thanks, guys. So maybe we can start with the co-marketing channel. Hilary, I guess can you give us any color on the conversations that you're having with these prospective new larger partners? What are the gating factors to getting these deals done? Are there any recurring issues? Any additional color that can help us think about kind of what pushes these across the finish line.

Hilary A. Schneider - President and Chief Executive Officer-elect

Yeah. Sure, DJ. The way to think about the co-marketing channel is that that channel definitely was impacted by the FTC matters and we've had a slower than expected recovery. One of the things that contributes to that is that we are really strategically realigning to target larger opportunities. And when we talk about larger opportunities, we're really talking about the potential to be integrated into the product offering flow of these larger companies. I'd say we're pleased with the scale and scope of the conversations we've had to date and that we're very confident about the ability to materially scale this channel. And it's really a question in our minds, as we work with these potential partners, around how do we get the right offer in the right place at the right time.

David E. Hynes - Canaccord Genuity, Inc.

Yeah, got it. And then on the IDA side, good to see that business executing well, it's obviously an important piece of the puzzle. If my math is right, it looks like the revenue per transaction dips a bit in the enterprise business. And I guess could you talk about is there strategic rationale there, right? Talk about pricing, do you sacrifice pricing in the near term to grow the data network? How do you think about that now and then kind of longer term pricing leverage in that business?

Hilary A. Schneider - President and Chief Executive Officer-elect

Yeah, absolutely. So as you recognize, IDA is the special sauce of our business. This unique data visibility not only helps us in scoring accurately for enterprises authentication of identity, but it also enhances the LifeLock offering. We know, for example, that when a LifeLock member receives an IDA alert, which is a Me or Not Me, then it increases the Net Promoter Score in a dramatic way.

David E. Hynes - Canaccord Genuity, Inc.

Yeah.

Hilary A. Schneider - President and Chief Executive Officer-elect

It is a (37:33) network effect of this business, which is the more data we see, the more effective our scoring is on the enterprise side and the more benefit we deliver to LifeLock, and we are prioritizing visibility to that data over pricing in the near term. Over the mid to long term, I think there's opportunity to rethink that prioritization.

David E. Hynes - Canaccord Genuity, Inc.

Yeah. Okay, that's fair. And then, lastly, maybe on the activist front (38:02), obviously, you have a 13D filer that says they've initiated a dialogue with the board. Maybe you could give us some color on kind of where their interests lie, kind of tone of conversations? Anything you could offer to help us think about what's happening on that front?

Hilary A. Schneider - President and Chief Executive Officer-elect

Yep. As you would expect, we're always in dialogue with our shareholders and we don't comment on individual conversations with any shareholders. I would emphasize that the board is focused on enhancing shareholder value.

David E. Hynes - Canaccord Genuity, Inc.

Got it. Okay. I'll pass the line. Thanks, guys.

Christopher G. Power - Chief Financial Officer

Thanks, DJ.

Operator

Thank you. Our next question comes from Scott Zeller from Needham & Company.

Scott Zeller - Needham & Co. LLC

Hi. Good afternoon. A question on the co-marketing channel. I'm trying to understand whether or not the challenge there is because you have partners that may have backed away and are not coming back to you or if it's because there are new partners you have in the pipeline that have not converted.

Hilary A. Schneider - President and Chief Executive Officer-elect

Sure. So let me just reiterate that we have not lost any material partners through the process. This is really around our pipeline and it is around targeting these larger opportunities. In this quarter, I'm sure you noticed in our statements that we've also strengthened our team. In addition to Mike Dean who joined us earlier this year, we've added Finn Faldi who will be focused on the co-marketing channel and has significant experience in that space, as well as Terry (39:45), who's going to be joining us in the employee benefits space. And so when we think about it, we actually like the tenor of the conversations we're having and the progress, but it will take us longer to realize the upside. So we're really looking at contribution in 2017.

Scott Zeller - Needham & Co. LLC

Okay. That's helpful. And can you characterize the types of arrangements these would be? You mentioned employee benefits. But will we also think of large financial institutions here? You mentioned getting your offering integrated into someone else's product array. So maybe just high level flavor of the types of partners.

Hilary A. Schneider - President and Chief Executive Officer-elect

Yes. You should be thinking about the largest companies in the United States.

Scott Zeller - Needham & Co. LLC

Okay. Okay. And you mentioned before, I think I heard on the prepared remarks there are three levels of reimbursement of funds. Could you just clarify that? Is it only the Ultimate Plus paying customers?

Hilary A. Schneider - President and Chief Executive Officer-elect

Yes. There are three levels. And the levels are $25,000, $100,000 and $1 million. And just to provide some added color, the offering of this lost funds reimbursement really is an extension of the differentiation of LifeLock. And it was launched in response to some in-depth consumer research we've conducted over the last year which really indicates that consumers are willing and care about protection of their financial assets and they're looking for peace of mind. And to give you some perspective, we used the same analytical rigor in developing the tiering of this new lost funds reimbursement that we used when we implemented Ultimate Plus and Advantage. And we're pleased with the early results that we're seeing. And we'll continue to iterate as we test and develop.

Scott Zeller - Needham & Co. LLC

Okay. Thanks very much.

Christopher G. Power - Chief Financial Officer

Thanks, Scott.

Operator

Thank you. Our next question comes from Scot Shiao of Bank of America.

Scott Shih Yau Shiao - Bank of America Merrill Lynch

Hi. So given what's happened in the co-marketing channel, would we expect COA to trend downwards for the rest of the year? Can we still expect that to still end higher in the year relative to last year?

Christopher G. Power - Chief Financial Officer

So we won't guide to those specifics, because a lot of that is going to be influenced by the mix within the channels overall. But certainly with the Q4 emphasis of the employee benefit channel and some additional shift we're seeing in the business to some of those signups really coming in the fourth quarter rather than through the year, I think you're going to see a significant improvement in the fourth quarter from a COA perspective. So I think it's really kind of more Q4 focused as we roll through the year, and it's going to be driven by that success we have in the EB channel.

Scott Shih Yau Shiao - Bank of America Merrill Lynch

Okay. Got it. And with the – in respect to the ARPU trends, would we expect the ARPU trends to continue to increase through the back half of the year as well? And what's the proportion of the GNMs on the higher ARPU products? Is that still greater than 40%?

Christopher G. Power - Chief Financial Officer

Yeah. So in terms of the Gross New Members that we added in the quarter, we were well over 40%. We were actually up just slightly from Q1, which was one of our best quarters ever. So very pleased with the new member mix of those premium offerings. In terms of some of the things that are going to influence the ARPU over time, obviously it's going to be dependent on channel mix. But certainly as our premium products continue to penetrate the base that gives us a level of tailwind from an ARPU perspective. And on top of that we've also historically been able to innovate and create new products, and new offerings and new features that allow us to introduce new products at higher price points.

Now having said that, there will be a bit of a headwind as well. The EB channel, we love the cost of acquisition elements of that business, but if you recall, it does tend to skew a little bit to the standard product. So it tends to put a little bit of pressure on ARPU. In addition to that, you know, with that premium channel you might get a slightly higher level of churn. So I think in terms of some of the factors to think about as we move forward, I think those are things to consider.

Scott Shih Yau Shiao - Bank of America Merrill Lynch

Okay. That's helpful. And lastly, was there any effect recently with the headlines with the data breaches? I think there were a number of older data sets that were released, was there any increase in the number of customers that were being seen or was it nothing like the Anthem?

Hilary A. Schneider - President and Chief Executive Officer-elect

I think the best way to think about that is the ongoing impact to the growth in the business.

Christopher G. Power - Chief Financial Officer

And really it's about the awareness for consumers. So it's just another example for consumers of enterprises not being able to contain consumers' data. So really over time it just continues to increase the awareness of consumers which ultimately kind of helps us over the long haul.

Scott Shih Yau Shiao - Bank of America Merrill Lynch

Okay, got it. Thank you.

Christopher G. Power - Chief Financial Officer

Thanks, Scott.

Operator

Thank you. Our next question comes from Dan Bergstrom from RBC Capital Markets.

Daniel Bergstrom - RBC Capital Markets LLC

Yeah, thanks for taking the question. Maybe just a bit more on the employee benefits channel? It's seasonal, enrollment in the fourth quarter sounds like a little bit more seasonal than previously. Could you talk to the sales cycle here? What goes on the other three quarters? Are you educating potential customers, working to be part of the enrollment process or are you really placing more resources into the broker networks that advise on the benefits packages?

Hilary A. Schneider - President and Chief Executive Officer-elect

Sure, Dan. Appreciate the question. So just to provide some context, this is really only the third year for this channel and we're very pleased with the results we're seeing. We do work through a broker network and the broker network has been influencing the employers who are projected to be adding identity theft protection at an increasingly rapid rate as they really look to differentiate themselves with their employees. But I think there has been a shift in more companies moving their open enrollments to Q4 than we've seen in the past.

And I'd also say that we feel really confident that we're on track to meet expectations and if you were going to take an example of the success we see in the employee benefits channel, it's really a perfect cross section for us of being top of mind for the consumer while they're signing up for other kind of protection and therefore can think about, "Gosh, I've thought about LifeLock in the past, really thought I wanted to get it. This is an easy way for me to do it." And the enrollment process for them is very easy because all the information is provided from the employer so they don't have to go through that process.

The other thing I'd call out we really like about this channel is that it does not have any of the billing issues associated with the rest of the channel.

Christopher G. Power - Chief Financial Officer

I think the other thing I'd add there as well, Dan, is companies really now are going through the decision process about what benefits they're going to be offering when we get to the fourth quarter. So from our perspective, we've got really good visibility to both deals that have closed in terms of employers committing to offer our product, although we haven't yet signed up our gross new member but also we have a good sense of the number of companies that are considering the offer as we get to the fourth quarter.

And I think the last thing I'd add there too is what's interesting as well is as we're learning and as we're growing in this business and it's performing very well, as you get often times to year two or year three after you've offered this employee benefit, you still pick up some members who, perhaps, maybe didn't sign up in year one. And so that also we have a level of visibility to as well.

Daniel Bergstrom - RBC Capital Markets LLC

Thanks. And then, Hilary, you talked about consumer awareness there. You've done some elevated brand spending over the first half of the year. I think that tends to have a longer tail versus more response-oriented advertising. How do you judge that? Can you tell if there's an uptick in second half new members related to that brand advertising? Or how should we think about measuring its success? Should people be watching the COA? Thanks.

Hilary A. Schneider - President and Chief Executive Officer-elect

Yeah. So clearly from a brand perspective, we're very pleased with our new campaign. And I hope you've all had a chance to look at some of the new TV spots.

The way I would think about that is that we, of course, measure COA in period. But as we run more TV, we clearly are driving awareness and we're seeing that in the increases we see in our already-high brand awareness. That kind of brand awareness really helps us when we think across raising the water for all ships. So, for example, on employee benefits, that higher brand awareness will translate to higher pull through for the employers to offer LifeLock to their employees. Now remember, the other benefit of the television advertising is television has added benefits across all channels.

Daniel Bergstrom - RBC Capital Markets LLC

Thank you.

Christopher G. Power - Chief Financial Officer

Thanks, Dan.

Operator

Our next question comes from Joe Maxa from Dougherty.

Joe Maxa - Dougherty & Co. LLC

Thank you. Most of my questions have been answered. I wanted to just maybe touch on the gross new members. I mean, obviously a lot of moving parts, and I may have missed it. But it sounded like a little bit of concern in Q3 versus Q4. Obviously, Q4 is strong with employee benefits but handicapped in Q3? Should we be thinking of a number similar to what you added last year?

Christopher G. Power - Chief Financial Officer

So Joe, as you're aware, we don't really guide to specific metrics. I think if you look at our business, I think the direct-to-consumer business was up in Q2 and we're getting some good performance there. As well, as we've discussed, the employee benefit channel does tend to be kind of heavily weighted to the fourth quarter, and we have talked about some of the challenges in the co-marketing channel certainly through the rest of 2016. So, again, we're pleased with the results. We'll continue to invest but I would expect the bigger impact to come with the EB channel in the fourth quarter.

Joe Maxa - Dougherty & Co. LLC

Right. Thank you.

Christopher G. Power - Chief Financial Officer

Thanks, Joe.

Operator

Thank you. At this time we have no further questions. I will turn the call back over to Hilary Schneider for closing comments.

Hilary A. Schneider - President and Chief Executive Officer-elect

Sure. Thank you for joining the call today. I want to encourage you to take the time to visit www.investor.lifelock.com for more information. And we certainly look forward to talking with you again soon. Thanks.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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