Gen Digital - Q3 2024
February 1, 2024
Transcript
Operator (participant)
Good afternoon, everyone. Thank you for standing by. My name is Victoria, and I will be your conference operator today. I would like to welcome everyone to the Gen Fiscal Year 2024 third quarter earnings call. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. At this time, for opening remarks, I would like to pass the call over to Jason Starr, Head of Investor Relations.
Jason Starr (Head of Investor Relations)
Thank you, Victoria, and good afternoon, everyone. Welcome to Gen's third quarter fiscal year 2024 earnings call. Joining me today are Vincent Pilette, CEO, and Natalie Derse, CFO. As a reminder, there'll be a replay of this call posted on the Investor Relations website, along with our slides and press release. I'd like to remind everyone that during this call, all references to the financial metrics are non-GAAP, and all growth rates are year over year, unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release and earnings presentation, both of which are available on the IR website at investor.gendigital.com. We encourage investors to monitor this website as we routinely post investor-oriented information such as news and events and financial filings.
Today's call contains statements regarding our business, financial performance, and operations, including the impact on our business and industry, that may be considered forward-looking statements, and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on current beliefs, assumptions, and expectations as of today's date, February first, 2024. We undertake no obligation to update these statements as a result of new information or future events. For more information, please refer to the cautionary statements in our press release and the risk factors in our filings with the SEC, and in particular, our most recent reports on Form 10-K and Form 10-Q. Now I'll turn the call over to Vincent.
Vincent Pilette (CEO)
Thank you, Jason. Good afternoon, everyone, and welcome to our earnings call. Only a few months ago, we celebrated Gen's one-year anniversary and held our first Investor Day as Gen. We were excited to share our strategy and our plans to expand our customer reach and our product roadmap. We know that we will capture the tremendous opportunity we have in consumer cyber safety over the next several years. In Q3, we delivered another consistent quarter of execution towards that goal. We grew cyber safety bookings to $1 billion, up 4%, cyber safety revenue up 3%, and delivered our 18th consecutive quarter of growth. We drove net subscriber count higher again this quarter, up 330,000 sequentially, with total direct customers finishing the quarter at a record 38.9 million.
While we remain focused on accelerating our growth, we continue to demonstrate our ability to operate with strong fiscal discipline, increasing our operating margin by another 80 basis points sequentially, up nearly seven full points since the Avast merger. And finally, we expanded our earnings power, growing EPS 10%. At our last Investor Day, we shared long-term goals that included accelerating revenue to mid-single digits, growing EPS by 12%-15%, and reducing our leverage to less than 3x EBITDA by 2027. As we discussed, our growth plan is underpinned by accelerating our subscriber growth, especially internationally and through partnerships, increasing value to our customers with cross-sell and upsell, and driving Gen's overall retention rate to 80%. We're already making progress here, particularly in our investments to increase Gen's customer base, entering new markets, and driving international growth.
In Q3, our direct acquisition channels grew double digits in all three regions, leading to a broad-based performance. Our mobile solutions continue to see strong traction internationally, capitalizing on growing internet connectivity in emerging markets. Our solutions are resonating with customers in these markets, and we have an integration roadmap that will enable us to drive more value over the life cycle. We will continue to invest in these higher growth markets and channels as we look to expand our reach. We are also making consistent headway in delivering added value to our current customers as they expand their digital footprint. In Q3, we delivered another strong quarter in cross-sell, upsell activities, with ARPU for these customers growing both year-over-year and sequentially in key markets, even though our overall reported ARPU slightly declined sequentially due to shifting mix of customer cohorts in mobile and emerging markets.
Of course, progress is not linear and uniform across all of our levers. Overall, Q3 retention was stable sequentially at 77%, with continued progress across key brands, but partially offset by mix and other integration-related activities. While slightly behind our aspirations this quarter, we remain on track and confident in our long-term target of 80%. In partner, the timing of a few large deals and the rollout of our solutions into our indirect customer employee base, impacted the in-quarter revenue. Overall, the partner channel continues to show strong engagement with a robust and growing pipeline and a competitive set of partner solutions, which is a key tenet of our strategy. To support our growth plan, we are leveraging our trusted brands and customer-centric approach. Our Cyber Safety capabilities continue to be recognized by leading third parties, and most importantly, our customers.
Recently, Norton and Avast were each named to PC Magazine's list of Best Tech Brands for 2024. LifeLock Net Promoter Score reached 67 exiting Q3, an all-time high, driven by our relentless focus on our customers and listening to their feedback. Gen continues to be a leader in the industry and trusted by consumers around the world. Ultimately, we are recognized, trusted, because of our technology and our ability to innovate and protect people from the ever-changing and increasing sophisticated threats they face every day. Last quarter, Avast blocked over 1 billion unique attacks per month, a stunning increase of 50% compared to a year ago, and over 10 billion for all of calendar year 2023.
As we have pointed out many times, these threats are not focusing on targeting your PC or your phone, but you as an individual, as you live your digital life. Threat actors are not missing a beat and have increasingly moved to web-based threats, such as social engineering and malvertising, as well as ongoing phishing attacks and AI-powered targeted email scams. Our customers are relying on us to out-innovate the threat actors and remain focused on increasing the pace at which we enhance and expand our products portfolio. Q3 was no different. We continued our focus on helping customers live their digital lives safely, privately, and confidently. We offered consumers better protection from phishing and email scams, bolstering Norton AntiTrack with Private Email and adding a new Safe Email standalone product.
We gave our customers a trusted way to navigate the web securely and privately with the launch of Norton Private Browser. And in Identity, we expanded our reach into new countries in all three regions and added new features in existing markets. As we mentioned in November, our AI technology has been and remains a key tenet of our strategy. Not only does powerful AI and deep learning technology power our core security engines, but we are now bringing AI to the forefront to make our products more interactive and intuitive. In December, as part of our ReputationDefender business, we launched Total Radius. This new innovative product, powered by AI, provides a fully automated analysis of all available information online to help customers quickly identify and protect themselves. To start, we are offering this product through our employee benefit channel.
In early January, we also fully launched Norton Genie, our AI-powered scan detection app. Both Norton Genie and Total Radius are excellent examples of how people can leverage the power of Gen's AI and cutting-edge technology to more easily protect themselves and their loved ones from online threats. I'll conclude by saying that we have a great opportunity ahead and are very confident in achieving our long-term targets we laid out at our Investor Day. The threat landscape is more perilous than ever, and Gen's trusted brands offer the best solutions to consumers to protect and empower their digital lives. We will continue to execute our strategy in a disciplined way to accelerate growth, drive further margin expansion, and create long-term value for all stakeholders. With that, let me pass it to Natalie to review our quarterly performance in greater detail and our guidance for the next quarter.
Natalie Derse (CFO)
Thank you, Vincent, and hello, everyone. For today's call, I will walk through our fiscal Q3 2024 results, followed by our outlook for Q4. I will focus on non-GAAP financials and year-over-year growth rates, unless otherwise stated. Also, please note, this is our first fiscal quarter that includes full financial results from Avast in both periods, as we have now passed the anniversary of the closure of the deal. Q3 was another quarter of consistent execution. Q3 revenue was $951 million, up 2% in USD and up 3% in Cyber Safety, excluding legacy business lines. Cyber Safety bookings grew 4% in constant currency, supported by continued growth in cross-sells and our direct acquisition channels. Direct revenue was $837 million, up 3% in constant currency.
Our direct customer base expanded for the second consecutive quarter, increasing to 38.9 million, up 330,000 customers sequentially and adding 500,000 customers year-over-year. Driving new customer acquisition remains a priority for us and is growing double digits year-over-year. Leading with our expanded product offerings and broadening our geographic efforts, we have deployed incremental marketing spend to capture structural demand growth for Cyber Safety, especially in channels like mobile and international markets. As we move forward, our robust product roadmap will continue to extend our reach into new markets and cohorts, as well as continue to support our retention efforts over the long term across all of our cohorts. On the monetization front, monthly direct ARPU was $7.21 in USD, an increase of $0.12 year-over-year and a decrease of $0.07 sequentially.
As previously shared, ARPU is impacted by many factors, including new customer growth, cross-sell adoption, geographic and channel mix. With the stronger growth in our new customer acquisition and traction in mobile and emerging markets, we are seeing the mix impacts on blended ARPU. While lower than the ARPU average, the cohort of customers we are acquiring in these new markets and channels are accretive to our installed base and we are able to acquire these new cohorts at a lower acquisition cost, proving out to be healthy ROI on our performance marketing dollars. These cohorts will also blend into our flywheel and offer opportunities for further expansion into our portfolio of products and services, in essence, feeding our cross-sell and upsell opportunity funnel.
Within our more mature cohorts, ARPU continues to scale as we drive cross-sell adoption, and this expansion reflects our customers' demand for increased coverage in the ever-changing cyber safety landscape. Turning to retention, our overall customer retention rate remains steady at 77%. As we've shared previously, we made significant progress in our retention rate in the first year as a combined company, yet still have many opportunities to improve retention across cohorts and across brands as we make progress towards our 80% retention rate target over the next few years. Currently, we are focused on driving retention rates up by improving user engagement, introducing new products and features, and clearly demonstrating value to our customers with our best-in-class, comprehensive cyber protection offerings and services.
As we move forward, we expect to drive additional uplift by continuing to execute on our product migration plans, and even more importantly, by creating hyper-personalized, AI-powered customer experiences and incorporating them into our differentiated products and omni-channel go-to-market strategies. Turning to our partner business. Scaling our partner business is a key component to achieving our overall growth plan. Partner revenue was $99 million in Q3, up 4% year-over-year. We continue to drive growth in this channel through employee benefits, with a record pipeline and additional expansion plans to accelerate further. Given the long nature of partner sales cycles, the progress will be nonlinear, and we will remain competitive with our offerings to capitalize on partner readiness across multiple channels.
Driving our partners business to $500 million remains the longer-term objective, and we are excited to share more progress in the coming quarters. Rounding out our revenue, our legacy business lines contributed $15 million this quarter, down from $23 million in prior year. As a reminder, we expect legacy to continue declining double digits year over year and accounts for less than 2% of our overall total revenue. Turning to profitability, Q3 operating income was $558 million, up 6% year-over-year. We increased operating margin to 59% as we work towards our 60% margin goal we outlined in our long-term model. Every point of operating margin expansion is harder to achieve than the last, but this expanding operating leverage enables us to redirect some of the efficiency gains back into our growth investment framework.
You will see us continue to invest in performance marketing to reach new and existing customers, to bolster our product portfolio with differentiated solutions, to amplify our international presence, especially in identity and privacy, and expand into trust-based adjacencies that will touch more parts of the consumer's digital life. These investments help fuel progress in each of our growth levers and strengthen our position to accelerate revenue growth to mid-single digits over the next three years. Q3 net income was $317 million, up 9% year-over-year. Diluted EPS was $0.49 for the quarter, up 10% year-over-year and up 11% in constant currency. Interest expense related to our debt was approximately $158 million in Q3, an EPS impact of $0.19.
Our non-GAAP tax rate remains steady at 22%, and our ending share count was 645 million, down 6 million year-over-year, reflecting the impact of our share repurchases. Turning to our balance sheet and cash flow. Q3 ending cash balance was $490 million. We are supported by $2 billion of total liquidity, consisting of our ending Q3 cash balance and a $1.5 billion revolver, and we have no near-term maturities due until April 2025. Q3 operating cash flow was $315 million, and free cash flow was $307 million, which includes approximately $201 million of cash interest payments this quarter.
Turning to capital allocation, we remain intentional and balanced with our capital deployment and are committed to returning 100% of excess free cash flow to shareholders. In Q3, we paid down $250 million of our Term Loan B and are now 3.9 times net levered. We also deployed $100 million for opportunistic share repurchases, the equivalent of almost 5 million shares. We have approximately $730 million remaining in our current share buyback program. Finally, we have paid $81 million to shareholders in the form of our regular quarterly dividend of $0.125 per common share.
For Q4 fiscal 2024, the board of directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on March 13th, 2024, for all shareholders of record as of the close of business on February nineteenth, 2024. Please note that the Q3 balance sheet and cash metrics above do not include a $900 million tax refund we received at the end of January, associated with tax capital losses disclosed in our fiscal year 2023 10-K. This domestic cash payment increases our liquidity. It's available for debt prepayment and/or share repurchase, and reduces our net leverage by 0.4 of a point to approximately 3.5 times net.
With our strong cash flow generation and disciplined capital deployment, we will continue to use a balanced approach in paying down debt and opportunistic share buybacks to help achieve our goals of delivering EPS growth of 12%-15% and driving net leverage below 3 times. Now, turning to our Q4 fiscal 2024 outlook. For Q4, we expect non-GAAP revenue in the range of $960 million-$970 million. We expect Q4 non-GAAP EPS to be in the range of $0.52-$0.54. This translates to fiscal year 2024 non-GAAP revenue in the range of $3.805 billion-$3.815 billion, and non-GAAP EPS to be in the range of $1.95-$1.97.
While this guidance is within the full year range we provided in November at our Investor Day, we recognize it's at the low end as a result of some of the factors mentioned earlier. Yet, we remain steadfast in driving our long-term growth plan. We are focused on operational excellence and delivering on our commitments, always in a disciplined and balanced manner. Our key performance indicators are trending in the right direction. Our strategy is working, and our financial model is resilient. We're committed to reinvest in our business to drive sustainable and profitable mid-single-digit growth, and create shareholder value over the long term. We look forward to reporting on our progress in the quarters ahead. As always, thank you for your time today, and I will now turn the call back to the operator to take your questions. Operator?
Operator (participant)
Of course. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of Saket Kalia with Barclays. Your line is now open.
Saket Kalia (Managing Director)
Hey, Vincent. Hey, Natalie. Thanks for taking my questions here. Hey, how are you?
Vincent Pilette (CEO)
Good.
Saket Kalia (Managing Director)
Natalie, maybe, maybe I'll start with you. Maybe my first question is, the bookings growth of 4% was really good to see. The revenue growth of 2% was a little bit below. I was just wondering if you could help us bridge those two metrics a little bit, and when you think those two growth rates maybe start to converge?
Natalie Derse (CFO)
Yeah, sure. Thanks for the question. So first, if I look at it, look, we're proud to be growing bookings for the second quarter in a row in mid-single digits, up 4%. As we've spoke to this quarter and last quarter, that growth is driven by the acceleration and the success of cross-sell into a broader portfolio. It's driven by a re-acceleration of DTC and customer acquisition, stable retention across the brands. The strength really coming through, not only across broad base, but identity and privacy products that we've introduced. And then when you look at revenue, keep in mind that that revenue on an as-reported basis, that first of all, includes legacy business lines, and you know, obviously is on a as-reported basis in USD.
When you, when you take that out and you really look at the Cyber Safety revenue, excluding legacy, excluding the FX headwinds, we grew, we grew 3%, so not that far off of the bookings rate of growth. And then as we continue to scale, and as, as we continue to, quarter after quarter, deliver on that bookings growth, that will eventually feed and, and really converge with revenue rate of growth over time.
Saket Kalia (Managing Director)
Got it. Got it. That makes sense. Vincent, maybe for my follow-up for you, listen, the highlight for me was the better net adds. I mean, 330,000 was great to see. You know, it feels like the ARPU profile, though, for some of the gross adds or for some of the newer adds are changing. So, you know, maybe it's early to talk about this, but as you think about the growth formula in Cyber Safety, do you think that we should think about different mixes of sort of what comes from the install base versus what comes from ARPU? How do you think about that sort of conceptually?
Vincent Pilette (CEO)
Yeah, and just to bridge first back to your first question, and Natalie, I think the two leading indicators we have for this business that will then flow back into the P&L is the booking growth rate, and Natalie mentioned our 4%. And then the second one is the customer count growth that we discussed, whether it's indirect or direct.
You're right. So we grew sequentially our direct customer count for the second quarter in a row. We actually achieved a record, right? So when you take Avast plus Norton LifeLock together at the time of the merger, we're now at a record 38.9 million, and that has been definitely a very strong sign of the quarter. We did discuss at the ID back in November that we'll drive with discipline. Every one of our channels is managed economically positive over the life cycle of the customers, right? So the CLV over CAC by all the channels is very important.
We're balancing our marketing investment across all of the channel, and if we have a little bit more momentum in certain, then we're going to capture quickly that presence in that channel. For the last two quarter, internationally, emerging markets, and maybe closer to the security line, which is identity and privacy, has been the traction. We also shared at the time that, in developed and emerging country, and ARPU is, you know, $35 on average in emerging markets as you move into more developed towards 70, and then when you get fully mature, and ARPU is 135.
Now, we feel good because we know we have very strong capability of cross-selling and upselling, and as we continue to mature new channels or enter a new channel and mature them, there's space there. We have a chance to expose our customers to a broader protection of their digital lives, and that has been our strategy. So that's how we're doing it. So the aggregated metric for total Gen on ARPU, if you want, has to consider that mix, and we're looking at the ARPU across all the channels and then driving the cross-sell, upsell in each one of those.
Saket Kalia (Managing Director)
Got it. Got it. That makes sense. I'll get back in queue to ask my next one. Thanks very much.
Vincent Pilette (CEO)
Yep.
Operator (participant)
Thank you for your question. The next question comes from the line of Hamza Fodderwala with Morgan Stanley. Your line is now open.
Vincent Pilette (CEO)
Hamza?
Hamza Fodderwala (Executive Director and VP Equity Research)
Hey, good evening. Thank you. Hey, how's it going? Thank you for taking my question.
Vincent Pilette (CEO)
Good.
Hamza Fodderwala (Executive Director and VP Equity Research)
So listen, you know, I understand that, you know, progress is not always linear across, you know, every metric, but clearly, you know, the ARPU did come in below your expectation. I'm wondering if it's, if it's just a function of just the higher mix of incremental, you know, international and mobile subs, or did the churn rate for your, let's say, higher-paying subscribers, the, the Norton LifeLock subscriber, if you will, did that, you know, come down more than you would have expected or didn't improve as much as you'd expected?
Vincent Pilette (CEO)
Yep. Let me address both, and they combine obviously in the dynamic. Definitely the ARPU is still growing year-over-year, but it's sequentially down, is driven by mix. We are not discounting more in each one of the channels. We didn't see anything outside of the normal business dynamic that we had seen in prior quarters. And you know, to be honest with you, we love all of our channels, and where we see momentum, we're going to allocate some of the marketing dollars. In this case, this quarter was maybe a little more allocated towards lower ARPU channels, but very economically positive in the long term. So we feel good about that. So that's the entire ARPU dynamic mix shift.
When you talk about retention, we were stable quarter-over-quarter. We're actually improving in key areas, but we're slightly below our plan, and we were doing real-time allocation of our resources. You know, we're also preparing to move now to common platform. This year is the big product set and merging the different campaigns, understanding the different things had to be some trade-offs with the day-to-day drive of the activity. So we did not improve as much as we had in our plan, if you want. But we feel really good and I think as we continue to progress, quarter-in-quarter-out may not be exactly linear, but feel very good that we will get to our 80% goal.
Hamza Fodderwala (Executive Director and VP Equity Research)
Got it. And just on the topic of ARPU, I know the main driver for you is to continue to deliver value through upsell and cross-sell, but unless I'm mistaken, I don't think you've taken really any price over the last couple of years, despite, you know, what has been record-high inflation and, you know, some of your peers are raising prices. So I'm just curious how you're thinking about, you know, maybe perhaps taking more price for the value that you're delivering going forward.
Vincent Pilette (CEO)
So, pricing is very strategic to us, right? And we really are pricing for value, so we constantly innovate, add new features, and then keep our price constant with markets. And when we say we didn't take price increase, that's not true. We always price for the value we deliver into the market, adding new features. I think the growth rate you mentioned, cross-sell, upsell, definitely the cross-sell, meaning adding more to Cyber Safety or the upsell towards that membership, it's two of our five key levers for growth, right? We also obviously want to continue to expand, very pleased to have new customer coming in last quarter, in this quarter. We want to expand and continue to expand with partners to provide cyber-safe solutions.
And we're looking at the overall, if you want, as a balanced approach, delivering and pricing for value.
Hamza Fodderwala (Executive Director and VP Equity Research)
All right. I'll hop back in the queue. Thank you.
Operator (participant)
Thank you for your question. The next question comes from the line of Peter Levine with Evercore. Your line is now open.
Vincent Pilette (CEO)
Hey, Peter.
Peter Levine (Managing Director and Senior Equity Research Analyst)
No, thank you for... Hi, how are you guys? Thank you for taking my question. Yeah, maybe just to piggyback off of the first two is, you know, since we last met in November, kind of when did you see these dynamics start to kind of pop up? Was it mid-quarter, towards the end of the quarter? Just curious to know when you kind of started to see these, you know, the mix shift within the channel. And then what are your assumptions into Q4 into next year as you kind of think about what's happening today?
Vincent Pilette (CEO)
Yeah. So, as we reported Q2, first quarter of sequential growth, as you know, we said we're finishing strongly in September with good momentum outside of the US and international and new emerging markets. That's what at the end of the day, we indicated kind of the profile of customer by those markets, so we can, we can model them. Obviously, they carried into Q3 at a stronger pace than we anticipated. We thought it would slow down. We didn't know it was sustainable. We saw it was sustainable. It continued to put marketing dollars into those trends. And I think going into Q4, we now have two quarter sequential experience with it, if you want. We plan to continue into Q, Q4. We'll, we'll, we'll give more indications when we give the annual guidance of 25 in May.
There's plenty of things can happen between now and then, especially making the progress in retention. In term of retentions, we, actually, as I mentioned, we made good progress across the brand, so I see nothing, changing from a fundamental, progress, and you know that we have the aspiration to bring the Avast brands to, closer to where the Norton is, and, and we're making good progress there. In term of trading off certain initiatives for, platform integrations, that were more day-to-day through the quarter as we were, preparing for integration.
Peter Levine (Managing Director and Senior Equity Research Analyst)
Thanks. You know, I think one of the comments you made was interesting, or a couple hours, you know, the record pipeline, I think, for the employee benefit channel. Maybe just if you can double down there and kind of let us know, you know, how that, you know, cohort of customers varies versus your traditional channel. Maybe talk about what the ARPU-
Vincent Pilette (CEO)
Yeah
Peter Levine (Managing Director and Senior Equity Research Analyst)
Looks like for those, like, the churn for those customers. Just curious, anything that you can share and, you know, when that becomes more meaningful to you guys. Thank you.
Vincent Pilette (CEO)
Definitely. In partners, we have multiple channels, right? Employee benefit is one of them. We have the telcos, we have some of the retail, we have strategic partners as well, and they all behave slightly differently. They also have a different relationship between your bookings and your revenue, compared to the normal DTC business, which is 90% of our business, as you know. In terms of the employee benefit channel, we continue to grow the pipeline. We've been growing double digits. Maybe we're a bit overoptimistic in terms of closing certain of these deals that would then carry an immediate impact here, during sign-up times, and those will be delayed and carry going into fiscal 2025. They're not lost deals, but it takes time to deploy.
We're also deploying into those installed base higher value proposition, which may be started initially as a basic identity protection, adding all the way to the full membership structure with ReputationDefender, a new product, and those taking a little bit more time. Each channel may have different ARPU of the installed base is very close to LifeLock, maybe 20-25% lower than the average, but very close to it.
Peter Levine (Managing Director and Senior Equity Research Analyst)
Great. Thank you for the color.
Vincent Pilette (CEO)
Yep.
Operator (participant)
Thank you for your question. The next question comes from the line of Matt Hedberg with RBC. Your line is now open.
Matt Hedberg (Managing Director and Software Research Analyst)
Oh, hey, guys.
Vincent Pilette (CEO)
Hey, Matt.
Matt Hedberg (Managing Director and Software Research Analyst)
Hey, guys. I hope you guys are well. Thanks for the time. Maybe just my questions are kind of similar to the first couple of ones that have been asked, but I guess, you know, I guess specifically on the ARPU piece, you've answered the question a couple of times. I guess, you know, specifically, you guys don't guide to net adds and ARPU, but, you know, sort of embedded in your Q4 guide, is it sort of continued mixed pressure? Is that something that we should kind of expect in kind of the shorter term? Obviously, there's a long-term, probably upward bias to ARPU, but just sort of wondering if you could give us a little bit more clarity on some of the Q4 assumptions.
Natalie Derse (CFO)
Yeah, I think from a—like we heard Vincent talk about, we, you know, when we now see two quarters of the momentum that we see, and look, we like what we see. I don't want that to be lost. In the overarching metric with ARPU sequentially down and now two quarters of sequential customer adds, I think it's important to understand as much as we can and explain to you guys what's happening in at the cohort level. So let's just talk about ARPU for a second first. If you break that down and you know, we really see the core online business, we see expansion in ARPU, and we've seen that for many, many, many quarters in a row, especially as we continue to drive in a successful manner, more and more adoption of cross-sell.
That has been a growth driver and lever for us in the recent quarters, and as you heard back in November, it will continue to be one of our main levers as we drive forward, not only with the different cohorts that come in and as we expand internationally, but as we, again, have a robust product portfolio and continue to bring new products to market. And then when you look at the economics of the other cohorts-
... they're very healthy. We've said, and we've been very explicit, that we will continue to invest in marketing to drive growth and drive expansion and diversify, but we don't burn money in the parking lot. So even at, you know, as the cohorts mix together and at the top level metric on a blended basis, it looks down quarter over quarter, or it is down quarter over quarter, within the cohorts, they're very healthy. And so as we look forward in that metric, or we look forward as to where the customer acquisition is gonna come, and be achieved compared to as they come through the funnel, you know, what products and solutions are they choosing at which time? It's definitely all about diversification, and it's all about growth.
We don't pick and choose or prioritize one channel market, et cetera, over the other. What we're looking for is sustainable and profitable growth, and as we look at the performance of the performance marketing dollars, we put the fuel behind the most fruitful opportunities that we can in a balanced approach. Now, how that math comes together, quarter in, quarter out, I think that's gonna look different, and it's going to flex as we make those decisions. And what we've got to, you know, make sure that we lay out for you guys is that it is a balanced and disciplined approach, and that the diversity that we are driving is a healthy one for Gen.
Matt Hedberg (Managing Director and Software Research Analyst)
Got it. Super helpful. Thanks, Natalie. And then I—you know, there was an earlier question, too, on the employee benefit revenue. We've—you know, we also thought that's a huge opportunity for you all. It sounds to me like, Natalie, I just want to clarify, you said the revenue that slipped out of Q3, we're not—we shouldn't expect that in Q4. That's more of a fiscal 2025 timing issue. Is that kind of the right way to think about the deals that didn't close this quarter?
Vincent Pilette (CEO)
Yeah, definitely a few key deals slipped into fiscal year 2025, and we did not put them into our Q4 forecast.
Natalie Derse (CFO)
That's another one where I want to make sure that we-
Matt Hedberg (Managing Director and Software Research Analyst)
They're not lost, so.
Natalie Derse (CFO)
Yeah, that's, that's another message I wanna make sure that we reiterate and are super clear. Like, the EB funnel is just incredibly robust, robust. It's never been stronger. The team there is really driving diversification, expansion, and really increasing the quality. So we've got, you know, deals in the hopper of all size and scale, and, we're just really having a disciplined approach. There's an operational excellence component to that. That team is doing really, really well. And I look at it as, you know, when we manage these deals, we're just being great partners. We're being great partners to our partners, for lack of a better way to say it. But, you know, the customers in the EB deals, those integrations can be, as we look at different sizes and scales of the deals, pretty complicated.
So we're making sure that we are absolutely delivering on our commitment to them. Then, as they integrate and really work through the integration on their side, there are eventually, you know, at times, just timing components to it. So that's how I would encourage you guys to look at it. Again, the EB funnel has never been stronger.
Matt Hedberg (Managing Director and Software Research Analyst)
Thanks a lot, Natalie. Thanks a lot.
Natalie Derse (CFO)
Thanks.
Operator (participant)
Thank you for your question. The next question comes from the line of Jonathan Eisenson with Bank of America. Your line is now open.
Jonathan Eisenson (VP and Equity Research Associate)
Hey, thanks for taking my question. I just have two.
Natalie Derse (CFO)
Hi, Jonathan.
Jonathan Eisenson (VP and Equity Research Associate)
So the first is, can you just touch on... Hey, thank you. Can you just first touch on deal linearity throughout the quarter? And then my second question is, any color you can give on how aggressive you plan to be on buybacks, given the injection of cash?
Natalie Derse (CFO)
Yeah, so the deal linearity, we just our partner channels are so diverse, and if I know, I know you attended the Investor Day, but for everybody else on the call, like, we've talked about how many different channels are in partner and, you know, quarter in, quarter out, the timing of those deals and the diversity of those channels and how they come together, they won't be linear. What I would reiterate is that, you know, what we talked about at our Investor Day, and I would reiterate here, is the partner channel is very, very critical for us. We laid out a growth plan over the long term to add about $100 million of incremental partner revenue.
And so the teams are aligned to that, driving towards that, and we'll stay focused on that goal and give you guys progress updates along the way. And then in terms of the share buyback, in terms of I don't really want to comment on conservative or aggressive, but we definitely will have a balanced capital allocation. We had already had, prior to the receipt of that $900 million, we had earmarked a balanced approach across share buyback and accelerated debt paydown for Q4. Again, as we laid out for you guys in November, we'll continue that balanced approach. And then, like we said, the $900 million is now, you know, available for us to deploy.
We already have, you know, that in ready to go in terms of how we're gonna deploy that in Q4.
Jonathan Eisenson (VP and Equity Research Associate)
Got it. Thank you.
Natalie Derse (CFO)
Sure.
Operator (participant)
Thank you for your question. Our next question is a follow-up from Saket Kalia with Barclays. Your line is now open.
Saket Kalia (Managing Director)
Hey, guys. Thanks for fitting me back in. Maybe just one follow-up if I could. Natalie, maybe for you. So the pipeline in the employee benefits and sort of the partner, that partner business sounds great. You know, just given some of the deal dynamics that didn't necessarily benefit here in Q3 or—and what we were now assuming in Q4, I was just wondering if you could put a finer point on what that revenue impact.
... was here in Q3? I mean, clearly, there's some ARPU impacts, right? That we've talked about quite a bit. But I'm curious how much of that partner business maybe contributed to some of the revenue delta in the quarter.
Natalie Derse (CFO)
Yeah, I would say, look, let's look at the top-level number. I think, you know, based on the performance that we delivered in Q3 versus what, you know, the midpoint of the guide, let's just face into that. That's about, you know, $5 million versus midpoint. And so nothing's gonna be material. There's a handful of things that go into that approximately $5 million miss to the midpoint, us delivering on the low end. And, you know, so there, the partner deals are a contributor. The fact that, you know, when we talk about our growth levers coming through, and we talk about the mix of the customers coming through the funnel, et cetera, that had some. There was a little bit of effects, et cetera.
So all in, nothing on an individual line on a basis is material, all tallying up to about a $5 million delta.
Saket Kalia (Managing Director)
Got it. Got it. Very helpful. Thanks.
Natalie Derse (CFO)
Thank you.
Operator (participant)
Thank you for your question. Our final question comes from the line of Hamza Fodderwala. Your line is now open.
Hamza Fodderwala (Executive Director and VP Equity Research)
Thank you. Just for my final, I wanted to sneak in a product question here, for Vincent. You know, just given that the sort of threat environment that we're seeing with the rise of ransomware, AI deepfakes, just the elections that are happening globally around the world, it seems like cybersecurity is as much of a problem for organizations as it is for consumers. And I'm curious, you know, what are you doing with your partners, with your customers to really educate them on having proper cyber hygiene, and specifically on the sort of AI deepfake issue? Are there any sort of products on the roadmap that could potentially deal with that going forward?
Vincent Pilette (CEO)
Yeah, absolutely. We have a lot of activities. We partner, that's why partner is so strategic, as we embed it into security and security concerns into solutions that the consumer buy, and then directly with the consumer, we have a full set of activities in term of educating, reminding them. It's also part of our customer success journey that we drive directly with all of our customers. Hygiene, as you know, in cybersecurity, is a big component of that. We definitely are using more and more AI, as Ondrej mentioned, at the AID, using AI to combat AI, if you want. The shift towards a personalized, interactive, intuitive cyber safety companion, if you want, is absolutely essential.
We launched Norton Genie as an example of early on, what we can do to try to identify some of those fake scams. They'll become more and more sophisticated, and with that, our product will become more and more powerful as it really can scam the entire spectrum of digital threats. So you'd see the evolution of Cyber Safety for consumer becoming more and more embedded and personalized to your your behaviors.
Hamza Fodderwala (Executive Director and VP Equity Research)
Thank you.
Vincent Pilette (CEO)
All right, great. Yep. Thanks, Hamza. This concludes our conference call today. Thanks for joining.