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LOCK > SEC Filings for LOCK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for LIFELOCK, INC.

Form 10-Q for LIFELOCK, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act"), with the Securities and Exchange Commission on October 3, 2012 (the "Prospectus"). This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "estimate," "expect," "intend," "may," "might," "plan," "project," "will," "would," "should," "could," "can," "predict," "potential," "continue," "objective," or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in this Quarterly Report on Form 10-Q and the Prospectus. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of proactive identity theft protection services for consumers and identity risk assessment and fraud protection services for enterprises. We protect our members by constantly monitoring identity-related events, such as new account openings and credit-related applications. If we detect that a member's personally identifiable information is being used, we offer near real-time, actionable alerts that provide our members peace of mind that we are monitoring use of their identity and allow our members to confirm valid or unauthorized identity use. If a member confirms that the use of his or her identity is unauthorized, we can stop the transaction or otherwise rapidly take actions designed to protect the member's identity. We also provide remediation services to our members in the event that an identity theft actually occurs. We protect our enterprise customers by delivering on-demand identity risk and authentication information about consumers. Our enterprise customers utilize this information in real time to make decisions about opening or modifying accounts and providing products, services, or credit to consumers to reduce financial losses from identity fraud.

The foundation of our differentiated services is the LifeLock ecosystem. This ecosystem combines large data repositories of personally identifiable information and consumer transactions, proprietary predictive analytics, and a highly scalable technology platform. Our members and enterprise customers enhance our ecosystem by continually contributing to the identity and transaction data in our repositories. We apply predictive analytics to the data in our repositories to provide our members and enterprise customers actionable intelligence that helps protect against identity theft and identity fraud. As a result of our combination of scale, reach, and technology, we believe that we have the most proactive and comprehensive identity theft protection services available, as well as the most recognized brand in the identity theft protection services industry.

On March 14, 2012, we acquired ID Analytics, a provider of enterprise identity risk assessment and fraud protection services and a strategic technology partner of ours since 2009, for a total purchase price of $186.0 million. Our acquisition of ID Analytics marked our entry into the enterprise market and enhanced the LifeLock ecosystem by expanding our data repositories and providing direct ownership of certain intellectual property related to our services. We began recognizing revenue from our enterprise customers immediately following the closing of our acquisition of ID Analytics on March 14, 2012.


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Since our founding in April 2005, we have experienced 30 consecutive quarters of sequential growth in both revenue and cumulative ending members primarily due to the success of our marketing efforts, the introduction of premium services, and our strong member retention rate. In general, increases in revenue and cumulative ending members occur during and after periods of significant and effective direct retail marketing efforts.

We derive the substantial majority of our revenue from member subscription fees. We also derive revenue from transaction fees from our enterprise customers. In the three-month period ended September 30, 2012, we recorded revenue of $72.1 million, an increase of 44% from the three-month period ended September 30, 2011. Revenue in our consumer segment was $65.6 million for the three-month period ended September 30, 2012, a 31% increase from $50.0 million for the three-month period ended September 30, 2011. We also generated income from operations of $6.2 million and net income of $7.9 million during the three-month period ended September 30, 2012. For the nine-month period ended September 30, 2012 we recorded revenue of $197.6 million, an increase of 40% from the nine-month period ended September 30, 2011, including year over year growth within the consumer segment of 30%. We generated income from operations of $7.4 million and net income of $19.4 million during the nine-month period ended September 30, 2012. Net income for the nine-month period ended September 30, 2012 includes an income tax benefit of $14.3 million recognized on the acquisition of ID Analytics.

Key Metrics

We regularly review a number of operating and financial metrics to evaluate our business, determine the allocation of our resources, measure the effectiveness of our sales and marketing efforts, make corporate strategy decisions, and assess operational efficiencies.

Key Operating Metrics

The following table summarizes our key operating metrics for the three- and
nine-month periods ended September 30, 2011 and 2012:



                                                  For the Three Months                     For the Nine Months
                                                   Ended September 30,                     Ended September 30,
                                                2012                  2011                2012             2011
                                                   (in thousands, except percentages and per member data)
Cumulative ending members                            2,376               1,970              2,376            1,970
Gross new members                                      187                 173                564              498
Member retention rate                                 85.9 %              82.6 %             85.9 %           82.6 %
Average cost of acquisition per member     $           147         $       153         $      153        $     142
Monthly average revenue per member         $          9.39         $      8.68         $     9.18        $    8.43
Enterprise transactions                             57,295              46,958            162,774          127,591

Cumulative ending members. We calculate cumulative ending members as the total number of members at the end of the relevant period. Most of our members are paying subscribers who have enrolled in our consumer services directly with us on a monthly or annual basis. A small percentage of our members receive our consumer services through a third-party enterprise that pays us directly, often as a result of a breach within the enterprise or by embedding our service within a broader third- party offering. We monitor cumulative ending members because it provides an indication of the revenue and expenses that we expect to recognize in the future.


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At September 30, 2012, we had approximately 2.4 million cumulative ending members, an increase of 21% from September 30, 2011.

Gross new members. We calculate gross new members as the total number of new members who enroll in one of our consumer services during the relevant period. Many factors may affect the volume of gross new members in each period, including the effectiveness of our marketing campaigns, the timing of our marketing programs, the effectiveness of our strategic partnerships, and the general level of identity theft coverage in the media. We monitor gross new members because it provides an indication of the revenue and expenses that we expect to recognize in the future. For the three-month period ended September 30, 2012, we enrolled 187,000 gross new members, up from 173,000 for the three- month period ended September 30, 2011.

Member retention rate. We define member retention rate as the percentage of members on the last day of the prior year who remain members on the last day of the current year, or for quarterly presentations, the percentage of members on the last day of the comparable quarterly period in the prior year who remain members on the last day of the current quarterly period. A number of factors may increase our member retention rate, including increases in the number of members enrolled on an annual subscription, increases in the number of alerts a member receives, increases in the number of members enrolled in our premium services, and increases in the number of members enrolled through strategic partners with which the member has a strong association. Conversely, factors reducing our member retention rate may include increases in the number of members enrolled on a monthly subscription, increases in the number of members enrolled in our basic LifeLock service, and the end of programs in our embedded product and breach channels. We monitor our member retention rate because it provides a measure of member satisfaction and the revenue that we expect to recognize in the future.

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At September 30, 2012, our member retention rate was 85.9%, an increase of 3.3% points from September 30, 2011.


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Average cost of acquisition per member. We calculate average cost of acquisition per member as our sales and marketing expense for our consumer segment during the relevant period divided by our gross new members for the period. A number of factors may influence this metric, including shifts in the mix of our media spend. For example, when we engage in marketing efforts to build our brand, our cost of acquisition per member increases in the short term with the expectation that it will decrease over the long term. In addition, when we introduce new partnerships in our embedded product channel, such as our partnership with AOL in the fourth quarter of 2011, our average cost of acquisition per member decreases due to the volume of members that enroll in our consumer services in a relatively short period of time. We monitor average cost of acquisition per member to evaluate the efficiency of our marketing programs in acquiring new members. For the three-month period ended September 30, 2012, our average cost of acquisition per member was $147, down from $153 for the three-month period ended September 30, 2011. We continue to manage our cost of acquisition across all channels.

Monthly average revenue per member. We calculate monthly average revenue per member as our consumer revenue during the relevant period divided by the average number of cumulative ending members during the relevant period (determined by taking the average of the cumulative ending members at the beginning of the relevant period and the cumulative ending members at the end of each month in the relevant period), divided by the number of months in the relevant period. A number of factors may influence this metric, including whether a member enrolls in one of our premium services; whether we offer the member any promotional discounts upon enrollment; the distribution channel through which we acquire the member, as we offer wholesale pricing in our embedded product, employee benefit, and breach channels; and whether a new member subscribes on a monthly or annual basis, as members enrolling on an annual subscription receive a discount for paying for a year in advance. While our retail list prices have historically remained unchanged, our average revenue per member increased by over 7% in both 2010 and 2011. This growth was primarily driven by increased adoption of our higher priced premium services by a greater percentage of our members, a trend we expect will continue. We monitor monthly average revenue per member because it is a strong indicator of revenue in our consumer business and of the performance of our premium services.

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Our monthly average revenue per member for the three-month period ended September 30, 2012 was $9.39, an increase of 8% from the three-month period ended September 30, 2011. Our monthly average revenue per member for the nine-month period ended September 30, 2012 was $9.18, an increase of 9% from the nine-month period ended September 30, 2011.

Enterprise transactions. We calculate enterprise transactions as the total number of enterprise transactions processed for either an identity risk or credit risk score during the relevant period. Our enterprise transactions are processed by ID Analytics, which we acquired on March 14, 2012. Accordingly, the enterprise transactions data includes transactions processed by ID Analytics before the acquisition. Enterprise transactions have historically been higher in the fourth quarter as the level of credit applications and general consumer spending increases. We monitor the volume of enterprise transactions because it is a strong indicator of revenue in our enterprise business.


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We had 57.3 million enterprise transactions in the three-month period ended September 30, 2012, an increase of 22% over three-month period ended September 30, 2011. We had 162.8 million enterprise transactions in the nine-month period ended September 30, 2012 an increase of 28% over the nine-month period ended September 30, 2011.

Key Financial Metrics

The following table summarizes our key financial metrics for the three and nine
months ended September 30, 2011 and 2012:



                                For the Three Months          For the Nine Months
                                 Ended September 30,          Ended September 30,
                                 2012            2011          2012          2011
                                                  (in thousands)
        Consumer revenue      $    65,579      $ 49,998     $  183,903     $ 140,994
        Enterprise revenue          6,538            -          13,709            -

        Total revenue              72,117        49,998        197,612       140,994
        Adjusted net income         8,906           267         13,066           (99 )
        Adjusted EBITDA            10,938         1,204         18,874         2,941
        Free cash flow             16,196         6,179         37,215        16,767

Adjusted net income. Adjusted net income is a non-GAAP financial measure that we calculate as net income (loss) excluding amortization of intangible assets, change in fair value of warrant liabilities, change in fair value of embedded derivatives, income tax benefits resulting from the acquisition of ID Analytics, and share-based compensation. We believe that adjusted net income provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made.

Our use of adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include the following:

although amortization of intangible assets is a non-cash charge, additional intangible assets may be acquired in the future and adjusted net income does not reflect cash capital expenditure requirements for new acquisitions;

adjusted net income does not reflect changes in, or cash requirements for, our working capital needs;

adjusted net income does not consider the potentially dilutive impact of share-based compensation;

adjusted net income does not reflect tax payments that may represent a reduction in cash available to us; and

other companies, including companies in our industry, may calculate adjusted net income or similarly titled measures differently, limiting their usefulness as a comparative measure.

Because of these limitations, you should consider adjusted net income alongside other financial performance measures, including various cash flow metrics, net income (loss), and our other GAAP results. The following table presents a reconciliation of adjusted net income to net income (loss) for each of the periods indicated:


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                                               For the Three Months             For the Nine Months
                                                Ended September 30,             Ended September 30,
                                                2012             2011           2012            2011
                                                                  (in thousands)
Reconciliation of Net Income (Loss) to
Adjusted Net Income:
Net income (loss)                            $     7,868        $ (515 )     $   19,423       $ (6,585 )
Amortization of acquired intangible
assets                                             1,966            -             4,291             -
Change in fair value of warrant
liabilities                                       (6,058 )          -            (3,117 )        4,124
Change in fair value of embedded
derivative                                         3,499            -             2,785             -
Tax benefit from acquisition                          -             -           (14,310 )           -
Share-based compensation                           1,631           782            3,994          2,362

Adjusted net income                          $     8,906        $  267       $   13,066       $    (99 )

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) excluding depreciation and amortization, interest expense, interest income, change in fair value of warrant liabilities, change in fair value of embedded derivatives, other income (expense) (which consists primarily of gains and losses on disposal of fixed assets), provision for income taxes, and share-based compensation. We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made.

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include the following:

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

adjusted EBITDA does not consider the potentially dilutive impact of share-based compensation;

adjusted EBITDA does not reflect cash interest income or expense;

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, limiting their usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss), and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA to net income (loss) for each of the periods indicated:


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                                                  For the Three Months             For the Nine Months
                                                  Ended September 30,              Ended September 30,
                                                  2012             2011            2012            2011
                                                                     (in thousands)
Reconciliation of Net Income (Loss) to
Adjusted EBITDA:
Net income (loss)                              $     7,868        $  (515 )     $   19,423       $ (6,585 )
Depreciation and amortization                        3,084            906            7,487          2,736
Interest expense                                       854             17            2,139            215
Interest income                                         (4 )           -                (6 )           (7 )
Change in fair value of warrant liabilities         (6,058 )           -            (3,117 )        4,124
Change in fair value of embedded derivative          3,499             -             2,785             -
Other                                                    1             -                 3             -
Income tax (benefit)expense                             63             14          (13,834 )           96
Share-based compensation                             1,631            782            3,994          2,362

Adjusted EBITDA                                $    10,938        $ 1,204       $   18,874       $  2,941

Free cash flow. Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less net cash used in investing activities for acquisitions of property and equipment. We believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net cash provided by (used in) operating activities prepared in accordance with GAAP to analyze our operating results. Users of this financial information should consider the types of events and transactions for which adjustments have been made.

Although free cash flow is frequently used by investors in their evaluations of companies, free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations including the following:

free cash flow does not reflect our future requirements for contractual commitments to third- party providers;

free cash flow does not reflect the non-cash component of employee compensation or depreciation and amortization of property and equipment; and

other companies, including companies in our industry, may calculate free cash flow or similarly titled measures differently, limiting their usefulness as comparative measures.

Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) operating activities, net income (loss), and our other GAAP results. The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities for each of the periods indicated:


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                                                  For the Three Months             For the Nine Months
                                                  Ended September 30,              Ended September 30,
                                                  2012             2011            2012            2011
                                                                     (in thousands)
Reconciliation of Net Cash Provided By
(Used In) Operating Activities to Free Cash
Flow:
Net cash provided by (used in) operating
activities                                     $    17,622        $ 6,419       $   40,721       $ 18,241
Acquisitions of property and equipment              (1,426 )         (240 )         (3,506 )       (1,474 )

Free cash flow                                 $    16,196        $ 6,179       $   37,215       $ 16,767

Factors Affecting Our Performance

Customer acquisition costs. We expect to continue to make significant expenditures to grow our member and enterprise customer bases. Our average cost of acquisition per member and the number of new members we generate is dependent on a number of factors, including the effectiveness of our marketing campaigns, changes in cost of media, the competitive environment in our markets, the prevalence of identity theft issues in the media, publicity about our company, and the level of differentiation of our services. Shifts in the mix of our media spend also influence our member acquisition costs. For example, when we engage . . .

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