Strong Member Signups, Large Potential Market, 22% Revenue Growth Bode Well For Shares Provided Risks Are Addressed
Established provider of identity theft solutions with 4x higher subscriber signups relative to its closest competitors
Consistent double digit revenue growth, earnings, cash flow growth with 87% member retention
Strong cash position with zero debt and 22% revenue growth in 2015
LifeLock, Inc. (NYSE: LOCK) provides identity theft protection solutions to individual and enterprise customers across the United States. As of September 30, 2014, the company had approximately 3.52 million individual customers and over 250 enterprise customers such as financial institutions, government agencies, technology companies, mortgage lenders and e-commerce providers. The company offers various identity theft protection packages including LifeLock Wallet, LifeLock Standard, LifeLock Advantage, LifeLock Ultimate Plus and LifeLock Junior at varying monthly subscriptions.
In December 2014, LifeLock was ranked among Deloitte’s Technology Fast 500 list which lists the fastest growing public and private companies in North America. In the Internet category, LifeLock was ranked 65th on fiscal year revenue growth of 181% from 2009 to 2013 from portfolio expansion, product functionality, new member acquisition and retention rates.
And, as the graph below shows, LifeLock has grown its subscriber base at almost 4x the pace of strong competitors such as Experian and Equifax.
Subscriber Growth Drives Revenue Growth
For the first three quarters of FY2014, LifeLock added 912,000 gross new members and ended Q3 2014 with 3.52 million members. LifeLock has consistently grown its membership base quarter after quarter, with recent year-over-year growth of about 23%.
For the third quarter, LifeLock reported an annual member retention rate of 87.5%, marking eight consecutive quarters of member retention rates above 87%. Over the past 11 quarters, the company’s member retention rate has averaged 86.8%.
In addition to growing its member base, LifeLock increased its monthly average revenue from $10.48 to $11.22 per member (up 7% year-over-year) for the three months ended September 30, 2014. The company also increased the number of its enterprise transactions by 25% to 66.1 million.
This combination of a steadily increasing membership base, rising average subscription fees and near 87% member retention points to steadily growing revenues with good visibility into future profits. Moreover, the company’s platform approach delivers solid leverage, with few added expenses per new member – so its business model supports revenue growth with expanding margins.
Large Addressable Market Provides Huge Growth Opportunities
LifeLock has a large and expanding addressable market that offers strong revenue growth potential. An identity theft study by Forrester Consulting showed that someone is a victim of identity theft every 2 seconds and that there were 26 million victims of identity theft in the U.S. over the past 12 months. The total cost of identity fraud in the U.S. totaled $25 billion in 2012. Online users are significantly more at risk for identity fraud than non-online users – social media users are 3x more at risk, smartphone users 3.5x more and online shoppers 4x more likely to fall prey to identity theft.
Moreover, with increasingly public cases of hacking (most recently at Sony Media and private restaurant chain Chik-Fil-A), Internet users the world over are increasingly worried about becoming victims and see low-cost subscription plans as an effective way of protecting their online information while also gaining peace of mind. In addition, economic transactions are increasingly consummated over online and mobile apps, and Americans are spending more of their time within an interconnected technology world – so, overall, there’s a greater desire to leverage solutions such as LifeLock to stay protected.
Estimates show that about 78 million Americans are concerned about identity security, and less than 30 million have actually done anything to stay protected. So this is a significant growth market for the industry as a whole, and LifeLock’s 4x higher member signup rates suggest it is capitalizing on this growth potential way more than its competitors.
New Partnerships Extend LifeLock’s Enterprise Reach
LifeLock currently provides identity fraud protection services for 4 of the nation’s top 5 wireless providers, 7 of the top 8 credit card issuers and 4 of the top 5 retail credit card issuers. In addition, management is consistently looking to establish new business relationships with enterprise customers as part of its strategic expansion plan.
In September 2014, LifeLock announced a new business partnership with Hilltop Holdings (HTH), the holding company for PlainsCapital Bank. Hilltop subsidiary PrimeLending now offers a free 30-day trial of LifeLock’s standard package to anyone who applies for a home loan and a free 6-month trial of the standard package to anyone who closes a home loan with PrimeLending. PrimeLending offers loans in every state in the U.S. and is the 4th largest domestic lender by purchasing units.
In November 2014, LifeLock partnered with social and mobile technology company Quadrant 4 Systems (QFOR) where Quadrant 4 will offer all LifeLock products to its private exchange clients to protect personal and financial data. Quadrant 4 offers SMAC (social, mobile, analytics and cloud) technology services to the healthcare, media and retail industries through various platforms.
History of Continuous Product Innovation, Improving Product Mix
LifeLock has a history of ongoing innovation in response to ever changing tactics of digital identity thieves. The company introduced service enhancements for its LifeLock Advantage and Ultimate Plus products to cover personalized alerts on credit card, checking and savings transactions and activity. Ultimate Plus members also have the option to apply personalized alerts to their investment accounts. Advantage and Ultimate Plus customers receive additional alerts on withdrawals, purchases or balance transfers that are above personalized limits.
These new products have enhanced the company’s product mix over the past four years, diversified revenue sources and rounded out the company’s product portfolio for a one-stop approach that is far more compelling for customers.
LifeLock has also developed Data Breach Services that allow organizations to incorporate identity theft protection as part of their data breach response plan to protect customers and employees. Given several recent high-profile corporate data breaches, LifeLock’s new service gives companies an emergency plan to quickly respond to breaches. While the service is set-up immediately, companies do not pay for the service until a breach occurs.
The Data Breach Service includes the primary LifeLock alert system, live member support 24/7, certified resolution support and $1 million total service guarantee.
The company also introduced beta testing of its new Privacy Monitor which allows consumers to suppress any or all personal identifiable information from common people-search websites and Internet-based advertising to help combat identity theft. With more consumers relying on online activity in their day-to-day lives, Privacy Monitor offers more control over personal information.
A recent poll showed that 86% of surveyed consumers do not want their personal information sold online and 83% wish to control how much of their personal information is publicly available.
Recent Dip in Shares Offers Buying Opportunity – 35% below $21.45 Average Price Target
LifeLock shares closed at $15.89 on 1/2/2015, giving the company a market capitalization of $1.49 billion. Since the company went public in October 2012, shares are up 117% but are down from their 52-week high of $22.85 and below their 50-day moving average of $17.18 but above their 200-day moving average of $15.12.
Shares were down over 14% on 1/2/2015 on speculation over CFO Chris Power’s plan to sell restricted shares, with no other compelling reasons. This represents a solid buying opportunity given core strength in the identity theft segment. Shares are also well below the $21.45 average Wall Street target price for shares, with about 35% upside off current levels.
LifeLock does not pay dividends and does not anticipate paying dividends in the future.
Experienced, Tech Savvy Management Team
Todd Davis, Chairman and Chief Executive Officer, is responsible for several key milestones and accomplishments over the last 10 years. Davis has successfully grown revenues, taken the company public and developed its growth strategy. Previously, Davis was part of executive management teams at several technology companies, most notably Dell.
Chris Power was named Chief Financial Officer in January 2011. He has over 20 years of financial experience with Internet-enabled companies and has held senior financial positions with insurance company NetQuote, job search company Salary.com, online jobs engine Monster Worldwide (MWW) and telecommunications company Nortel Networks.
Steve Seoane is Chief Product Officer, responsible for improving current products and developing new, innovative products to address growing customer needs. Seoane bring over 15 years of product development experience in areas such as fraud management, authentication, compliance and credit risk.
Some Investment Risks Could Be Damaging
While management has done an excellent job of growing the company, gaps remain. The company’s former Chief Information Security Officer is suing the company for exaggerating its consumer protection claims. In addition, LifeLock has been sued more than 80 times over the past two years and accused of securities fraud in a class action lawsuit. Additionally, Consumer Reports questions the company’s identity theft protection claims and consumers that tried to cancel service apparently received quite the run around, with many alleging deceptive business practices. Therefore, not all is well at this company. However, if management addresses these open issues effectively, shares could ascend to significant new highs.
42% Increase in Q3 2014 Operating Income
For the three months ended September 30, 2014, LifeLock had total revenue of $123.03 million (up 29%), gross profit of $92.7 million (up 31%), adjusted EBITDA of $17.9 million (up 40%), income from operations of $9.53 million (up 42%) and net income of $5.45 million (down 16%), or $0.06 per share (down 14%), primarily on higher income taxes.
Revenue growth was led by a 31% increase in consumer revenue and offset by a 6% decrease in enterprise revenue.
As of September 30, 2014, LifeLock had $128.63 million in cash and cash equivalents, $109.7 million in marketable securities and $528.3 million in total assets. Major liabilities include $145.8 million in deferred revenue. The company is debt-free, and has $322.6 million in total stockholders’ equity.
For the nine months ended 9/30/2014, the company generated $72.1 million in operating cash flow, up 39% from the comparable year ago period.
Guidance Supports Analyst Estimates
For Q4 FY2014, management anticipates adjusted net income of $0.26 to $0.27 per share on total revenue of $127 million to $129 million and adjusted EBITDA of $29 million to $30 million. In FY2013, the company reported earnings per share of $0.22 on total revenues of $102 million.
For FY2014, management anticipates adjusted net income of $0.46 to $0.47 per share on total revenue of $473 million to $475 million and adjusted EBITDA of $54 million to $55 million. Free cash flow is expected to be $82 million to $86 million for the full year.
LifeLock’s early January dip in shares offers a compelling opportunity to start establishing positions. The company reported 42% operating income growth in Q3 2014, continues to outperform its peers (with Q3 revenue growth of 29% versus 5.2% on average for its industry) and carries no debt. And while GAAP net income was down about 16% in Q3 2014, this was primarily due to higher taxes and does not reflect poorly on core operations which have delivered solid double-digit growth. Moreover, analysts expect 22% revenue growth going into 2015 and the company could also be an acquisition candidate given its beaten down stock. Overall, sector growth and impressive member signups should drive positive results going into 2015.