May 22, 2015
Technology
Ticker: LOCK
Current Price: $15.33
Recommendation: Underperform
Price Target: $13.87
LifeLock
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§ Numerous legal issues will tarnish LifeLock’s reputation and dissuade
potential customers from joining.
§ Banks, credit bureaus, insurance companies and other financial institutions are beginning to incorporate identity protection services as part of their
standard service package, leaving LifeLock’s services an unnecessary and expensive alternative.
§ LifeLock is not positioned to take advantage of the high growth segment of enterprise consumers. Firms in the market that focus entirely on
enterprise consumers will outpace them.
§ LifeLock has failed to demonstrate an ability to develop the technologies that are necessary to compete in a high tech industry.
University of Oregon Investment Group

University of Oregon Investment Group
LifeLock provides proactive identity theft protection services for consumers and consumer risk management services for enterprises. It was founded by Todd
Davis and Robert Maynard in 2005, shortly after which Maynard left the company amid controversy. Todd Davis is the current CEO of LifeLock. It is located in Tempe, Arizona and currently has 669 employees. LifeLock IPO’d in
October 2012 with a market cap of $876 million. It is the most recognized brand in identity theft protection according to reports commissioned by LifeLock.
LifeLock operates through two business segments: consumer subscribers and enterprise. The Consumer segment offers identity theft protections services to consumers on a monthly or annual basis. The Enterprise segment offers identity risk assessment and fraud protection services to enterprise customers. The consumer subscribers segment is the original segment, while the enterprise segment was started through the acquisition of ID Analytics in March 2012.
Consumer Subscribers
LifeLock offers identity theft protection services to consumers on a monthly or annual subscription basis. It has 4 levels of services that correspond with 4 levels of pricing. LifeLock Junior, the lowest level of service, is $6.00 per month, LifeLock Standard, the next level of service, is $9.99 per month or
$109.89 annually, LifeLock Advantage, the second highest level of service, is
$19.99 per month or $219.89 annually, and LifeLock Ultimate Plus, the highest level of service, is $29.99 per month or $329.89 annually. They also offer a mobile wallet app as a result of their acquisition of Lemon Wallet on December
12, 2013. As of December 31, 2014, LifeLock served approximately 3.6 million members and had an annual member retention rate of 87.7%, which was their ninth consecutive quarter above 87%. During 2014, the cumulative member base grew 32% and they added 1.16 million new members. The consumer segment made up 94% of LifeLock’s revenue in 2014.
LifeLock monitors identity-related events, such as the opening of accounts and any credit-related applications. When a customer signs up for a LifeLock protection plan, the company provides 4 services:
§ Places an initial alert on the customer’s consumer report with a credit bureau and periodically renews it for an additional 90 days
§ Obtains and provides the customer a copy of his or her free annual disclosure of his or her consumer report
§ Submits a request on the customer’s behalf to remove the customer’s name from lists for prescreened offers of credit
§ Offers a $1 million guarantee to customers who become victims of identity theft while subscribing to LifeLock’s services
When LifeLock detects that a member’s personally identifiable information is being used, they offer notifications that allow members to confirm valid or unauthorized identity use. When a member confirms that the use of his or her identity is unauthorized, LifeLock takes actions to help protect the member’s identity and determine whether there has been an identity theft. If an identity theft has actually occurred, they take actions designed to help restore the member’s identity through a remediation service that works directly with government agencies, merchants, and creditors.
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Enterprise
Enterprise customers typically pay based on their monthly volume of transactions. As of December 31, 2014, LifeLock served more than 300 enterprise customers. They protect enterprise customers by delivering on demand identity risk, identity authentication, and credit information about consumers. Enterprise customers then use this information to make decisions about opening or modifying accounts and providing credit to consumers to reduce financial losses from identity fraud. LifeLock’s number of enterprise transactions increased 13% from 2013 to 2014, but the enterprise segment makes up less than 6% of total revenue for 2014. LifeLock entered the enterprise market after it acquired ID Analytics Inc. in March 2012. ID Analytics Inc. is a provider of enterprise identity risk assessment and fraud protection services and had been a strategic partner of LifeLock since 2009.
The foundation of LifeLock’s identity theft protection services is the LifeLock ecosystem. The ecosystem combines large data repositories of personally identifiable information and consumer transactions, proprietary predictive analysis, and an advanced technology platform. LifeLock’s members and enterprise customers enhance the ecosystem by continually contributing to the identity and transaction data in the repositories. LifeLock applies predictive analytics to the data in its repositories to provide it’s consumers and enterprise customers with actionable intelligence that helps protect against identity theft and identity fraud. LifeLock is the smallest company to have ISO 27001 certification, the highest security standard for data handling and processing.
LifeLock co-founder Robert Maynard resigned from his position with LifeLock in 2007. The inspiration story for LifeLock revolves around Maynard’s week in jail in 2003. The company uses it as a frightening example of what can happen to victims of identity theft. Maynard was arrested at his Phoenix apartment and accused of failing to pay back a $16,000 casino loan to the Mirage in Las Vegas.
Maynard was hauled to the county jail despite his protests that he wasn’t even in
Vegas when the loan was made. He was released after seven days, but spent more than $20,000 and many hours on the phone trying to clear his name. While in jail, he came up with the idea for LifeLock so other people could avoid being victimized by identity theft. The company claims that one of the men who stole
Maynard’s identity is now doing time for murder.
The company uses this story to influence people to take protective measures against identity theft, such as subscribing to LifeLock. However, the real story is a bit different than the story that LifeLock trots out so often. Maynard did spend a week in jail in 2003 because of an unpaid $16,000 casino marker. However, it was Maynard’s marker. There was no identity theft involved; Maynard was guilty. Even though he claimed to be a victim of identity theft, he never filed a single legal claim and he never attempted to recover the $20,000 he had to pay to resolve the situation.
In 2007, Maynard was suspected of being an identity thief and stealing his father’s identity to obtain an American Express card. He has also been the target of a Federal Trade Commission investigation involving a previous business venture in the credit industry. He resigned in 2007, but continued to work for
LifeLock for around 6 months as a contractor.
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LifeLock was sued 80 times between 2010 and 2014. They are also facing a class action securities fraud suit.
Federal Trade Commission Fine
In 2010, the Federal Trade Commission (FTC) called LifeLock’s advertising claims “bogus” and accused LifeLock of operating a scam and con operation.
The FTC, along with 35 state attorneys general, levied a fine of $12 million against LifeLock for deceptive business practices and for failing to secure sensitive customer data. The FTC said that LifeLock engaged in false advertising by promising customers that their services would make personal information useless to thieves. In reality, “the protection they provided left such a large hole…that you could drive a truck through it according to FTC Chairman
Jon Leibowitz. –Wired.com
The Federal Trade Commission counts are:
Count 1: LifeLock represented that their services provided complete protection against all forms of identity theft by making consumers’ personal information useless to identity thieves.
-LifeLock services do not provide complete protection against all identity theft and do not make personal information useless to identity thieves.
Count 2: LifeLock represented that their services prevented unauthorized changes to customers’ address information.
-LifeLock services do not prevent unauthorized changes to customers’ address information because the alerts LifeLock places on customer accounts do not require users of the consumer report to contact the customer before changing address information.
Count 3: LifeLock represented their services constantly monitored activity on each of its customers’ consumer reports.
-LifeLock services do not monitor activity on customers’ consumer reports.
Count 4: LifeLock represented that their services would ensure that a customer would always receive a phone call from a potential creditor before a new credit account was opened in the customer’s name.
-LifeLock services do not ensure that a customer would receive a phone call from a potential creditor before a new credit account was opened in their name because the alerts the LifeLock places do not require it.
Count 5: LifeLock represented that they employed reasonable and appropriate measures to protect personal information of customers from unauthorized access.
-LifeLock does not employ reasonable and appropriate measures to protect personal information of customers from unauthorized access. They did not install antivirus or antispyware programs on computers used by employees to remotely access the network, nor did they regularly record and review activity on the network.
Count 6: LifeLock represented that they encrypted sensitive customer information that they stored or transmitted.
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-LifeLock does not encrypt sensitive customer information that they store or transmit. They also have poor password management practices for employees and vendors who accessed the information.
Count 7: LifeLock represented that they limited access to sensitive information only to authorized employees on a “need-to-know” basis.
-LifeLock did not limit access to sensitive customer information only to authorized employees on a “need-to-know” basis.
Corporate Identity Theft
In 2008, LifeLock was sued by NameSafe, a competitor, for allegedly stealing the company’s corporate identity and deceptive trade practices. NameSafe claimed that LifeLock stole its trademark and deceptively diverted traffic meant for NameSafe’s website to LifeLock’s own website.
Former Employee Issues
As of March 2014, Michael Peters, a former chief information security officer for LifeLock, is suing the company under whistleblower-protection statutes, claiming that he was unjustly fired for objecting after the company deliberately turned off or reduced the number of alerts it sent to customers in order to reduce the number of calls to its customer support center.
In 2006, LifeLock began to run ads that featured CEO Todd Davis’ real social security number and a quote of him stating that he’s “absolutely confident
LifeLock is protecting my good name and personal information, just like it will yours.” Since 2007, Davis’ identity has been stolen over 20 times, a fact that
Davis and the company have attempted to cover up. Even though Davis had
LifeLock services, he didn’t find out that he was a victim of identity theft until a creditor called his wife attempting to collect. Additionally, LifeLock interfered with the police investigation of one of the people who stole Davis’ identity.
Before the police could finish investigating the crime, LifeLock stepped in and coerced the subject into making a videotaped confession that wasn’t admissible in court.
LifeLock is part of the Identity Theft Protection Services industry. Companies in this industry primarily provide software and services aimed at reducing the risk of identity theft from online or electronic media. Firms typically use monitoring software to track unauthorized use of credit and other personal information. The main activities of the industry are credit monitoring, identity theft threat assessment, identity theft response, and identity theft insurance.
Identity Theft:
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Identity theft occurs when an unauthorized party gains access to an individual’s personally identifiable information, such as the individual’s name, address, phone number, date of birth, or social security number.
Identity Fraud:
Identity fraud occurs when personally identifiable information is misused for financial gain, which could include purchasing products or services, making withdrawals, modifying existing accounts, or creating new false accounts.
According to IBIS World, the Identity Theft Protection Services industry has experienced slow growth at an average of 2.4% annually over the last five years.
It currently sits at $3.2 billion. Steady growth is expected over the five years to
2020 as a result of the proliferation of the Internet into nearly all financial activities as well as a number of recent high-profile security breaches that compromised the financial information of millions of consumers. Revenue is projected to increase at an average of 2.7% annually to reach $3.6 billion in
2020.
Identity theft has been the most reported consumer complaint in the United
States for the past 14 years according to the Federal Trade Commission (FTC).
There were 26 million identity theft victims in the United States from May 2013 to May 2014, which corresponds to a victim every 2 seconds. The estimated cost of identity fraud in the United States in 2012 was $25 billion. A number of trends are contributing to an increased rate of identity theft and identity fraud, including the following:
Increasing number of data breaches:
Enterprises that act as custodians of personally identifiable information are increasingly subject to hacking and data breaches, as evidenced by the series of breaches at a number of large retailers during 2014. During 2014, 904 million records were exposed by data breaches, leaving millions of consumers exposed to an increased risk of identity theft. According to a commissioned study by
LifeLock, one out of three of those who were notified that their personal information may have been compromised in a data breach in the 12 months preceding the study reported that they experienced identity theft during such period.
Increase in e-commerce and Internet-based transactions:
Consumers and enterprises are becoming more exposed to an increased risk of identity theft as more banking, e-commerce, and account openings are conducted over the Internet and through mobile devices. Identity thieves from anywhere in the world can conduct numerous fraudulent transactions using the same credit card or other personally identifiable information across a large number of enterprises in a short period of time.
Use of social networks:
The increased use of social networks has caused consumers to share significant amounts of personally identifiable information online, which exposes them to a
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greater risk of identity theft. Social networking users often share significant amounts of personal information about themselves or their family members that can be easily accessed by identity thieves and used to answer knowledge-based authentication questions, crack passwords, or gain access to accounts.
Proliferation of mobile devices:
The rapid proliferation of smartphones, laptops, tablets, and other mobile devices by consumers and enterprises increases the risk of identity theft because these devices often contain personally identifiable information and are easy to steal or misplace.
Capital Intensity and Wages:
The Identity Theft Protection Services industry has a low level of capital intensity. In 2015, for every dollar spent on capital, about $8.20 are spent on wages. Capital is required for computer hardware and other technology used for tracking and monitoring identity theft. Nevertheless, a large portion of the industry’s cost structure is dedicated to wages. The software quality depends on the programmers who code it and the technology depends on highly skilled employees for research and development. Wages account for an estimated
37.7% of revenue.
Technology Change:
The Identity Theft Protection Services industry relies on powerful computer and software technology to track, monitor, prevent, and respond to identity theft. In addition, identity theft protection companies use computers and software to maintain customer records, process financial transactions, and maintain title records. Network firewalls, intrusion prevention systems, application firewalls, and anti-malware are used to protect the companies’ networks and encryption technologies are used to protect their data. The level of technological change is high and companies must keep up with this in order to stay competitive.
Revenue Volatility:
The Identity Theft Protection Services industry has displayed a low level of revenue volatility over the past five years. Some consumers and businesses view security products as non-discretionary, which ensures some revenue stability for the industry. Long-term trends of increased credit and debit card use will result in slow and stable year-to-year growth.
Research and Development:
Identity Theft Protection Services industry companies invest a large portion of their revenue in developing new products to open up new markets and gain a competitive edge. Without new products, companies cannot continue to compete in an industry with such high technological change.
Marketing:
Marketing has become increasingly important as new startups have entered the industry. The Identity Theft Protection Services market is skewed towards wellknown and established brands, so new entrants have to spend a large amount of
money on marketing in order to break into the industry.
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Individuals:
Individual consumers provide the majority of revenue in this industry, about
80%. This has declined slowly over the past five years. Individuals purchase identity theft protection services to prevent misuse and falsification of personal information. Industry firms target all residents of the United States with credit cards and social security numbers because they are all potential victims of identity theft.
Corporations:
Corporations account for about 20% of industry revenue, however this has been growing over the past five years. Large companies that frequently use personal information purchase identity theft protection services to prevent identity theft.
Other companies use these services to prevent customers from using false information for the purchase of goods and services.
Per Capita Disposable Income:
As consumers’ disposable income increases, their willingness and ability to invest in identity theft protection services to protect their growing income increases. However, when disposable income is low consumers are less likely to invest in identity theft protection services because they do not have the available funds. Per capita disposable income is expected to increase in 2015.
Percentage of Services Conducted Online:
As consumers increasingly conduct services online such as shopping and banking, they increase the risk of identity theft. As a result, consumers who use the Internet for services are more likely to purchase identity theft protection services. The percentage of services conducted online is expected to increase in
2015. However, an increasing number of apps and websites are providing free services to assist consumers in tracking their credit on their own, posing a threat to the industry.
Private Investment in Computers and Software:
When businesses spend more on computers and software, they spend more on identity theft protection services to protect their employees. Increased investment in computers and software positively affects the Identity Theft
Protection Services industry. Private investment in computers and software is expected to increase in 2015.
Number of Mobile Internet Connections:
Identity thieves gain an additional point of access to personal information with
Internet-enabled phones and tablet computers. As more and more consumers purchase Internet-enabled devices and save personal information on them, they will spend more money on identity theft protection services. The number of mobile Internet connections is expected to increase in 2015.
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Companies in this industry compete based on brand name, pricing, breadth of services offered, and reliability of customer service. Some companies focus entirely on the consumer segment, some on the enterprise segment, and some on both. Consumers often choose recognizable industries for important issues such as identity theft, so name brands are a large selling point. Quality of service is also of serious importance because of the highly sensitive nature of the data that the industry handles. Companies that can offer competitive pricing as well as multiple tiers of subscription will be attractive to potential customers with limited budgets. Companies in the Identity Theft Protection Services industry focus on the variety of services offered to compete with each other. Wider ranges of preventative services will entice more potential customers. External to the industry, credit bureaus are a threat as well as websites and apps that assist customers in tracking their credit on their own for free.
Key Factors for Success:
§ Investing in technical research and development
§ Access to a highly skilled workforce
§ Brand name recognition and a good reputation
§ Wide and expanding product range
§ Ability to quickly adopt new technology
Market Share Concentration:
The Identity Theft Protection Services industry has a low level of market share concentration. The two largest firms account for almost 24.4% of industry revenue. LifeLock is the largest company in the industry, with 18.6% market share. Intersections Inc. is the second largest with 5.8% market share. There are
54 companies in the industry. Because of the relatively low barriers to entry in this industry, new entrants can offer very similar products to the major names.
As more companies have entered the industry, it has become increasingly difficult to differentiate one from the other. The breadth of services offered are becoming more and more similar, deterring some companies without the bonus of brand recognition to enter. Also, a number of mergers and acquisitions have caused some firms to exit the industry. Over the past five years, the number of firms in the industry declined at an average annual rate of 1.1%.
Barriers to Entry:
The barriers to entry in this industry are low but increasing. Startup costs for identity theft protection companies are low, consisting of mainly capital investments in computers and software. However, new entrants must compete with larger and more established companies with brand name recognition. Some services that are offered by identity theft protection companies such as softwarebased credit monitoring are easier for new and smaller entrants to undertake.
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Consumer Services:
LifeLock pursues a multi-channel member acquisition and brand marketing program that is designed to grow their member base by increasing brand awareness and maximizing their reach to prospective members. They use a variety of marketing programs to target members, including radio, television, print advertisements, direct mail campaigns, online display advertising, paid search and search-engine optimization, third-party endorsements, and education programs. In 2014, they derived just over half of their gross new members from their consumer marketing programs.
LifeLock also utilizes strategic and affiliate partner distribution channels to refer prospective members and sell consumer services to their partners’ customer bases. They have developed and implemented a national sales organization that targets new partners to enhance their partner distribution channels. In 2014, they derived just under half of their gross new members from their partner distribution channels. These channels include co-marketing, embedded products, employee benefits, online affiliates, and data breach.
Enterprise Services:
LifeLock utilizes a combination of direct and indirect strategies to market to their enterprise services. Their internal sales organization is structured based on strategic accounts and industry verticals and is supported by account management, customer service, and customer implementation support teams.
Part of their sales strategy is to offer prospective enterprise customers the opportunity to provide LifeLock with historical data so that they can demonstrate the return on investment had LifeLock’s services been used over a specific period of time.
LifeLock focuses on the retention of current members and believes that their ability to establish and maintain long-term relationships with their members partly depends on the strength of their member service organization. More than
200 employees are in LifeLock’s member services organization and their
Tempe, Arizona member service center is open 24/7/365. They provide remediation services during normal business hours and only call customers with alerts between the hours of 9 am and 9 pm. An alert after 9 pm is called in at 9 am the next day. LifeLock leverages frequent communication and feedback from members and enterprise customers to improve member services.
Members:
As of December 31, 2014, LifeLock had approximately 3.6 million members.
Most members are paying subscribers who have directly enrolled in consumer services on a monthly or annual basis. A small percentage of members receive consumer services through a third-party enterprise that pays LifeLock directly,
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often as a result of a breach within the enterprise or by embedding the service within a broader third-party offering.
Enterprise Customers:
LifeLock has approximately 50 direct enterprise customers. These include financial institutions, telecommunication and cable service providers, government agencies, and technology companies. Through these direct enterprise customers, LifeLock also provides enterprise services to more than
250 indirect enterprise customers, including large retailers, automobile and mortgage lenders, and e-commerce providers. No single enterprise customer accounted for 10% or more of total enterprise revenue in 2013 or 2014.
LifeLock operates in a competitive and rapidly evolving business environment.
Primary competitors are the credit bureaus that include Experian, Equifax,
TransUnion, Affinion, EWS, Intersections, CSID, and LexisNexis. Some of their competitors have substantially greater financial, technical, marketing, distribution, and other resources then LifeLock possesses. This affords them the ability to devote greater resources to the development, promotion, and sale of services, to deliver competitive services at lower prices, and to introduce new solutions and respond to market developments and customer requirements more quickly than LifeLock, giving them a competitive advantage.
Competitive Strengths
§ Breadth and depth of data repositories
§ Strong network effects
§ Patented and proprietary analytics
§ Most comprehensive service offerings
§ Leadership position
LifeLock acquired ID Analytics on March 14, 2012. ID Analytics is a provider of enterprise identity risk assessment and fraud protection services and has been a strategic partner of LifeLock since 2009. This acquisition enabled LifeLock to enter the enterprise market and expanded its data repositories. The acquisition was paid for with $166,474,000 of cash and 1,586,778 shares of convertible redeemable preferred stock with a fair value of $19,476,000 on the acquisition date.
LifeLock acquired Lemon Wallet on December 12, 2013. Lemon was previously a digital wallet platform that allowed users to store their ID, payment, loyalty cards and more on their smartphone. LifeLock paid $42.6 million for Lemon and is launched an application called “LifeLock Wallet” which is based on Lemon’s technology. This acquisition allows LifeLock to expand into the mobile space with innovative technology. On May 17, 2014, LifeLock pulled its Wallet app from the App Store, Amazon Apps, and Google Play and deleted all data stored by current users after it deemed the app non-compliant with security standards.
CEO Todd Davis said “ we have determined that certain aspects of the mobile app may not be fully complaint with payment card industry security standards.”
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There was no evidence that user information had been compromised, but the company believed that deleting all of the data was the right thing to do. They promised to re-launch the Wallet app with the highest level of payment card industry compliance once the security flaw has been resolved. It is now available in mobile app stores again, but it is much less popular than it had been.
LifeLock generated revenue of $476 million in 2014, an increase of $106.3 million from $369.7 million in 2013. This increase was driven primarily be organic growth in their consumer segment of approximately 32.1%. LifeLock’s key organic growth strategies are listed below:
Extend leadership position through continued enhancement of services
LifeLock intends to grow by introducing new services and expanding its current services, such as the LifeLock Wallet mobile application. It also intends to explore and consider the password management and protection market as well as the tax return fraud protection market, both of which involve protection and authentication of personally identifiable information.
Expand data repositories and analytics
LifeLock intends to expand its data repositories with valuable and differentiated data from new and existing enterprise customers and continue to supplement them with data from third-party fulfillment partners. As its membership base grows, they expect an increase in the number of alerts and responses to reinforce the breadth and depth of their data and visibility into consumer behavior.
LifeLock will continue to enhance their algorithms to apply more sophisticated analytics to more types of consumer transactions and to improve their ability to detect potential identity theft attempts more effectively.
Grow customer base
LifeLock intends to leverage their marketing campaigns and existing and new strategic partners to grow their membership base. They will make continued investments in these areas in order to enhance their premium brand and product superiority message, increase awareness for the need for consumer services, and enhance their ability to efficiently acquire new members. LifeLock also intends to leverage the effectiveness of the LifeLock ecosystem to demonstrate to potential enterprise customers the benefits of becoming part of the ecosystem with the goal of expanding their enterprise customer base.
Continue focus on customer retention
LifeLock plans to invest in increasing membership retention by optimizing and expanding the number of value-added, actionable alerts they send to their members to provide them peace of mind and convenience and to demonstrate the value of their services. For enterprise customers, they plan to invest in making their services easy to integrate into business processes and expanding the types of risk assessment services that they provide to enterprise customers.
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Increase sales to existing customers
LifeLock plans to add additional service offerings for their members to further drive monetization. In their enterprise business, they believe that they have the opportunity to attain deeper penetration of their existing customers’ organizations by expanding across various departments and new lines of business within enterprises that already use LifeLock and by adding new services.
LifeLock has always had an aggressive marketing policy with over 40% of revenue going towards marketing efforts. Marketing spending is also on an upward trend that I don’t believe will trend downward anytime soon. Aggressive marketing and advertising is how LifeLock maintains its reputation as the most recognizable brand in identity theft protection and how it attracts potential new customers. They will continue to increase marketing and advertising spending in order to beat out competitors in brand name recognition.
Mr. Davis co-founded LifeLock in 2005. In 2009, he received the Ernst &
Young Entrepreneur of the Year award for Orange County/Desert Cities region.
Prior to leading LifeLock, Davis served as a managing partner of a marketing organization and was an executive in multiple technology startup companies. He began his professional career at Dell Computer and holds undergraduate degrees in entrepreneurship and management from Baylor University.
2014 Compensation: $3,806,790
Ms. Schneider joined LifeLock as president in 2012. Prior to this role, she was executive vice president at Yahoo! Americas. Prior to Yahoo!, Schneider held senior leadership roles at Knight Ridder, Red Herring Communications, Times
Mirror, and Drexel Burnham Lambert. She holds a bachelor’s degree in economics from Brown University and an M.B.A. from Harvard Business
School.
2014 Compensation: $2,922,818
Mr. Power joined LifeLock in 2011 as chief financial officer. Prior to LifeLock,
Power served as the COO and CFO with NetQuote, Inc. He brings more than 20 years of financial, strategic, and operational expertise to LifeLock. Power has a bachelor’s degree in commerce and economics from University of Toronto and also received his M.B.A. from University of Toronto.
2014 Compensation: $2,115,695
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LifeLock’s management has typically been at the low end of revenue guidance and the high end of cost guidance, sometimes entirely missing it. Selling,
General, and Administrative expense has consistently been much higher than management guidance. Research and Development expense has also often surpassed guidance figures. Gross margin is typically at the low end of its guidance figures. Management is largely projecting similar guidance figures as it has in the past, including gross margin of 75%-77%, SG&A of 43%-47%, and
EBITDA of 20%-25%. Gross margin seems reasonable based on historical data, but SG&A expense and EBITDA don’t seem at all reasonable since 2014 had
SG&A expense of 55% and EBITDA of 11.7%.
We currently hold this stock in the DADCO portfolio. We have 300 shares, which represents 10.96% of the total portfolio. It was bought at $11.23. When this company was pitched, it was pitched as a high growth company to both
DADCO and Svigals.
January 23, 2015
A class action lawsuit was filed against LifeLock in California, alleging that they engaged in deceptive advertising. The suit alleges that LifeLock had frequent service delays, failed to maintain technology capable of performing the security it advertised, and didn’t cancel accounts for customers when requested.
If this class action lawsuit is successful, it would be disastrous for LifeLock’s reputation and as a result its membership. In an industry that is so dependent on good customer service and being deemed trustworthy, being found guilty of deceptive advertising would most likely tank LifeLock’s stock price and its new member enrollment.
March 25, 2015
LifeLock is under investigation by the Federal Trade Commission (FTC) and has previously agreed to pay $11 million to the FTC and $1 million to a group of
35 state attorneys general to settle charges that the company used false claims to promote its identity theft protection services. Not only will LifeLock’s bottom line take a hit with non-tax deductible legal expenses, its reputation will take another blow. Consumers may only be able to handle so many legal problems before they decide that LifeLock is not to be trusted.
§ The number of industry firms is in decline, which means less competition
§ LifeLock has the largest market share by far in the Identity Theft Protection
Services industry
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§ Increased credit and debit card use will prompt more consumers to want to protect their personal information
§ Increasing high profile data breaches at large companies will cause consumers to be concerned about their personal data
§ Demand from businesses is expected to increase robustly over the next five years
§ Data breach in LifeLock’s databases
§ Further legal problems and negative publicity stemming from them
§ Inability to manage customer acquisition costs, resulting in higher acquisition costs per member than revenue gained per member
§ Competitors investing significant amounts in research and development and producing new technology that LifeLock is unable to compete with
§ Changes in government regulation resulting in adverse impact to LifeLock
§ New entrants offering similar products cheaper
LifeLock is such a unique company that it is nearly impossible to find good comparable companies. To choose comps, I did a preliminary screen with the
FinViz screener. Companies were screened on multiple metrics, including debt/equity, market cap, gross margin, operating margin, EPS growth and sales growth. The companies I chose have similar growth rates to LifeLock and are exposed in the same type of industry risk. Direct competitors of LifeLock such as Intersections were considered, but they were ultimately deemed inappropriate comparables because they were either private or much smaller with very different metrics. As a result, none of the comps are in LifeLock’s specific industry, but all are in the technology sector and most are in the application software industry, which is Identity Theft Protection Service’s parent industry.
In determining what weighting to assign to each company, I compared the multiples of EV/Revenue, as well as gross margin and EBITDA margin. When weighting the multiples, I weighted EV/Revenue and EV/EBIT the highest because they are the multiples that LifeLock mostly trades off of. The multiples of EV/Gross Margin, EV/(EBITDA-Capex), and P/E were not considered because of LifeLock’s negative multiples in these areas. The final comparable price target was reached through a EV/Revenue weighting of 45%, a EV/EBIT rating of 30%, and a EV/EBITDA rating of 25%.
“Shutterstock, Inc. operates as an online marketplace for commercial digital content imagery. The company provides its products for visual communications, such as Websites, digital and print marketing materials, corporate communications, books, publications, and video content. It also licenses commercial digital imagery and music to its customers; offers online learning for digital professionals; and digital asset management software services.” –
Yahoo Finance
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Shutterstock has a similar debt/equity structure to LifeLock as well as similar
EPS growth rates for the next year and the next five years. It also has a similar
IPO time and is subject to many of the Internet risks that LifeLock is subject to.
It has the least weight attached to it because it is quite a bit bigger than LifeLock and has a high EV/Revenue multiple.
“Pegasystems Inc. develops, markets, licenses, and supports software to automate complex and changing business processes in the United States and internationally. It provides Pega 7, a unified platform that enables clients to build enterprise applications; and software applications for marketing, sales and on boarding, customer service and support, and operations, as well as industryspecific business processes.” – Yahoo Finance
Pegasystems was chosen as a comparable company due to its very similar market cap and enterprise value. It also has similar EPS growth and similar gross margin. Pegasystems has similar reputation and image risks as LifeLock because of their very customer focused services. They also have similar database risk because of the large amount of confidential data that they manage.
Pegasystems has similar revenue and gross profit multiples with LifeLock and has similar database activities, so it is rated highly.
“MicroStrategy Incorporated is a provider of enterprise software platforms. The
Company provides flexible, powerful, scalable, and user-friendly platforms for analytics, mobile, identity, and loyalty, offered either on premises or in the cloud. The MicroStrategy Analytics Platform enables organizations to analyze vast amounts of data and distribute actionable business insight throughout an enterprise.” - Reuters
Microstrategy operates in similar enterprise industries as LifeLock, exposing it to the same associative risks. It also provides some services related to identity protection, although these make up a small part of their platform. Microstrategy is larger then LifeLock, but it has comparable revenue and gross margins. It has a weight of 20% because its similar but slightly higher revenue multiple.
“Tangoe, Inc. provides connection lifecycle management (CLM) software and related services to enterprises and service providers worldwide. Its CLM software covers the entire lifecycle of an enterprise’s communications assets and services. The company markets and sells its solutions primarily through direct sales force; and indirect distribution alliance and channel partners.” – Yahoo
Finance
Tangoe was chosen as a comparable company because of its similar growth rates and similar debt/equity structure. It is smaller than LifeLock, but generates similar net income. It also has a similar marketing policy, selling primarily through direct sales but also through alliance and channel partners. Tangoe has a
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25% weighting because of its similar net income, growth rates, and revenue multiple.
“SolarWinds, Inc. designs, develops, markets, sells, and supports enterpriseclass information technology (IT) and infrastructure management software to IT and DevOps professionals in various organizations. The company offers enterprise-class network management products and tools that allow network administrators and other IT professionals to monitor and manage the performance and configuration of their network infrastructure, as well as to collect and analyze the log data for IT operations, security, and compliance management.” – Yahoo Finance
SolarWinds has very similar past and future EPS growth to LifeLock. It is a slightly larger company, but has similar revenue figures and similar revenue growth rates. It has the same debt/equity structure and manages many databases, opening it up to similar database risk. SolarWinds has a 20% weighting because of its similar operation setup and similar but slightly high revenue multiple.
I broke revenue into consumer revenue and enterprise revenue and then projected future revenue by using a different method in each segment.
Consumer Revenue
Product Mix: I used historical data and management guidance to project out product mix. Recently, LifeLock Basic has been losing significant market share to LifeLock Premium products. I continued that trend for the next couple of years and then stabilized the product mix at 44% LifeLock Basic, 54% LifeLock
Premium, and 2% LifeLock Junior from 2017 onwards.
Monthly and Annual Average Revenue per Member: I used my product mix projections to estimate future monthly revenue per member. I calculated a weighted average of monthly revenue per member based on my product mix from 2010-2024. I compared the historical average revenue per member from
2010-2014 to my calculated weighted average in order to calculate the effect of promotions had on average revenue. I found that my calculated weighted average was around 150% higher then the actual average revenue per member, which is attributable to promotion tactics such as 3-month free trials and discounted prices for consumers with certain memberships. Over time, LifeLock will have a decrease in promotions as it matures. Because of this, I kept the difference between my calculated weighted average revenue and actual revenue at 150% in 2015 and 2016 and then steadily trended the difference downwards by 1% per year, ending at a difference of 142% on 2024. I divided my calculated weighted average revenue by the difference in that year in order to get actual monthly average revenue per member. I multiplied this number by 12 to get annual average revenue per member.
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Gross New Members: Gross new members is the total number of new members who enroll in consumer service during the specific period. The 2015 growth rate is the weighted average of the 2010-2014 growth rates. I then decreased the growth rate by 1% per year, which I believe is realistic for a company that is
LifeLock’s age.
Member Retention Rate: Member retention rate is the percentage of members on the last day of the prior year who remain members on the last day of the current year. According to management guidance, member retention rate should be relatively stable. I increased the retention rate by 0.1% in 2015 and 2016 and then held it steady at 87.9%.
Cumulative Ending Members: Cumulative ending members is the total number of members at the end of the specific period of time. I calculated cumulative ending members using the formula below:
Cumulative ending members = (Cumulate ending members from last period +
Gross new members in the current period) * Member retention rate
To calculate total consumer revenue, I multiplied the average revenue per member by the average of the cumulative ending members of the previous year and the cumulative ending members of the current year.
Enterprise Revenue
Enterprise Transactions: Enterprise revenue is based on the number of enterprise transactions done. Management gave guidance that enterprise transactions will decrease by around 8% in 2015 and then increase steadily. I used the 8% decrease to project 2015 transactions and then projected a 5% increase in 2016 with a 1% increase every year after.
Since enterprise revenue is based off of enterprise transactions, I decreased enterprise revenue by 8% in 2015, increased it by 5% in 2016, and increased by
1% every year afterwards to match enterprise transaction growth.
Cost of services was initially estimated by using percentage of revenue method.
For 2015, I calculated annual average cost of services per member as 23% of the annual average revenue per member. Cost of services had historically been around 23% of revenue. Management gave guidance that cost of services will be around 25% of total revenue. Since LifeLock is attempting to increase the number of service alerts sent out per customer, I increased cost of services until
2019. After 2019 I slightly decreased cost of services under the assumption that they will become more efficient at providing more service alerts.
SG&A is historically over 55% of revenue. Management gave guidance for 47% of revenue, but I don’t believe that this is at all realistic for the company. I believe that marketing and advertising expenses will continue to increase as
LifeLock continues attempting to reach potential consumers. The cost of acquisition of new members has been steadily increasing since 2010 and will rival the revenue gained from them. As a result, I increased SG&A expense to between 57% and 59% of revenue.
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Research and development is incredibly important for LifeLock’s growth because it determines how competitive their products are. For the next few years
I steadily increased R&D spending to 11% of revenue. After 2019, I decreased it back down to 10% of revenue as LifeLock matures and becomes more established.
Since LifeLock IPO’d in October 2012, there was not enough historical price data available to really rely on the beta obtained from running regression. I ran a since inception (948 days) daily regression against the technology software and services industry and my comps. That regression gave LifeLock a beta of 0.87 since inception. I weighted that beta 20%. Since my comps are not very similar to LifeLock, I weighted the Comps Vascek and Hamada both 10%. I weighted the Industry Vascek and Hamada both 30% to come out with a beta of 0.94, which I believe is a reasonable beta based both on the regression and the betas of other companies in the industry.
Since the unlevered free cash flow growth rate for 2024 was around 20%, I chose to use a stepped-down intermediate growth rate model. I trended down the growth rates for 2025-2029 by assigning rates of 16%, 12%, 8%, 4%, and 3% respectively. This will allow cash flows to be predicted more smoothly and accurately.
Computers and software are essentially the only capital expenditures that
LifeLock makes. In order to provide the increased services that LifeLock is promising to its members, they will need to buy more computers and software.
Also, as members increase, LifeLock will need more computers and software to keep up. I trended capital expenditures upwards by 0.2% of revenue per year in order to reflect this.
LifeLock had negative earnings before taxes in both 2010 and 2011, with the result that they have racked up a large deferred tax asset and paid taxes for the first time 2014. Due to this lack of historical data, I had to predict the tax rate for
LifeLock based on comparable companies. Comparable companies averaged a tax rate of 35%, which I used as my terminal tax rate. Since I projected negative earnings before taxes for 2015, I assumed that LifeLock would not pay any taxes in 2015. After 2015, I assumed a low starting tax rate of 2% and increased it by
0.5% every year.
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While LifeLock has a strong top line, its bottom line, as well as its reputation, is shaky. Since its IPO, LifeLock has been involved in multiple legal battles and has seen embarrassing management blunders that should greatly concern consumers. Trust is essential to LifeLock’s value proposition and they have done an abysmal job of maintaining that trust. Additionally, LifeLock’s services are poised to become unnecessary for consumers, leaving just the enterprise segment that LifeLock is not positioned to take advantage of. LifeLock will not be beneficial for DADCO in the future and it should be removed from the portfolio.
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Bloomberg BusinessWeek
Consumer Affairs
FactSet
FinViz
Google Finance
IBIS World
LifeLock 2014 10K
LifeLock 2015 10Q
LifeLock Earnings Call Transcript
LifeLock Investor Presentations
LifeLock Prospectus
MicroStrategy 2014 10K
MicroStrategy Investor Presentations
PegaSystems 2014 10K
PegaSystems Investor Presentations
Shutterstock 2014 10K
Shutterstock Investor Presentations
SolarWinds 2014 10K
SolarWinds Investor Presentation
Tangoe 2014 10K
Tangoe Investor Presentations
Yahoo!Finance
May 22, 2015
Fi
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