October 21, 2015 - 1:41pm EST by
2015 2016
Price: 9.15 EPS 0.70 0.80
Shares Out. (in M): 95 P/E 0 0
Market Cap (in $M): 871 P/FCF 0 0
Net Debt (in $M): -325 EBIT 0 0
TEV ($): 546 TEV/EBIT 0 0

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 LifeLock’s service is a combination of identity theft alarm and identity restoration insurance. For a monthly fee of $10 to $30, LifeLock (LOCK) will monitor to make sure a customer’s identity has not been stolen. LOCK looks for specific data points, e.g., change of home address or opening of new financial and other accounts, and alerts the customer if it suspects his or her identity has been stolen. In addition, LOCK will spend up to a million dollars to restore the customer’s stolen identity.

 The identity theft protection field is very competitive and in all honesty very gimmicky. There are many players in the field that for the most part just pull consumer credit reports and spit out alerts based on changes in the reports. LifeLock’s business, too, was gimmicky – until 2012 when it bought ID Analytics.

 ID Analytics has contracts with five out of six US wireless carriers and seven out of ten US credit card issuers. Here’s how it works: Let’s say a customer comes to a Verizon store to buy a phone. Verizon enters the customer’s info into the ID Analytics system. ID Analytics analyses millions (if not billions) of data points it has on the US population and tries to determine whether that customer in the Verizon store is who he says he is.

 ID Analytics benefits tremendously from the network effect: the more vendors such as Verizon use it to detect fraud, the more robust and thus more valuable its data becomes. That consumer attempting to buy a cell phone at the Verizon store is another data point that goes into the ID Analytics system. ID Analytics charges Verizon pennies to prevent fraud that may cost Verizon hundreds of dollars.

 In the past the ID Analytics business model was to sell its services to fraud-detection competitors, but not anymore. After ID Analytics was bought by LifeLock, it let its contracts with competitors lapse (which explains why revenues from this business declined recently). Today ID Analytics revenue is only 4% of LifeLock’s total revenue, but ID Analytics is responsible for most of LifeLock’s competitive advantage. LifeLock now can alert a customer sooner than any of its competitors if the customer’s identify has been used to open an account with one of ID Analytics’ clients. ID Analytics is a beneficiary of first-mover advantage: it is close to impossible for anyone else to replicate the relationship it has with its customers.

 LifeLock as a company has a checkered history (we are being very kind here). Its co-founder used to give away his Social Security number on CNBC, daring fraudsters to try to steal his identity. Well, it was stolen a few dozen times. The company has also been fairly aggressive with its advertising practices. It got into trouble with the FTC. It settled the lawsuit in 2010 and entered into a consent decree after paying a $12 million fine, and the Social-Security-number-sharing co-founder was let go.

 In 2014 the company disclosed that the FTC was investigating it again for mis-advertisement. The FTC alleges that LOCK was misstating how quickly it notified customers when their identities were stolen and had overstated the level of security of customer data. Two important caveats to the FTC’s allegations: First, no customer data was lost – thus, even if data was not stored as securely as the company advertised, there were no victims. And second – and this is very important – according to the FTC LOCK was in violation from November 2012 to March 2014, so the company’s current business practices are not in question.

 LifeLock was in negotiations with the FTC, and it looked like it was going to settle by paying a fine somewhere around $40 to $100 million. However, it failed to reach a final agreement, and the FTC filed a lawsuit. LifeLock’s stock collapsed, declining by more than half in one day. We bought it!

 LifeLock is a good example of when a great balance sheet, a significant growth runway, and a very cheap valuation can turn a third-rate lemon into delightful lemonade and thus create a very compelling buying opportunity. In our analysis, in the very, very worst case (the probability of which is extremely low) LifeLock may have to return all revenues it collected from new customers during the 16-month period questioned by the FTC. We estimate that would cost LifeLock around $500 million.

 LifeLock has $300 million in cash (a third of its current market capitalization) and no debt on its balance sheet. Its business generates about $100 million of free cash flows a year. Let’s estimate that it would probably take at least two years for the FTC’s lawsuit to be resolved. By that time LifeLock will have another $200 million in the bank. In the worst-case outcome, in two years LifeLock pays the FTC $500 million from the cash on its balance sheet. If the lawsuit concludes sooner, LOCK can borrow the difference – it business spits out a lot of cash.

 The $500 million penalty number is an incredibly, incredibly conservative estimate. We are only using it to try to kill the business. We still cannot! Let’s put this number into its proper context: General Motors just settled with the Justice Department over the ignition switch fiasco that claimed 124 lives. GM paid $900 million. By contrast, customers love LifeLock’s service – the retention rate is 87%. In other words, the average customer stays with LifeLock for six years. Finally, the company has hired one of the best legal minds in the country, David Boies, to defend it.

 LifeLock has four million customers, and it is has the largest mindshare with consumers when it comes to identity theft. Almost every week we read about tens of millions of consumer records being stolen. A very important issue with stolen identity is that it does not expire. Credit card numbers can easily be changed, but your Social Security number and date of birth are set in stone. Thus, data stolen five years ago is still valuable to thieves today and may be resold multiple times.

 LOCK is growing its customer base about 20% a year, while revenue per customer is growing 6-8% a year. In two years, we estimate the company’s earnings power should be north of $1.40. At 15 times earnings, it should be a $21 stock. At its current price LifeLock has a very limited downside and double or triple on the upside.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


LOCK is growing its customer base about 20% a year, while revenue per customer is growing 6-8% a year. In two years, we estimate the company’s earnings power should be north of $1.40. At 15 times earnings, it should be a $21 stock. At its current price LifeLock has a very limited downside and double or triple on the upside. 

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