Lifelock

We closed out our position in Lifelock ( LOCK - $14.37 ) in 2013 after it acquired a fledgling "mobile wallet" provider for nearly $50 million.  Since then Lifelock's core identity protection business has continued to thrive, bolstered by the Target Stores break in and a general increase in concern about personal privacy.  Lifelock has been spending heavily to accelerate customer acquisition, impacting margins in the near term.  Costs are expensed as incurred.  Revenues are recognized as earned over time, month by month.  Renewal rates remain in the 85%-90% range.  The lifetime value of those new customers will be highly profitable if renewals stay up there.

The mobile wallet acquisition is costing money, too.  Lifelock is promoting the idea to its existing customer base.  Adoption has been so-so.  The revenue contribution is significantly less than the marketing outlay.  When we checked out of the stock last year our 2014 earnings estimate stood at $.45 a share.  We dropped it a nickel following the acquisition.  It now stands at $.30 a share.  The share price has followed suit, slipping from 20 to below 15.  The long term outlook remains pretty attractive.  Lifelock added 344,000 subscribers in Q1 (+38% year to year), bringing the total to 3.22 million.  Over time margins could improve materially if marketing costs level off or decline.  To really get the stock going Lifelock will need to pyramid additional services onto that loyal customer base.  The "mobile wallet" isn't a loser necessarily.  But it doesn't appear to be turning into a big winner, either.

There's a slight risk to the identity theft business, too.  Other approaches could emerge to address the issue, exerting pressure on Lifelock's strategy.  Even today, people can "freeze" their reports at the major credit rating agencies, preventing any new cards or bank accounts from being opened.  That stops most criminals in their tracks.  But it does require a little more effort than writing a $30 check to Lifelock each month.

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