LifeLock (NYSE:LOCK) reported third-quarter results on Oct. 28. The identity theft protection specialist also announced an agreement with the Federal Trade Commission that could help the company avoid sizable legal costs.
Back in July, the FTC announced that it was taking action against LifeLock for allegedly violating a 2010 order by "continuing to make deceptive claims about its identity theft protection services, and by failing to take steps required to protect its users' data." LifeLock's stock would go on to lose more than 50% of its value in subsequent months.
However, in its third-quarter earnings press release, LifeLock disclosed that a deal could soon be reached, saying:
The Company also announced that it has reached agreements with the staff of the Federal Trade Commission and representatives of a national class of consumers on a comprehensive settlement resolving outstanding litigation relating to its past marketing representations and information security programs. The Company noted that the agreements are not yet final, as the FTC staff's recommendation to approve the settlement must still be approved by the Commission itself and a federal judge, and the class action settlement will require review and approval by the court.
LifeLock also noted that "[t]he proposed FTC settlement does not require us to change our current products, services, or business and information security practices, including in particular, our current marketing and advertising practices."
It appears that, if approved, this agreement will allow LifeLock to settle its legal situation and emerge relatively unscathed. Not surprisingly, shares surged more than 40% on the news Thursday.
As for LifeLock's actual business performance, the company's subscription-based model continues to grow steadily. Q3 2015 was the 42nd consecutive quarter of sequential growth in revenue and cumulative ending members. It added approximately 251,000 gross new members during the third quarter and ended the period with approximately 4.1 million members -- a 16% year-over-year increase.
In addition, customers continue to show a willingness to pay more for its protection services, with monthly average revenue per member increasing more than 6% from Q3 2014 to $11.91.
And maybe most importantly -- especially in light of the FTC lawsuit -- LifeLock's customer retention rate remained high at 86.6%, although that figure was down from 87.5% in third quarter of 2014.
Combined, these drivers helped revenue climb 24% year over year to $152 million, with consumer revenue rising 25% to $144.6 million and enterprise revenue increasing 5.6% to $7.3 million.
Including a $96 million charge for the potential damages related to the FTC action and class action lawsuits, LifeLock suffered a net loss of $65.1 million in Q3 2015, compared with net income of $5.5 million in Q3 2014. Excluding the impact of this legal reserve and other charges, adjusted net income was $27.6 million in Q3 2015, compared with $15.9 million for Q3 2014. And on this adjusted basis, EPS surged 75% year over year to $0.28 per share.
Balance sheet and cash flow
LifeLock's asset-light business model continues to throw off cash, including $20.8 million in operating cash flow and $18.4 million in free cash flow. This strong cash generation continues to strengthen its balance sheet, which ended the quarter with no debt and cash and marketable securities of $332 million, up from $326 million at the end of the second quarter of 2015.
For the fourth quarter, management expects revenue to be in the range of $153 million to $155 million and adjusted EPS to be between $0.28 and $0.30.
Management also updated its full-year 2015 guidance, with revenue now projected to be in the range of $584 million to $586 million (up from a previous estimate of $577 million to $582 million), and adjusted EPS forecast to be in the range of $0.61 to $0.63 (up from $0.58 to $0.61).
"We are pleased with our performance in the quarter, which reflected a 24% increase in revenues and strong gains in adjusted net income and adjusted EBITDA," said Chairman and CEO Todd Davis. "In addition, we believe the agreements we announced today are in the best interest of our shareholders and represent a positive step toward achieving closure on substantial outstanding litigation against the Company. These settlements, if approved, will enable all of us to focus on our mission of protecting our members."
Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends LifeLock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.