LifeLock 2013 Annual Report Download - page 42

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We are a leading provider of proactive identity theft protection services for consumers and fraud and risk solutions for enterprises. We protect our
members by constantly monitoring identity-related events, such as new account openings and credit-related applications. If we detect that a mem ber’s
personally identifiable information is being used, we offer notifications and alerts, including proactive, near real-time, actionable alerts that provide our
members peace of mind that we are monitoring use of their identity and allow our members to confirm valid or unauthorized identity use. If a member
confirms that the use of his or her identity is unauthorized, we can proactively take actions designed to protect the member’s identity. We also provide
remediation services to our members in the event that an identity theft actually occurs. We protect our enterprise customers by delivering on-demand identity
risk and authentication information about consumers. Our enterprise customers utilize this information in real time to make decisions about opening or
modifying accounts and providing products, services, or credit to consumers to reduce financial losses from identity fraud.
The foundation of our differentiated services is the LifeLock ecosystem. This ecosystem combines large data repositories of personally identifiable
information and consumer transactions, proprietary predictive analytics, and a highly scalable technology platform. Our members and enterprise customers
enhance our ecosystem by continually contributing to the identity and transactio n data in our repositories. We apply predictive analytics to the data in our
repositories to provide our members and enterprise customers actionable intelligence that helps protect against identity theft and identity fraud. As a result of
our combination of scale, reach, and technology, we believe that we have the most proactive and comprehensive identity theft protection services available, as
well as the most recognized brand in the identity theft protection services industry.
On December 11, 2013, we acquired mobile wallet innovator Lemon for approximately $42.4 million in cash and launched our new LifeLock Wallet
mobile application. The LifeLock Wallet mobile application allows consumers to replicate and store a digital copy of their personal wallet contents on their
smart device for records backup, as well as transaction monitoring and mobile use of items such as credit, identification, ATM, insurance, and loyalty cards.
The LifeLock Wallet mobile application also offers our members one-touch access to our identity theft protection services.
We derive the substantial majority of our revenue from member subscription fees. We also derive revenue from transaction fees from our enterprise
customers.
We offer our consumer identity theft protection services on a monthly or annual subscription basis. As of December 31, 2013, approximately 60% of
our members subscribed to our consumer services on an annual basis. We currently offer our consumer services under our basic LifeLock, LifeLock
Command Center, LifeLock Junior, and premium LifeLock Ultimate services. Our average revenue per member is lower than our retail list prices due to
wholesale or bulk pricing that we offer to strategic partners in our embedded product, employee benefits, and breach distribution channels to drive our
membership growth. In our embedded product channel, our strategic partners embed our consumer services into their products and services and pay us on
behalf of their customers; in our employee benefit channel, our strategic partners offer our consumer services as a voluntary benefit as part of their employee
benefit enrollment process; and in our breach channel, enterprises that have experienced a data breach pay us a fee to provide our services to the victims of the
data breach. We also offer special discounts and promotions from time to time to incentivize prospective members to enroll in one of our consumer services.
Our members pay us the full subscription fee at the beginning of each subscription period, in most cases by authorizing us to directly charge their credit or
debit cards. We initially record the subscription fee as deferred revenue and then recognize it ratably on a daily basis over the subscription period. The prepaid
subscription fees enhance our visibility of revenue and allow us to collect cash prior to paying our fulfillment partners.
Our enterprise customers pay us based on their monthly volume of transactions with us, with approximately 40% of them committed to monthly
transaction minimums. We recognize revenue at the end of each month based on transaction volume for that month and bill our enterprise customers at the
conclusion of each month.
We have historically invested significantly in new member acquisition and expect to continue to do so for the foreseeable future. Our largest operating
expense is advertising for member acquisition, which we record as a sales and marketing expense. This is comprised of radio, television, and print
advertisements; direct mail campaigns; online display advertising; paid search and search-engine optimization; third-party endorsements; and education
programs. In 2013, 2012, and 2011, our total advertising expense was $86.2 million, $66.0 million, and $54.6 million, respectively. We also pay internal
and external sale commissions, which we record as
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