Gen Digital Inc. (GEN)
Current Price (as of 4/16/2024): $20.44
Business
Gen Digital Inc. (GEN), formerly known as NortonLifeLock, Inc., is a global provider of Cyber Safety solutions. They aim to protect users from viruses, malware, adware, ransomware, identity theft, home title theft, data breaches, and other threats. GEN also offers virtual private network (VPN) solutions and social media monitoring services for its users. The company provides both free and paid subscription-based Cyber Safety solutions for individuals and small businesses (<250 employees), having sold its Enterprise Security software division for $10.7 billion in 2019. With approximately 500 million total users across more than 150 countries, GEN boasts 65 million paid Cyber Safety customers.
GEN derives its revenues from three geographical regions: the Americas (US, Canada, and Latin America), which account for 68% of revenue; EMEA, accounting for 21% of revenue; and APJ (Asia Pacific and Japan), accounting for 11% of revenue. The company’s Cyber Safety software and services generate revenues across three key categories: security and performance, identity protection, and online privacy.
The security and performance category comprises Norton, Avast, Avira, AVG, and CCleaner offerings, providing real-time protection for PCs, Macs, and mobile devices. The identity protection segment includes LifeLock Identity Theft Protection and Restoration, Dark Web Monitoring, Home Title Protect, Social Media Monitoring, and Avast Secure Identity offerings.
Lastly, the online privacy segment consists of VPN solutions that enable customers to securely transmit and access private information, such as passwords, banking info, and credit card numbers, when using public Wi-Fi on PCs, Macs, and mobile iOS and Android devices. Additionally, this segment includes BreachGuard and similar browser extension solutions, offering secure, speedy browsing across multiple devices while shielding sensitive online data from threats like malicious websites, phishing, and unauthorized data collection.
Positive Outlooks
- GEN is combating AI-powered targeted email scams and attacks with its own AI technology, which helps users protect themselves and their loved ones from online threats. The Norton Genie app, as shown in the slide below, is a brand-new AI-powered innovation offered by GEN. It immediately assists users in identifying potential scams when the text or website in question is entered into the Genie application.
Additionally, GEN has launched Total Radius as part of its Reputation Defender business. This innovative product, powered by AI, provides a fully-automated analysis of all available information online to help customers quickly identify threats and protect themselves.
- With over 500 million freemium users, GEN plans to cross-sell them into paid offerings, which would translate into billions of dollars in revenue. The company’s current goal is to retain and grow its user base through bundling, offering several products and services for sale as one combined product. This will allow current and potential customers to simply use one vendor, GEN Digital Inc., for all their cyber safety needs.
- The company’s overall customer retention rate remains steady at 77%, with a long-term goal of reaching an 80% retention rate. GEN is focused on driving retention rates up by improving user engagement and introducing new products and features. By 2027, GEN also plans to accelerate revenue to mid-single digits, grow EPS by 12% to 15%, and reduce its leverage to less than 3x EBITDA.
- GEN looks to accelerate customer growth through international expansion by capitalizing on growing internet connectivity in emerging markets. GEN says its product offerings are resonating with customers in these markets.
- GEN released a new Norton small business product in September last year, catering to freelancers, gig workers, and very small businesses. The company has seen sales double from this product offering and intends to invest more in this segment.
- GEN's partnership strategy significantly extends its customer base and represents a robust revenue stream for the company. Collaborating with telecommunications giants such as TELUS and British Telecom, GEN reaches customers through bundled solutions. Additionally, GEN provides private browser protection via search partnerships with major platforms like Google, Bing, and Yahoo. These collaborative channels contribute approximately $400 in annual revenue.
- GEN generates over $700 million in free cash flow annually. The firm is committed to returning 100% of excess free cash flow to shareholders through dividends and its share buyback program. Currently, GEN has approximately $730 million remaining in its share buyback program.
Negative Outlooks/Risks
- GEN’s business model primarily targets individuals rather than enterprises, exposing the company to intense competition due to the lower switching costs associated with individual consumers. For instance, GEN contends with significant competition from various companies, including software vendors specializing in Cyber Safety solutions such as Bitdefender, Kaspersky, McAfee, and Trend Micro. Additionally, operating system providers like Apple, Google, and Microsoft, as well as companies such as Nord, Life360, and LastPass, present formidable competition.
In the identity protection segment, GEN faces competition from credit bureaus like Equifax, Experian, and TransUnion. Unfortunately, some of GEN’s competitors possess greater financial resources, enabling them to offer competitive solutions at lower prices or even for free.
- While GEN generates strong free cash flow, it currently holds over $9.081 billion in long-term debt, resulting in an alarming debt-to-capital ratio of 77%. This ratio indicates that the company finances 77% of its operations through debt, signifying significant financial leverage. If the company's revenues were to decline due to intense competition or adverse macroeconomic conditions, such as a recession, it may encounter difficulties in meeting its debt obligations.
- GEN generates significant revenues outside of the United States, and this is expected to grow as the company expands internationally. Therefore, changes in economic conditions that affect foreign currency exchange rates can lead to transaction exposure, causing fluctuations in profits.
Financial Results and Outlook
Revenue and earnings per share figures came in at the low end of guidance at $951 million and $0.49 for the third quarter of FY2024, ending on 12/29/23. This forced the company to lower its full-year outlook for revenues to $3.805 billion to $3.815 billion, down from $3.810 billion to $3.835 billion. GEN also lowered its expected EPS figures for FY2024 to the range of $1.95 to $1.97, from $1.95 to $2.00. For the fourth quarter of FY2024, GEN anticipates revenue to range from $960 million to $970 million and expects EPS to be in the range of $0.52 to $0.54.
Valuation
GEN has performed relatively in line with the S&P 500 over the past 6 months, providing investors with a 16.33% return compared to the S&P 500’s 15.88% return. GEN’s Forward Non-GAAP P/E of 10.54x says that investors are paying 55.54% less for each dollar of annual earnings than the IT sector median of 23.70x. Furthermore, GEN's Forward Non-GAAP PEG (Price/Earnings to Growth) ratio of 0.92 suggests that the stock is trading at a discount to its earnings per share growth rate. Additionally, it indicates that investors buying GEN are paying less per unit of earnings growth compared to the IT sector median PEG ratio of 1.86. GEN’s forward Price/Book ratio of 5.31 is 36.11% higher than the IT sector median of 3.90, indicating that investors are paying 5.31 times more than what the company is worth or what its assets can be sold for.