Gen Digital Earnings: Solid Results After Aiming To Optimize Business Following Avast Acquisition

We are maintaining our $21 fair value estimate for no-moat Gen Digital GEN after the firm kicked off fiscal 2024 with financial results largely in line with our estimates. We reiterate our belief that despite being a large fish in the consumer cybersecurity pond, Gen’s long-term financial prospects are restricted by the commodity-like nature of the consumer security market the firm operates in. At the same time, we believe Gen can expand margins as it digests the Avast acquisition and sets its target on building a more efficient combined business unit. Relatedly, we believe Gen can unlock value in Avast’s customer base by improving customer retention and increasing Avast customers’ average revenue per user which still lags Gen’s Norton offering. Following the earnings report, Gen’s shares are trading in the 3-star range and are fairly valued.

Gen’s top line for the first quarter clocked in at $946 million, up 34% year over year (after adjusting for Avast’s acquisition, Gen’s organic growth rate was in low-single digits in constant currency). Gen’s Direct ARPU, expanded to $7.26 from $7.24 in the last quarter. We see a roadmap for further ARPU expansion, especially from Avast’s customer base which had a preacquisition ARPU of roughly $4.

On the profitability front, Gen’s continued focus on operational discipline bore fruit as the firm expanded adjusted operating margins 50 basis points sequentially to 57.6%. While we don’t concur with management’s long-term expectation of a 60%-plus adjusted operating margin, we do model incremental margin expansion as the firm seeks to extract synergies from its Avast acquisition.

Gen provided guidance for the second quarter of fiscal 2024 with annual sales in the range of $940 million to $950 million and non-GAAP EPS in the range of $0.46 to $0.48. We view both these goals as attainable.