NortonLifeLock: Bullish On Consumer CyberSecurity
- NortonLifeLock reported its latest quarterly result highlighted by solid growth and firming profitability.
- The company continues to add customers across an expanding product mix supporting a positive long-term outlook.
- Cybersecurity tools for consumers are gaining importance, positioning NortonLifeLock to consolidate its market position.
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NortonLifeLock Inc. (NLOK) is a leader in cybersecurity tools for consumers across its flagship computer anti-virus software and identity protection solutions within its "Norton 360" platform. The pandemic over the past year has driven a recognition for the importance of online protection against cyber threats across devices including mobile. The company just reported its latest quarterly result highlighting continued operating and financial momentum with a growing customer base. We are bullish on NLOK viewing the recent correction in shares as a buying opportunity. This is a high-quality stock supported by solid fundamentals and a positive long-term outlook.
NLOK Earnings Recap
NortonLifeLock reported its fiscal 2022 Q1 result on July 27th with non-GAAP EPS of $0.42 which was $0.01 ahead of market estimates. Revenue of $691 million climbed 12.5% year-over-year and was also above expectations. The story here financially has been an effort towards efficiency with cost cuts implemented during the pandemic. Operating expenses as a percentage of revenue at 35.5% declined by an impressive 460 basis points from last year. Management explains some of this has been driven by a new marketing strategy targeting more cost-effective opportunities. The result is a 22% increase to the operating income reaching $354 million and an operating margin of 51.2%, a record for the company and up from 47.1% in the period last year.
(Source: Company IR)
Beyond the revenue growth, the important point is that the number of direct customers continues to grow with the 7th consecutive quarter of net adds. NortonLifeLock now has 23.1 million customers, up 11% y/y or an extra 2.6 million paying users across its product and services lineup. Within this figure, about 1.6 million customers came from the acquisition of "AVIRA" in December 2020. Still, the company added 150K compared to the previous quarter. A metric here to watch is the direct average revenue per user "ARPU" at $8.84, which is down 2% from $9.03 in the period last year, but up from $8.80 in Q4. Management explains that the change is based on the product mix with an expectation to remain relatively stable.
(Source: Company IR)
In terms of product updates, NortonLifeLock took steps in the quarter to further integrate AVIRA features into its "Norton 360" platform. Management sees momentum from small and medium-sized businesses utilizing identity theft protection solutions as a growth area. The company is also betting on security functions and tools for the PC gaming market while also noting continued partnerships with manufacturers for pre-installed security software and VPN solution in the OEM business. An interesting new product is "Norton Crypto" which is still in the early stages of rolling out but allows users to use home PCs to mine cryptocurrency and safely track, transfer and store earnings in the cloud. Management projected a positive outlook during the conference call:
We are off to strong start to fiscal year 2022, with solid financial results for Q1. The direct-to-consumer demand for cyber safety remains a global opportunity, and our Q1 results are evidence of that evolving and underpenetrated opportunity... At the heart of it, it is critical for us to focus on product and service innovation. This is the only way we can stay at the fore front of the ever-changing scope and sophistication of cybercrimes and offer consumers the best in cyber safety.
It's worth mentioning that there have been rumors regarding a potential acquisition or merger with "AVAST Software", a current competitor with consumer anti-virus software. During the conference call, management did comment that discussions between the two companies are ongoing although there were no concrete developments to confirm. NortonLifeLock has a long history of pursuing acquisitions and any new deal is simply part of the long-term strategy.
Finally, the company ended the quarter with $1.2 billion in cash against $3.9 billion in debt. Considering $1.3 billion in adjusted EBITDA over the trading twelve months, the net-debt to EBITDA leverage ratio at 1.9x is indicative of a solid balance sheet.
(Source: Company IR)
NLOK Stock Price Forecast
One of the questions for NortonLifeLock was whether the trends from last year simply represented a windfall from the pandemic dynamics. We believe this quarterly report was strong enough to confirm that the underlying growth trends represent a sustained demand for consumer cybersecurity solutions which we believe can continue. Headline making security threats from ransomware and hackers highlights the importance of online protection which is a market NortonLifeLock is well-positioned to consolidate its leadership.
The attraction here comes down to the company's financial profile. NortonLifeLock is profitable and generates significant cash flows. Management is guiding for full-year revenue growth between "8% and 10%+" while the EPS target range of $1.65 and $1.75 implies an 18% increase at the midpoint from $1.44 in fiscal 2021. According to consensus estimates, the market forecast for revenue and EPS area is within the range of management guidance for this year. Looking ahead, the market sees growth averaging in the mid-single digits while EPS climbs 13% in fiscal 2023 and 8% in fiscal 2024.
In terms of valuation, NLOK is currently trading at a forward P/E of 14.3x on consensus 2022 EPS. The other metric we're looking at is the price to free cash flow which is also around 14x considering nearly $1 billion in free cash flow over the past year. Both of these measures are attractive in our opinion for a segment leader with a positive long-term outlook.
Norton's subscription model with a high retention rate supports consistent cash flow generation which also makes NLOK a high-quality dividend stock. The company pays a quarterly dividend of $0.125 per share yielding 2%, relatively attractive within the tech sector. The annualized payout of approximately $295 million is around 25% of the free cash flow level. Longer-term, the company has an objective over the next 3-5 years to return upwards of 100% of free cash flow to shareholders between the dividend and all stock buybacks. On that point, the company maintains $1.8 billion remaining in the current share buyback program, which can further add to the shareholder return.
Is NLOK a Buy?
There's a lot to like about NLOK which has successfully moved beyond its legacy "Anti-Virus" suite into a more diversified portfolio of cyber safety solutions that have gained importance as more devices are connected to the internet.
We rate shares of NLOK as a buy with a price target of $29.00 for the year ahead representing a 17.5x forward P/E ratio. The strong financial profile with firming margins and segment leadership supports an expansion of the valuation warranting a higher premium for the stock. The bullish case here is that the demand for consumer cybersecurity tools continues to grow to allow to company to surpass expectations. Investors should also pay attention to any update regarding the potential AVAST acquisition particularly as it relates to the terms of the deal. We view an entry into the European market and a global expansion opportunity as a long-term positive for the company.
In terms of risks, beyond a deterioration to the global macro outlook, Norton is expected to trend in consumer spending. Weaker economic conditions can pressure growth adding to volatility in the stock. Key monitoring points over the upcoming quarters include the customer additions as well as the operating margin which will be important for management to keep elevated.
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This article was written by
BOOX Research is now Dan Victor, CFA
15 years of professional experience in capital markets and investment management at major financial institutions.
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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in NLOK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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