Company Overview: NortonLifeLock Inc. (NASDAQ: NLOK) is engaged in offering a broad range of application and software products for firewall, virus protection, virtual private network (VPN), vulnerability management, security services and intrusion detection. The company carries out its operation across three geographic regions, namely: (1) Americas (which includes the US, Canada, and Latin America), (2) Europe, the Middle East and Africa, and (3) Asia-Pacific Japan.
NLOK Details
Geographical Expansion and Acquisition Synergies to Aid NLOK: NortonLifeLock Inc. (NASDAQ: NLOK) was founded in 1982 and was previously known as Symantec Corporation. However, in November 2019, it changed its name to NortonLifeLock, after the sale of its enterprise business to Broadcom Inc. The company is one of the top providers of cybersecurity solutions and is known for some of the most widespread brands in security and utilities, including Norton Anti-Virus, Norton System Works, and Norton Internet Security. The company protects personal computers and mobile devices against malware and viruses via its subscription-based Norton security solutions. The company’s LifeLock solution offers monitoring, alerts, and restoration services to its customers, thereby providing identity theft protection solutions.
Recently, the company stated that it has inked a deal to buy Avira from Investcorp Technology Partners for a purchase consideration of $360 million in cash. The buyout is expected to be completed in 4QFY21. NLOK anticipates expanding its Norton 360 platform and its go-to-market model, via Avira’s portfolio of cybersecurity and privacy solutions. Avira presents greater than 30 million active devices and has more than 1.5 million paying customers. Consequently, its addition will enhance NortonLifeLock’s customer base and is likely to serve as a major growth driver in the long term.
For the financial year ended on 2 April 2020, total net revenues stood at $2,490 million. Net income for the company stood at $3,887 million, up from the year-ago figure of $31 million. Looking at the past performance, NLOK delivered a CAGR of ~4.6% and 11.8% in revenues and net income, respectively, over the period of FY16-FY20.
Past Performance During 2016 – 2020 (Source: Company Reports)
NLOK also expects to aid its top-line growth by 3 points through the Avira acquisition and resulting in an operating margin of nearly 50% after considering the buyout synergies. Furthermore, NLOK plans to bolster its international footprint by acquiring coverage in Europe and key emerging markets. Going forward, the company expects to benefit from the expansion of its Norton 360 memberships in countries like EMEA, Asia Pacific, and Latin American regions.
It is worth mentioning that a wide range of worldwide workforce has been working from home to suppress the circulation of the COVID-19 pandemic. Consequently, people logging into employers' networks involves larger security. This movement is expected to augment demand for the company’s products during the global uncertainties. This apart, robust client retention and renewal rates are expected to aid NLOK’s financial results, going forward. At the end of the 2QFY21, the company’s client-retention rate was 85%. The company’s continuous focus on expanding partner channel and employee benefit programs were key positives during the second quarter.
2QFY21 Key Financial Highlights: During the quarter, the company reported non-GAAP earnings of 36 cents per share, which doubled from the year-ago figure of 18 cents. In 2QFY21, revenues came in at $626 million, up 5% year over year. The year over year increase in both top-line and bottom-line was mainly due to robust execution, favorable foreign currency exchange rates, and the elimination of the company’s final stranded costs. Direct average revenue per user (ARPU) during the quarter came in at $9.10 per month, up 2% from the prior corresponding period. The company added 117,000 customers in 2QFY21, taking the total count to 20.7 million. During the quarter, gross profit stood at $536 million, which increased by 5.9% on a year over year basis. Non-GAAP operating income skyrocketed by 71.6% year over year and came in at $314 million.
2QFY21 Results Highlights (Source: Company Reports)
Key Developments: The company unveiled new solutions such as Norton 360 for Gamers, which is designed to foster cybersecurity in the gaming universe. It also launched Norton 360 with LifeLock for family, an all-in-one security plan to protect the entire family’s identities, devices, and online privacy. The company has also bolstered its confidentiality subscription by launching Privacy Monitor Assistant, which supports customers to regain control over their private information. These new initiatives are likely to drive innovation in the company’s product portfolio and enhance user acquisition. This, in turn, is expected to aid the company’s financial performance, going forward.
Balance Sheet and Liquidity Position: The company exited the quarter, with a cash balance of $1.05 billion, as compared to $1.1 billion reported at the end of the previous quarter. Long-term debt came in at $3.56 billion at the end of 2QFY21, down from the $2.84 billion reported in the prior-quarter end. Cash used from operations, during the quarter stood at $113 million. During the first six months of FY21, the company generated an operating cash flow of ~$57 million.
Liquidity Highlights (Source: Company Reports)
Key Metrics: Gross Margins, EBITDA Margin, and Net Margin for 2QFY21 stood at 85.6%, 45.2%, and 26.5, higher than the industry median of 77.3%, 11.3% and -0.8%, respectively. Current ratio came in at 1.02x in 2QFY21, higher than 1QFY21 figure of 0.77x. Net debt leverage in 2QFY21 stood at 2.0x.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 52.96% of the total shareholding. Capital World Investors and The Vanguard Group, Inc. hold the maximum interests in the company at 12.43% and 10.78%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Risks: Although NLOK’s long-term business fundamentals look promising, the ongoing economic glooms in the wake of the global coronavirus outbreak remain a potential headwind. Further, the company’s fundamentals are likely to be negatively impacted due to the sale of its enterprise security asset to Broadcom and ID Analytics business to LexisNexis Risk Solutions, part of RELX Plc. NLOK’s leveraged balance sheet might also pose risks with a principal debt of $3,625 million and a cash balance of $1,049 million as of October 2, 2020.
Outlook: For 3QFY21, NLOK expects revenues to be in the range of $625 million and $635 million, implying a 4-5% growth, after adjusting for ID Analytics revenues of $15 million. Furthermore, for 3QFY21, the company is predicting earnings on a non-GAAP basis from continuing operations to be in the ambit of 36 cents and 38 cents per share.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
Stock Recommendation: The stock of NLOK closed at $20.77 with a market capitalization of ~$12.29 billion. The stock is currently trading below the average of its 52-week low and high level of $15.12 and $28.70, respectively. The stock went up ~4.2% in the last six-month period and ~39.2% in the last one year. On a technical analysis front, the stock has a support level of ~$20.1 and a resistance level of ~$22.43. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like we have taken the peer group - Palo Alto Networks Inc (NYSE: PANW), CrowdStrike Holdings Inc (NYSE: CRWD), and Proofpoint Inc (NASDAQ: PFPT), to name a few. Considering the above factors, robust 2QFY21 results, decent outlook, strong liquidity position, acquisition synergies, and current trading level, we recommend a “Buy” rating on the stock at the closing price of $20.77, down by 0.05% on 4 January 2020.
NLOK Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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