NortonLifeLock Inc. (NLOK, Financial) is a well-known cybersecurity player with offerings such as Norton System Works, Norton Anti-Virus and Norton Internet Security.
The company came into existence after the $11 billion acquisition of Symantec's enterprise business by Broadcom (AVGO, Financial) in 2019. NortonLifeLock has been on a decent growth trajectory with its management making continuous efforts to increase its subscriber base. Some good examples of these efforts include introducing dark web monitoring as a new offering to its Norton 360 suite and increasing the penetration of international markets with the acquisition of Avira. In addition, the remote-working and e-learning culture that has resulted from the Covid-19 pandemic has given a huge boost to the demand for online protection tools. The company does appear to be a compelling pick within the consumer cybersecurity space.
Financial performance
NortonLifeLock witnessed a robust third quarter, which was driven by major growth in direct-to-consumer revenue as well as partner revenue. The company reported a top line of $639 million, demonstrating 3.40% growth as compared to the $618 million reported in in the prior-year quarter. The company beat the analyst consensus estimate of $630.50 million. Its gross margin of 86.38% and operating margin of 43.97% were also higher than that in the same quarter of the previous fiscal year. The company's adjusted earnings per share of 38 cents were 1 cent above the analyst consensus estimate and its $293 million worth of operating cash flows were also particularly encouraging for shareholders.
The Avira acquisition
NortonLifeLock closed the previously announced acquisition of consumer-focused cybersecurity and privacy player Avira in January in an all-cash deal valued at $360 million from private equity player Investcorp Technology Partners.
Interestingly, Investcorp acquired Avira eight months ago for a consideration of $180 million, which raises the question of whether NortonLifeLock overpaid for the company. Avira has been known to have a particularly strong base in Europe and key emerging markets and operates on a freemium model. Notably, it has a gaming booster function that can be incorporated into the company's Norton 360 platform for gamers. This acquisition has moved the company from the number three spot in market share to number one in Germany, helping Norton reach a larger consumer base globally.
Through this acquisition, NortonLifeLock will potentially acquire 1.3 million paying customers and over 30 million active users, which are expected to contribute to its top-line growth in the coming years. In addition, the company expects to add approximately three points of growth to its total revenue and has a target to achieve 50% operating margin post synergies within six months. It is worth noting that Avira has offerings that cover capabilities in privacy performance and internet of things, including Phantom VPN, Privacy Pal, threat intelligence and so on, that extends beyond its primary antivirus offerings. Its futuristic nature of offerings is definitely a big green flag in favor of the acquisition and possibly even justifies the $360 million price tag.
Norton 360 platform evolution
Norton 360 is a subscription-based all-in-one protection plan that continues to be one of the key contributors to the company's customer count growth and retention success. In January, the company introduced the Norton 360 app that enables customers to access their device security, online privacy and identity features in a single location. This led to higher customer engagement. The easy-to-use app makes it convenient for customers to access and manage their cyber safety tools from one dashboard. Additionally, the company has added dark web monitoring into its Norton 360 offering across multiple countries, which shows Norton is making immense efforts to expand its international consumer base.
It is also worth mentioning that the rise in hacking events across the globe has increased the demand for cybersecurity-related products because the company witnessed a 5% growth in direct-to-consumer revenue. I believe these innovative solutions could help the company win customers, consequently increasing its business volume.
Competitive risks and final thoughts
NortonLifeLock has witnessed a decent appreciation in stock price along with good revenue growth, but the multiple expansion has been limited. Even today, the company is valued at an enterprise-value-to-revenue ratio of around 6, which hasn't changed much. One of the biggest factors associated with this limitation is that NortonLifeLock faces intense competition from companies such as Microsoft (MSFT, Financial), Intel (INTC, Financial) (through its McAfee acquisition), Kaspersky and Avast that are gaining market share. The Avira acquisition does put the company in a good position given the strong growth in online gaming and IoT, coupled with the need for better antivirus protection. Overall, I believe the stock definitely deserves a "hold" rating at current levels.
Disclosure: No positions.
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