Gen Digital Earnings: In-Line Results More Than Offset by Our Lower Growth Outlook; Trim Fair Value

We are lowering our fair value estimate for no-moat Gen Digital GEN to $21 from $24 after the firm closed out fiscal 2023 with results meeting our expectations, but first-quarter guidance is below our prior forecast. We are also moderating our medium-term top-line growth estimate, which also contributed to our fair value estimate being trimmed. With shares down 2% after-hours, we view Gen’s shares as moderately undervalued. While we maintain our no moat rating for Gen, driven primarily by the commodity-like consumer cybersecurity market the firm operates in, we see a path to margin expansion as the firm seeks to build a more efficient business unit following its acquisition of Avast in fiscal 2023.

While we don’t share management’s optimistic expectations regarding the scale and timeline of these synergies being extracted following the acquisition, we believe Gen could unlock value in Avast’s customer base by increasing customer retention and expanding its average revenue per user.

Gen’s top line for the fourth quarter clocked in at $947 million, up 32% year over year (adjusting for the acquisition of Avast, sales grew 4% in constant currency). Partner sales grew by double digits for the 10th consecutive quarter. We continue to highlight growing partner revenue through an expanded ecosystem as a key long-term growth driver for Gen. Driving that top line, Gen’s ARPU expanded to $7.24 from $7.09 last quarter. Management cited increased value creation for customers as the driver behind the ARPU increase as management seeks to improve Avast customers’ ARPU (roughly $4 preacquisition).

On the profitability front, Gen’s continued focus on operational discipline bore fruit as the firm expanded adjusted operating margins 260 basis points to 57.1%. 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 extracts synergies from its Avast acquisition.