Gen Digital Earnings: Strong Customer Adds Coupled With Improved Profitability Mark a Solid Quarter

We are maintaining our $21 fair value estimate for no-moat Gen Digital GEN after the firm reported a solid second quarter largely in line with our prior estimates. Along with the second-quarter results, the firm also hosted an investor day, detailing its long-term operating model and reiterating the cost synergies the firm expects to extract following its Avast acquisition in calendar 2022. While we expect Gen’s adjusted operating margin to expand over our explicit forecast, we view Gen as a no-moat business, primarily due to its presence in a commodity-like consumer security market that has limited customer switching costs. Following the earnings report, Gen’s shares are trading in the 3-star range and fairly valued.

Gen’s top line for the second quarter grew 27% year over year to $948 million (after adjusting for Avast’s acquisition, Gen’s organic revenue growth rate was 3%). Driving this top-line expansion was an uptick in Gen’s average revenue per user, or ARPU, which grew to $7.28, up $0.30 from a year ago. As a growth lever, management had previously set a goal of increasing the customer retention within Avast’s customer base. We saw some positive results on this front, with the firm’s overall retention increasing 200 basis points to 77%, driven by an uptick in Avast customer retention.

On the customer additions front, after multiple quarters of macro-induced declines, Gen’s customer base finally began to grow again. The firm’s customer count for the second quarter ended at 38.5 million, up 0.38 million sequentially. We see this growth as an indication that management’s recalibrated marketing strategy is resonating with its potential customer base.

On the profitability front, Gen’s continued focus on operational discipline bore fruit as the firm expanded adjusted operating margins 30 basis points sequentially to 57.9%. Looking ahead, we are modeling incremental expansion in the firm’s adjusted margins as it extracts cost synergies from the Avast acquisition.