Gen Digital Remains Ahead of the Pack in Increasingly Commodified Consumer Security Segment

Analyst

Malik Ahmed Khan

We think Gen Digital is a strong player in the consumer-oriented security space. With offerings ranging from security, identity protection, and privacy, Gen has its fingers in many consumer-focused pies. However, as we look at the overall consumer-focused cybersecurity space, we see cutthroat competition, a lack of pricing power, and a lack of evident customer switching costs. With these factors top of mind, we expect Gen's future growth prospects to not be in excess of low single digits.

The business' overall strategy relies on three levers for growth: international expansion, partner-based revenue streams, and bundled offerings. While all three strategies can help the firm attain more customers or increase its average revenue per user, ARPU, we find it pertinent to differentiate between its sound strategies and our bearish outlook on the overall industry. 

As we think of the industry's outlook, Gen's three key end markets—security, identity protection, and privacy—are teeming with competitors. At the same time, it is important to highlight Gen's strategies that we think are sound and will allow the firm to grow despite a challenging competitive landscape. First, the firm's focus on international expansion is well reasoned, and we see growth potential in Asia and EMEA. Second, the firm's emphasis on bundling can allow it to create more sticky clients. Lastly, we think the firm's emphasis on partner-based revenue streams can allow it to create more certainty around its top line. Embedding Gen's offerings in an existing ecosystem of applications within a company can allow it to grow its installed base organically.

All in all, we are cognizant of Gen's strengths as a strong player in the consumer-focused cybersafety space and the challenging landscape the firm occupies. While we view the firm's strategies in maneuvering the space as sound, we believe the industry's competitive dynamics will restrict Gen's future growth potential.

Business Strategy & Outlook

We assign a no moat rating to Gen. While we think Gen is a strong performer in the consumer-focused cybersecurity space, we view the overall space as not conducive to economic moats. This structural disadvantage is due to cutthroat competition, the lack of pricing power, a high number of suppliers, and complementary offerings from operating systems such as Microsoft. Due to these factors, we remain unconvinced of Gen’s ability to carve out an economic moat in this space owing to a lack of customer switching costs.

When thinking about the software space as a whole, we typically find consumer-focused businesses to be less moaty than their enterprise-oriented counterparts. While we assign narrow and wide economic moats to cybersecurity vendors under our coverage, those moats are mostly built on the foundations of high customer switching costs, as enterprise customers often have more to lose than to gain when switching cybersecurity vendors. As a business that focuses on individuals, Gen’s products do not have high customer switching costs that typically protect moats in the cybersecurity space.

Within the software space, companies can often increase their sales by either selling more subscriptions or increasing their average revenue per user, ARPU. When thinking about the latter, firms can often upsell customers or offer bundled products at a discount to drive ARPU upward. This up-/cross-selling motion can lead to increased switching costs as a customer who uses a provider for multiple use-cases is seen as more churn-resistant. However, in Gen’s case, we have seen only modest growth in organic ARPU. We also do not see a clear path toward material ARPU expansion for the firm.

Gen can broadly be partitioned into security, identity protection, and privacy. The firm’s core offering in the security business is bundled under Norton—a recognizable brand for many consumers due to the firm's popular antivirus software. While Gen controls roughly 40% of the consumer-focused cybersecurity market, competition is plentiful. From the likes of McAfee, Trend Micro, and ESET to in-built solutions provided by operating system developers like Microsoft—we find it difficult to envision a durable competitive advantage in this space. Individual consumers, by and large, are price-sensitive, and no significant switching costs exist to prevent them from switching vendors. As a result, customer acquisition is often attained by providing bundle discounts or utilizing a "freemium" model. However, due to the lack of switching costs, customers are prone to switching away from their existing vendors provided with a steeper discount or additional offerings.

The plethora of vendors and low switching costs culminate in Gen's customer retention rate in the mid-80s. Put another way, all Gen's existing customers can be expected to churn within seven years. Also, the mid-80s figure is an overall blend for the entire company. We'd estimate a lower retention rate for customers that have only used Gen's products for a year or less—thereby informing our view on the firm's lack of customer switching costs.

Gen's identity protection segment can be categorized under its LifeLock product group. LifeLock provides identity monitoring, alerts, and restoration services for an individual's persona and accounts across a wide gamut of potentially nefarious activities. LifeLock is a popular consumer brand with a history of strong performance within this space. However, similar to the cybersecurity space discussed above, we do not view the identity protection space as conducive to economic moats. Within this space, the most obvious threat is competition from credit bureaus (Equifax, TransUnion, and Experian) and companies such as Credit Karma. All the bureaus mentioned above provide identity protection services bundles with their native credit-related offerings. We view identity protection as a natural add-on when customers think about the potential damage to their credit scores if their identity is compromised.

Another area of concern when thinking about the durability of LifeLock's business prospects is the inherent cyclicality in customer demand in the identity protection space. Customers, in our opinion, are reactive, not proactive, when it comes to identity protection. As a result, the demand for LifeLock's products is positively related to major hacks that compromise consumers' private information (such as social security numbers).

Lastly, Gen has expanded its offerings to tap into the privacy space. These offerings, such as VPNs and privacy monitors, seek to enhance a consumer's privacy and security while using the internet. Consumer-focused offerings within this space are prone to the same competitive threats as the cybersecurity and identity protection spaces listed above. With competition plentiful and a plethora of largely free web-based VPNs for customers to use, we do not believe Gen's privacy offerings warrant an economic moat.

All in all, while we view Gen as a strong performer in its respective end markets, we think that its competitive landscape is filled with trip mines that make it difficult for the firm to build out an economic moat. While the firm's recent acquisitions could help drive its top line and benefit from cost synergies, it is our opinion that the firm's core business will remain exposed to competitive threats that loom large in the consumer-focused cybersecurity, identity protection, and privacy verticals.

None

Economic Moat

Gen Digital Inc

Gen Digital, Inc. engages in the provision of security, storage, and systems management solutions. The firm focuses on providing consumer cyber safety with its business solutions. The company was founded by Gary Hendrix in April 1982 and is headquartered in Tempe, AZ.

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Gen Digital, Inc. engages in the provision of security, storage, and systems management solutions. The firm focuses on providing consumer cyber safety with its business solutions. Its brands include Norton, Avast, Lifelock, Avira, AVG, and CCleaner. The company was founded by Gary Hendrix in April 1982 and is headquartered in Tempe, AZ.

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