Fitch Ratings has affirmed Gen Digital Inc.'s (fka NortonLifeLock Inc.; NYSE: GEN) Long-Term Issuer Default Rating (IDR) at 'BB+'.

Fitch has also affirmed GEN's senior secured term loans and the secured revolver at 'BBB-'/'RR1' and its senior unsecured notes at 'BB+'/'RR4'. The Rating Outlook remains Negative.

The Negative Outlook reflects GEN's elevated leverage following the acquisition of Avast plc (Avast), which was largely funded with debt. GEN is a significant generator of FCF, and Fitch forecasts that the company's leverage (as defined by Fitch) will remain higher than the negative rating sensitivity of 3.5x for the next several quarters. GEN is committed to having long-term net leverage (as defined by the company) of approximately 3.0x, and Fitch believes the company can achieve this by balancing debt reduction with its share repurchase plan.

Key Rating Drivers

FCF to Lower Debt: Following the acquisition of Avast, GEN has significantly increased its leverage, and Fitch now forecasts leverage (defined as EBITDA Leverage) to be approximately 4.0x at the end of FY24, higher than previously anticipated. With growth in EBITDA, mandatory amortization payments, and expectations for the early repayment of debt, Fitch expects leverage to fall to below 3.5x at the end of FY25. GEN has publicly stated that it has a long-term net leverage target (as defined by GEN) to be approximately 3.0x.

Avast Merger Increases Leverage: In September 2022, GEN completed the acquisition of Avast, a company based in Prague. When the merger occurred, the company changed its name from NortonLifeLock Inc. to Gen Digital Inc. Avast was acquired for just over $9 billion including the repayment of $942 million of Avast's debt. Shareholders were paid with cash, which was largely funded with debt, and 94 million shares of GEN's common stock that was valued at $2.1 billion.

Capital Allocation Strategy: GEN intends to utilize its FCF for both debt repayment and share repurchases. Fitch believes the company will reduce debt and over the past four fiscal years, it has repaid $2.4 billion of debt while repurchasing $1.9 billion of equity. Before dividends, Fitch estimates that GEN will generate $1 billion or more annually over the forecast horizon. During the first nine months, approximately $904 million was used for share repurchases. In the first month of 4QFY23, GEN voluntarily repaid $250 million of the TL B.

Share Repurchase Program: GEN has stated that its long-term target is to reduce its diluted share count to pre-Avast merger levels and for the merger, 94 million shares were issued. During 3QFY23, GEN spent $500 million to repurchase 23 million shares leaving another 71 million shares to bring the count to pre-merger levels. With the stock price just over $21 per share (as of Feb. 15, 2023), that translates into another $1.5 billion of share repurchases.

High Interest Expense: With rising interest rates, GEN will have a significant amount of cash directed toward interest expense. Prepayment of debt will reduce the interest expense burden and help the company reach its publicly stated target of having net leverage (as defined by GEN) of approximately 3.0x by the end of FY25.

Somewhat Diverse Offerings: For the quarter ending Dec. 30, 2022, GEN had 65% of its revenues from consumer security solutions such as Norton 360 Security, Avast Security offerings, Norton Secure VPN, Avira Security and other consumer security offerings. Almost 35% of revenues were from Identity and information protection includes revenues from Norton 360 with LifeLock offerings, LifeLock and other privacy offerings. The remaining 2% of revenues are derived from legacy revenues. Approximately 66% of revenues were from the Americas, 24% from EMEA and 10% were from APJ for the recent quarter.

Avast Acquisition Strategy: Avast's focus was more on cyber privacy, and it did not have a strong presence in North America. Norton has more of a focus on cyber security, and LifeLock has a focus on identity, and both of these offerings are largely in the U.S. and Canada. Over time, GEN plans to focus on its cross-sell/upsell opportunities.

Negative Outlook: The Negative Outlook reflects Fitch's concern that leverage may be above the negative rating sensitivity of 3.5x for a sustained period of time. GEN has the ability to generate significant FCF, which may be directed toward share repurchases, acquisitions, debt reduction and dividends.

Should the company prioritize debt paydowns over the next several quarters, Fitch would expect leverage to fall below 3.5x and the Outlook could return to Stable. On the other hand, if GEN prioritizes returns to shareholders and debt funded acquisitions, Fitch would expect leverage to remain over 3.5x for an extended amount of time, which could result in a one-notch downgrade to 'BB'.

Derivation Summary

GEN's 'BB+' rating reflects its significant size, strong brand recognition, its operating profile and EBITDA margins in the mid-50's. With a strong focus on the consumer market, the company had actively been looking to grow and expanded its international presence. The Avast acquisition helps GEN achieve these goals.

The company's rating is two notches above MeridianLink (MLNK) and Instructure Holdings, Inc. (INST), which are not direct peers, yet all three are public software companies rated in the 'BB' range. MLNK is focused on software systems for financial institutions. INST is focused on learning management systems for educational institutions. The rating for GEN is higher given its size and stronger credit profile. MLNK and INST have EBITDA margins in the low 40's and 30's, respectively, which is much lower than GEN. MLNK and INST are both significantly smaller than GEN, which generates about 10x the EBITDA of the smaller rated software companies. Fitch expects gross leverage for both MLNK and INST to be below 4.0x.

GEN is rated below other technology peers including Constellation Software (BBB+/Stable) and Cadence Design Systems (A-/Stable). These are higher rated than GEN since they have stronger credit profiles. However, GEN has consistently had stronger EBITDA and FCF margins, which benefit from its strong consumer market position.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Revenue growth in the double digits in FY24 reflecting the Avast acquisition and strong single digit beyond then, reflecting Fitch's assumptions for the consumer's appetite for cybersecurity software, privacy and identity protection;

Gross margins are in the range of low 80's to nearly 85%;

EBITDA margins of in the mid-50's reflecting increased operating efficiencies longer-term;

FCF is directed toward debt repayment and shareholder returns continue through flat dividends and share repurchases;

Fitch assumes that GEN may be acquisitive once leverage is reduced to its net leverage (as defined by GEN) target of 3.0x.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to a Stable Outlook:

Should Fitch anticipate that GEN will reduce leverage (defined by Fitch as EBITDA Leverage) to below 3.5x over the next several quarters, the Outlook could be revised to Stable from Negative.

Factors that could, individually or collectively, lead to Positive rating action/upgrade:

Fitch's expectation of leverage below 2.5x on a sustained basis;

Debt/FCF ratio below 5x on a sustained basis.

Factors that could, individually or collectively, lead to Negative rating action/downgrade:

Fitch's expectation of leverage above 3.5x on a sustained basis;

Debt/FCF ratio above 7.5x on a sustained basis;

Evidence of negative organic revenue growth and/or erosion of EBITDA and FCF margins;

Significant debt-financed acquisitions or share repurchases that significantly weaken the company's credit profile for a prolonged period of time.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Liquidity Expected to Remain Solid: As of Dec. 30, 2022, GEN had total liquidity of $2.3 billion including $812 million of cash on the balance sheet and a fully undrawn secured $1.5 billion revolving credit facility due 2027.

GEN has approximately 74% of its debt as floating rate debt and the remaining 26% is fixed rate debt. GEN's Term Loan A2 amortizes at 5% per annum while Term Loan B amortizes at 1% per annum. The nearest debt maturity is in 2025 when $1.1 billion of senior notes become due. With strong FCF, Fitch expects GEN's liquidity to remain robust.

Issuer Profile

Gen Digital, Inc. (f.k.a. NortonLifeLock, Inc.; NYSE: GEN) is a global provider of consumer cyber safety solutions, with more than 500 million users in over 150 countries. The company offers consumers both premium and 'freemium' software. Gen Digital provides solutions for cybersecurity, privacy and identity protection.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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