IPO Launch: McAfee Readies $759 Million U.S. IPO

IPOStreet

McAfee (MCFE)intends to raise $759 million in an IPO of its Class A shares, according to an S-1 registration statement.

San Jose, California-based McAfee was founded to develop computer intrusion detection and protection software for consumer and enterprise markets globally.

In 2011, McAfee was acquired by Intel (INTC). In 2017, Intel contributed McAfee to an LLC and retained 49% ownership.

51% ownership was acquired by private equity firms TPG and Thomas Bravo.

Management is headed by president and CEO Peter Leav, who has been with the firm since February 2020 and was previously CEO of BMC Software and CEO of Polycom

Below is a brief overview video of a review of McAfee Antivirus:

Source: The Cyber Lab

The company’s primary offerings include:

  • Computer endpoint protection
  • Identity protection
  • WiFi protection
  • Privacy

As of June 27, 2020, management said its consumer services protected more than 600 million devices, with some of its largest customers being government and enterprise customers.

The firm pursues enterprise and government accounts through a direct sales force, while channel partners interface with mid-market customers.

Consumers can sign up for the firm's software and services through a self-serve online process.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was stable at 0.3x in the most recent reporting period.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. MCFE’s most recent calculation was 23% as of June 30, 2020, so the firm has a ways to go in this regard.

According to a 2020 market research report by Grand View Research, the global market for cybersecurity software and services was an estimated $157 billion in 2019 and is expected to exceed $300 billion by 2027.

This represents a forecast strong CAGR of 10.0% from 2020 to 2027.

The main drivers for this expected growth are constantly changing cyber threats against a backdrop of more complicated consumer and enterprise software requirements and infrastructures.

Also, the transition of enterprise IT from on-premises to the cloud will create significant new opportunities for new services and capabilities.

Below is a chart showing the historical and projected U.S. cybersecurity market dynamics by component:

mcafeemkt

Major competitive or other industry participants include:

  • NortonLifelock (NLOK)
  • Avast/AVG
  • Kaspersky
  • Trend Micro (TMICF)
  • ESET
  • Microsoft (MSFT)
  • Symantec (Broadcom) (AVGO)
  • Palo Alto Networks (PANW)
  • Sophos (SPHHF)
  • Sentinel One
  • Cylance
  • Carbon Black (VMware) (VMW)
  • Tanium
  • Others

Financial Performance

McAfee’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increased gross profit and gross margin
  • Sharply increased operating profit and operating margin
  • Growing cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

mcafeepl

Source: Company registration statement

As of June 27, 2020, McAfee had $257 million in cash and $7.8 billion in total liabilities.

Free cash flow during the twelve months ended June 27, 2020, was $627 million.

McAfee intends to raise $759 million in gross proceeds from an IPO of 37 million of its Class A shares, offered at a midpoint price of $20.50 per share.

Class A shareholders and Class B shareholders will each be entitled to one vote per share.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $13.3 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 8.57%.

Management says it will use the net proceeds from the IPO as follows:

approximately $525.0 million to repay all outstanding obligations with respect to our Second Lien Term Loan

a final payment, which we estimate will be $22 million to pay certain affiliates of our Sponsors and Intel upon the termination of the Management Services Agreement which will terminate in connection with the completion of this offering; and

the remainder for working capital and other general corporate purposes, including the acquisition of, or investment in complementary products, technologies, solutions, or businesses, although we have no present commitments or agreements to enter into any acquisitions or investments.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Goldman Sachs, TPG Capital BD, BofA Securities, Citigroup, RBC Capital Markets, Deutsche Bank Securities, UBS Investment Bank, Mizuho, Evercore ISI, Piper Sandler, Stifel, Academy Securities, Blaylock Van, C.L. Kong & Associates, Ramirez & Co., and Siebert Williams Shank.

Commentary

McAfee is seeking public capital to pay down its significant debt load.

The company’s financials show reasonable topline revenue growth at scale, growing operating results and strong free cash flow.

Sales and Marketing expenses as a percentage of total revenue are dropping; its Sales and Marketing efficiency rate has been stable despite the Covid-19 pandemic.

The market opportunity for security software and services to consumers and enterprises is large and expected to grow at a substantial rate, so MCFE has industry tailwinds in its favor.

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 52.9% since their IPO. This is a top-tier performance for all major underwriters during the period.

As to valuation, compared to NortonLifeLock, McAfee is producing revenue growth but is asking IPO investors to pay a significant premium on an EV/EBITDA basis.

MCFE also has a material debt load and an unusual structure in that it is majority owned by two private equity firms but also 49% owned by Intel, who appears to be spinning it out after owning it outright and apparently deciding that it wasn’t core to its business.

I would like to have seen MCFE growing topline revenue at a faster rate given that the industry is expected to grow at 10% per year and MCFE is only producing 8.52% growth, slower than the industry average expectation.

While McAfee will likely perform reasonably well and it is generating significant free cash flow, I’m underwhelmed by its performance and heavy debt load, so my opinion on the IPO is NEUTRAL.

tstNEUTRAL

Expected IPO Pricing Date: October 21, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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