AI-Driven Security Features Will Strengthen Customer Retention

Key Takeaways

• Subscription model transition improves revenue stability and predicts higher margins, boosting recurring revenue growth.
  
• Expanding Vision One platform and strategic partnerships increase global market share and revenue growth.
  
• Transitioning to subscription models and strategic changes in discounts may lead to instability and declines in revenue and customer satisfaction across key markets.

Catalysts

Develops and sells security-related software for computers and related services in Japan and internationally.

• Trend Micro's shift to a subscription-based model is expected to drive future recurring revenue growth, likely improving revenue stability and predictability over time. This shift could lead to higher margins as subscription services often provide better long-term financial outcomes compared to perpetual licenses.
  
• The expansion of the Vision One platform to small and medium businesses through MSP partners is anticipated to boost future top-line sales and improve the revenue growth rate in the SMB segment, which has been experiencing slower traction.
  
• As Trend Micro anticipates a refresh cycle for its security appliances, this could result in a significant uptick in sales as customers upgrade their existing infrastructure, positively impacting future revenue growth.
  
• Efforts to expand Vision One's capabilities, including innovations in AI-driven security features like network detection and response, are likely to support higher customer retention and increase cross-selling opportunities within existing large enterprise accounts, potentially boosting both ARR and net margins.
  
• Continued emphasis on market expansion efforts, such as the increased penetration into the Middle East and Southeast Asia, along with strategic partnerships with industry leaders like NVIDIA and Google, are key growth catalysts that could drive future revenue growth, enhancing both earnings and market share globally.

Trend Micro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Trend Micro's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 16.2% in 3 years time.
• Analysts expect earnings to reach ¥51.8 billion (and earnings per share of ¥404.19) by about December 2027, up from ¥24.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.0x on those 2027 earnings, down from 45.5x today. This future PE is lower than the current PE for the JP Software industry at 43.0x.
• Analysts expect the number of shares outstanding to decline by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.52%, as per the Simply Wall St company report.

Trend Micro Future Earnings Per Share Growth

Risks

• The transition from perpetual licenses to subscription models is causing fluctuations in pre-GAAP numbers and deferred revenue, indicating potential instability in future revenue projections.
  
• Weakness in key markets such as the SMB segment and consumer business, coupled with the strategic decision to stop discounting on multiyear contracts, may negatively impact net sales and gross sales.
  
• A significant decline in cash flow, influenced by income tax payments and foreign exchange impacts, could affect the company's financial liquidity and its ability to reinvest in growth initiatives.
  
• Workforce reductions and reorganization efforts may lead to short-term disruptions in operations, particularly if technical support is impacted, potentially affecting customer satisfaction and future revenue.
  
• Variability in regional performance, such as the pre-GAAP revenue decline in North America and weakness in the European public sector, raises concerns about consistent revenue generation across regions.

Valuation

• The analysts have a consensus price target of ¥8618.67 for Trend Micro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥9800.0, and the most bearish reporting a price target of just ¥7200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥320.4 billion, earnings will come to ¥51.8 billion, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 5.5%.
• Given the current share price of ¥8437.0, the analyst's price target of ¥8618.67 is 2.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.