Corporate watch: AVG breaks out | beyondbrics

By Nicholas Watson of bne

Shares in AVG Technologies have had a bumpy ride since the antivirus software maker?s IPO in New York at the start of this year. But the surge in its shares on October 31 following strong earnings results indicates that investors are starting to look at the Czech-based company in a new light.

The shares rose 8.2 per cent to $10.84 on what traders described as ?monster volume? as the company announced that its net profit for the third quarter rose more than fourfold to $19m from $3.6m a year earlier, and as its revenues hit $95m, up 34 per cent.

With 2012 revenue expected to be in the range of $94m to $98m and net profit in the range of $9m to $10m, the company consequently increased its financial outlook for the whole of 2012. Revenue is now forecast to be $354m ? $358m, up from the previous outlook of $336m ? $344m.

The shares were up another 14 per cent by mid-morning in New York on November 1, taking the stock up 27 per cent from the low hit earlier in the year, but still well down on the $16 that the shares were sold at on February 2, which raised $128m for the company.

Analysts at the time blamed the damp squib of a debut on the general malaise on the world?s markets and a certain wariness of high-priced technology stocks ? AVG came at about 20-times earnings ? which had prompted some to warn about a possible second tech bubble forming.

There were also concerns with the way that AVG had used a cashpile accumulated before the IPO to pay out $550m in dividends. Francis Gaskins, head of the IPO database and research firm IPO Desktop, said this was quite a lot for a company with a market cap of around $800m.

There were also more fundamental doubts about AVG?s business model, something that was exemplified by the decision of Avast Software, another Czech free antivirus software maker, to pull its Nasdaq IPO six months later due to what a spokeswoman described at the time as the ?overall bad market conditions.?

Both companies were set up in the early 1990s using software developed toward the end of the communist rule that came out of the country?s technical colleges. The going was tough in the early stages, but business really took off when AVG and then Avast became among the first companies in the industry to change their business models from charging for all services to offering a basic, free anti-virus programme and then charging for upgrades and premium services.

AVG claims that as of June 30 it had around 128m active users, while Avast says, very precisely, it is ?protecting 165,963,809 active devices around the globe.?

This year, AVG was voted by readers of the British magazine PC Pro as the best provider of free anti-virus software, which at once highlights how popular the company?s products are, but also how its been pigeon-holed into the category of makers of free software, which many investors clearly doubt is sustainable in the long term.

J R Smith, chief executive of AVG, admits that being the first in the industry to offer free products has ?kind of put us a little bit in a box?, but slowly the company is succeeding in convincing investors that AVG has evolved from offering just hardcore security into other services and platforms ? a process that ?s being made easier by the release of such strong financial results.

Richard Seewald, a partner at the Zurich-based private equity outfit Alpha Associates, which was an early investor in AVG, says that the company?s strong performance is being driven by its leading position in the consumer security space as well as increasingly the growth of its internet-search business. ?The continued growth of AVG, quarter on quarter, since the IPO is in our view, demonstrable proof of the viability of this model,? he says.

Smith says diversification is key to surviving in this rapidly-evolving business. ?If you and I were having this conversation a few years ago, we?d be discussing a free product with premium-based services ? but that model won?t get you anywhere today,? he tells beyondbrics.

He said it was ?a problem? focusing ?on security alone in a market that?s highly commoditised between us, other premium companies, and new players like Microsoft? at a time when growth rates of shipments of computers were declining.

?Diversifying our product portfolio and leveraging the goodwill built by our brand for the last five years was one reason why we were able to go public earlier this year, because we had a more robust story to tell, not one just about premium security,? he says, without referring directly to Avast.

The release this summer of AVG?s 2013 product suite, which moved the company firmly outside the pure internet security business, epitomises this. Smith says that while the core of its business will always be security, the new products include technology to increase the speed and efficiency of a user?s computer; a big section on privacy, which identifies what websites are tracking a user when online and rating them to warn if there are suspicions that those sites are selling a user?s information; and free telephone support in English-speaking countries on all its products, both for free and paid users.

?Our free product is still better than most paid products ? better detection and better protection, and also includes anti-spyware and a whole bunch of extra functionality including privacy,? Smith says. ?There are things in our free product that you can?t even get in many of our competitors? paid products.?

In October, AVG launched its cloud care product for small companies as those kinds of businesses stop being so reliant on hardware.

?We?re evolving from hardcore security into a ?peace-of-mind? product across multiple platforms, such as mobile, trying to make people?s user experience better, faster, easier and safer,? says Smith. ?We?re leveraging the trust of our brand that was built up in the security aspect and diversifying into other areas.

Related reading:
AVG: not feeling the love, beyondbrics
Avast ye! Putting brakes on CEE tech IPOs, bb

Source: http://blogs.ft.com/beyond-brics/2012/11/01/corporate-watch-avg-breaks-out/

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