AVG Technologies in Play, an Alternative Look at Q3 Financial Results

The San Francisco Giants win the World Series in even numbered years.  Rumors circulate about AVG Technology being an acquisition candidate occurs in odd number years. Okay, even numbered as well. Couple that with  so-so financial results? You may want to sell, as well.  

Even before AVG went public, there were “always” rumors about them being for sale as the right price.  Companies being mentioned usually included Hewlett Packard and Cisco. Earlier this year, AVAST Software, an AVG competitor, signed a binding  agreement with CVC Capital Partners for a major investment in the company. The investment valued Avast at about $1 billion US.

Other than throwing off cash for the investors, AVG has   been something of a disappointment. The plan was to go public in early 2012  at $16 to $19.  Instead, they opened and closed around $13. AVG’s market cap, as of 11/15 is just under $1 B.

From a technology standpoint, AVG's growth has been through purchase rather than developing things in house. In September, 2014 they purchased Location Labs, a provider of security for mobile technology. http://now.avg.com/avg-solidifies-leadership-in-growing-mobile-security-market-with-acquisition-of-location-labs/

AVG  entered the mobile security market by purchasing the Israeli firm DroidSecurity in late 2010 DroidSecurity had both a free and paid prospect).  They   increased their share by quietly giving the product away on certain Huawei mobile phones in India (That  announcement appeared on the web and disappeared quickly.  Huawei was being investigated in the 2012 time frame  by the US congress for potentially posing a security threat).

In product testing (ability to stop malware), AVG has failed to be one of the leaders. In AV-Comparatives October Real World Protection tests, AVG came in 10th out of 22. In the September, "File Detection Test of Malicious Software", AVG received on star,finishing 20th out of 22.

(www.av-comparatives.org)  In the Virus Bulletin (www.virusbtn.com ) RAP (Reactive and Proactive test), they weren’t in the top 20. ( https://www.virusbtn.com/vb100/rap-index.xml)

On to the financials. AVG Technologies has their headquarters in the Netherlands. They have an office in Ireland.   Those interested can find multiple stories on the “Double Irish” or “Double Irish Dutch Sandwich”, a technique to significantly g reduce US taxes.  Just saying! Apple and a number of US companies are being creative in using this technique.

For those focused only on revenue (hello analysts), AVG’s 9 months subscription revenue and SMB revenue (less than 15% of their business), is up for the first 9 months of 2014 versus 2013. Trailing revenue, Consumer and Total Revenue, and US Revenue, all down.

For those focusing more on  the bottom line, net income, consumer income, Net Income, Consumer Income, SMB Income, and Operating Income are all down for the first 9 months of 2014.

For those focusing on cash, Net Cash provided by operations is down 35% for the first nine months of this year. The data below is from their latest Form 6-K, available on AVG's web site. 

One would have thought that the positive vibes and karma emanating from the SF Giants home ball park (ATT Park) would have rubbed off on AVG Technologies, given AVG’s US headquarters near proximity to the park. Not the case, however.  

Hewlett Packard and Autonomy – The Soap Opera Goes On, Plus a Lawsuit

One of these days, the stories will come together about Hewlett Packard and Autonomy.  In the mean time -  They paid too much.  They took an $8 billion write down on the acquisition.  They accused the Autonomy  of poor bookkeeping.  Hewlett Packard’s financial advisors on the acquisition  stated  that they did not need to do a total deep dive before putting their blessing on the acquisition.  The prior CEO of Autonomy, Leo Apotheker, states that the books were correct at the time of the acquisition and that revenue was accrued for properly. 

Now Hewlett Packard and CEO Meg Whitman are denying that the company has tried to sell Autonomy and SAP is saying that they were approached.  In addition, for Hewlett Packard, April showers brought…  May lawsuits, as they are now facing a $1 billion shareholder lawsuit over the acquisition.  The California suite filed at California's San Francisco district court, which accuses those who oversaw the deal of conducting "cursory due diligence on a polluted and vastly overvalued asset".  $1 billion buys a whole lot of HP tablets.  http://www.guardian.co.uk/business/2013/may/07/shareholders-sue-hp-autonomy-deal

 

The stock has been recovering somewhat in price from its 52 week low of just under $11.35 to a 52 week high of $24 in late March.  When Meg Whitman took over the reins of Hewlett  Packard as CEO, the stock was trading at around $23.  For their first fiscal quarter of this year, net revenue was down  $28 B, lower than in fiscal Q1  2012.  Earnings were positive at $1.2 B, versus a loss of just under $7 B the previous quarter.  The stock is essentially unchanged, though, from a year ago while the Dow and NASDAQ are up about 25%.  Hewlett Packard has outperformed beleaguered Dell (another interesting story) but not by much. 

  

Whitman may make it through the end of 2013.  If so, Oracle’s Hurd, formerly of Hewlett Packard, will have to find a different partner for “Dancing with the Stars”.  The earnings conference call for the latest quarter is scheduled for May 22 after the markets close.    

http://www.techweekeurope.co.uk/news/hp-autonomy-sap-denial-116304

http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-EventDetails&EventId=4881977

Hewlett Packard - The Adventure Continues for HP and CEO Meg Whitman

For Hewlett Packard and CEO Meg Whitman, there is never a dull moment.    Board Chairman Ray Lane was essentially given a vote of no confidence by shareholders and has relinquished his chair position.  . John Hammergren, who has been on the board since 2005, and former Wachovia CEO G. Kennedy Thompson, a director since 2006, will resign, as well.  The three could perhaps offer themselves as a package deal for Dancing with the Stars.

All three have   been on the board for much of Hewlett Packard’s precipitous decline in stock price.  There for Autonomy.  There for the  tablet debacle.  You really can’t  really  blame the board for these, in some respects.  External smartest guys in the room and others in the Hewlett Packard organization did make the recommendations. 

After hitting a 52-week low of $11.25, that stock has gone up to $20.66.  This is still substantially below the just under $45 they were trading at a couple of years ago.  On a percentage basis, the Dow has increased about 20% and Dell has decreased about 10% over the same period.

So, what is HP going to do?  Meg Whitman is still saying recovery will be a four-year process.  Hewlett Packard has been investing in security as part of their strategy.  Tablets were revived from coaster status to being part of the strategic mix. Smart phones may be part of the mix in 2014.   Last week, as part of project Moonshot, Hewlett Packard introduced a line-up of super servers.  These are designed to appeal to the biggest social-media, cloud-computing, and e-commerce sites.

Autonomy is going to continue to be part of HP.  Even after the massive writedown.  "We remain committed to Autonomy; we remain committed to the brand, to Cambridge, to the U.K.," she said at a  recent news conference.   "It is an almost magical technology. ... It plays into a big shift in the market, the area of Big Data, which HP should be in."  Bets are being taken as to who will ultimately be thrown under the bus for the analysis of this deal and from which side of the pond.   http://www.denverpost.com/business/ci_22999671/hewlett-packard-ceo-meg-whitman-remains-committed-autonomy

 

The laptop/PC business won’t drive a recovery.  Printer sales and ink revenue won’t increase if laptop/PC sales tank.  According to IDC, laptop/PC sales dropped over 11% in Q1 versus the same period in 2012. For HP, the drop was 24%.  Windows 8 sales have not been astronomical, as well. 

The takeoff in tablets has sucked the growth out of PC and laptop sales.  Tablets will   out-ship desktop PCs this year, according to IDC.  They are also forecasting that by the end of 2013, desktop PC shipments will dip 4.3 percent.  Tablet shipments will rise to 190 million units, an annual growth rate of 48.7 percent, according to the firm.

Whitman was named CEO in September 2011, replacing Leo Apotheker.  “The pressure is on Meg,” stated Toni Sacconaghi, an analyst with Bernstein Research.  A housecleaning of the board “bought her a year.” according to an April article in the New York Times.  More bold moves are needed by Hewlett Packard and Whitman.  Going private (unlike what Dell is trying to do) isn’t an option.

Whitman and Hewlett Packard need to make even more aggressive  moves.   

http://www.datamation.com/mobile-wireless/tablets-to-surpass-desktop-pcs-this-year-idc.html

 

http://www.forbes.com/sites/connieguglielmo/2013/04/04/hewlett-packards-board-continues-to-deliver-drama-as-chairman-lane-steps-down/

“Hewlett Packard and Meg Whitman – The First Year.  Turbulence and Turmoil in the Valley” at

http://kensek.blogspot.com/2012/09/hewlett-packard-and-meg-whitman-first.html

HP-Autonomy acquisition under US Government Investigation - the Adventure Continues

The investigation over the $11.1 billion 2011 Autonomy (founded by Mike Lynch)  acquisition by Hewlett Packard   is growing into an even  larger  legal soap opera. The  US Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC), and the Serious Fraud Office are  all now involved.  Accounting firm  Deloitte, one of the advisors in the deal, is going to be quite busy responding to inquiries. KPMG may have to get involved, as well. Meg Whitman and the rest of the Hewlett Packard board will be having chats, as well. 

There are a number of ways to value an acquisition.  One of the most rigorous methods is using discounted cash flow analysis. Doing revenue multiple based on similar companies is another way.  However, revenues are fuzzy.  You can sign a 10-year contract, and depending on the deal, recognize the revenue at one time, or spread the revenue over a 10-year period.  Ditto with the costs associated with the sale.  There are hard dollars associated with determining profitability, as well as soft dollars.   

Much  of the value of an acquisition rests on the discounted cash flows from future revenues based on projections.  If the projection drops, the value of the acquisition drops. And if the drop is material, it has to be reflected on the acquiring company’s (HP’s) books. Hence, the $8.8 billion write-down.

In a December 28 article ZD Net article,    “HP-Autonomy acquisition under US govt investigation”, ZD quoted from a blog posted by founder and former Autonomy CEO Mike Lynch. 

Lynch said HP had failed again to provide detailed calculation on its US$5 billion write-down of Autonomy or publish an explanation of the allegations it made against his former management team. 

"Furthermore, it is now less clear how much of the $5 billion write-down is in fact being attributed to the alleged accounting issues, and how much to other changes in business performance and earnings projections.  This appears to be a material change in HP's allegations," he said. 

Lynch again dismissed any claims of impropriety and pledged to cooperate with the DOJ investigation.  "We continue to reject these allegations in the strongest possible terms.  Autonomy's financial accounts were properly maintained id in accordance with applicable regulations, fully audited by Deloitte, and available to HP during the due diligence process."

It has already been written how Autonomy was sloppy in where they assigned revenues and costs between the hardware and software in some of their deals.  This is going to cost them  if it is determined in the investigation  that they ignored US generally accepted accounting principles  (GAAP).  The IRS does not like to be shortchanged. 

However,   Hewlett Packard (CEO Meg Whitman and the HP Board) would have to approve of  this adjusted valuation.  If it was largely based on  adjusting the  forecast  of future revenues downward, and this was then used this in calculating the $8.8 billion  write-down of the deal, HP should be willing to share this information.

The firm, Robbins Geller Rudman & Dowd LLP filed a class action suit against Hewlett-Packard last week in November. They’re probably enjoying this.

http://kensek.blogspot.com/2012/12/another-look-at-hewlett-packard.html

 

Another Look at the Hewlett Packard, Autonomy Debacle

The word "debacle"  has probably been used more times in the press in the last couple of weeks  by the press in describing the Autonomy Hewlett Packard situation than in the whole previous quarter.

Hewlett Packard takes an $8 billion write down.  Their stock hits a 10-year low.  Hewlett Packard refers the “issue” to the Serious Fraud Office in the UK and the US Securities and Exchange Commission’s Enforcement Division for civil and criminal investigation.  Prior Autonomy management says that they have done nothing wrong and that Hewlett Packard is blaming Autonomy to cover up any Hewlett Packard mismanagement over the last year.  Oracle states that they told people that the acquisition was overvalued.  This is ugly.

It appears  as if Hewlett Packard’s “smartest guys in the room” either erred or failed to do enough due diligence.  KPMG is   saying it was not engaged to perform any formal audit work by Hewlett Packard  but “merely provided it with “a limited set of non-audit related services” in relation to the deal.”  Deloitte is keeping quiet.

  

Lawsuit?    Robbins Geller Rudman & Dowd LLP filed a class action suit against Hewlett-Packard last week.  KPMG and Deloitte are both named, also.

With respect to accounting/revenue recognition  – part of this is concerned with which accounting system people were talking about.  Hewlett Packard looks at GAAP Accounting.  Autonomy was using Europe’s accounting standards, which allows for more liberal recognition of revenue.  GAAP is a foreign word (or a spelling error) to many writing about this.  Revenue recognition isn't something most writers have gone beyond the most basic understanding of. 

Among accounting gimmicks  used at Autonomy, according to Whitman: the company had been booking the sale of computers as software revenue claiming the cost of making the machines as a marketing expense (very red flag!); revenue from long-term contracts was booked up front, instead of over time (not GAAP accounting).

The above is a great argument for focusing on cash flow as opposed to revenue in a valuation model.  It is harder to play games with cash flow.

http://allthingsd.com/20121121/oracles-ellison-vindicated-in-autonomy-pr-flap-by-hps-8-8-billion-writedown/

What will happen now?  The SEC and the UK  Serious Fraud Office  will  perform their investigations.  Hewlett Packard will have “terse” discussions outside the press with the “smartest guys in the room” though there will continue to be  public statements, as well. Then there's that lawsuit.

Autonomy execs will keep proclaiming their innocence.  They also want to see Hewlett Packard’s notes in calculating the write down. 

 

The anonymous whistle blower who mentioned “improprieties”  will probably try to stay anonymous for awhile, while still hiring a food taster and  holding a mirror under his car to examine brake linings.

For Meg Whitman, the magnifying glass has gotten larger, and the leash around her neck has probably been ratcheted up a bit by Hewlett-Packard’s board.  Of course, these same board members approved the Autonomy acquisition.