AVG Technologies Financial Results 2014 – An Alternative View (some quick thoughts on issues for 2015) and AVG ME

AVG Technologies released their financial results in February.  As usual, the focus was on revenue.  Per their announcement,   “Subscription revenue increased 12% to $281.6 million from $250.8 million year over year. Our consumer subscription business grew 11% to $223.1 million and our small business segment by 18.7% to $58.5 million. For the fiscal year 2014, total revenue was $374.1 million”

Looking at the numbers versus fiscal 2013 and Q4 2013 versus 2014 is a little troubling, as a lot of red is involved in the changes.

With the exception of Subscription Revenue, all other figures above were lower in  Q4 and for 2014 overall versus 2013.  Much of the drop in platform derived revenue was expected, however.  The increase in subscription revenue didn’t make up for the decline in platform derived revenue.  AVG’s focus is going to be on subscription revenue.

In the transcript to the press conference, CEO Kovacs commented that, “We have also exceeded a very important user count milestone, as we came in at over 101 million mobile users, to give a total user count reached of 197 million. Both of these are well on our way to the important milestones

Two potential red flags with this.  There may be double counting of users, if a user has AVG product installed on both a smart phone and a laptop.  Also, several years ago, AVG promoted that they had  on the order of 130 million users. This was before they acquired their way into the mobile business (Israeli based company acquisition).   Doing the math, they may have lost, market share on the order of   34 million desktop users.  That’s quite a bit.   How user is/was defined may have changed over the years.  5 million of the additional users were through the acquisition of Location Labs. 

Paid user count for 2014 on the desktop was approximately 19 million.  The means the majority of the consumer base was free, which means zero switching costs and the possibility for churn.

2014 acquisitions by AVG included acquisitions of Locations Labs, Norman Safeground and Winco.  Revenue from these were not broken out separately.

Some Threats for 2015

SMB

In 2014, AVG’s SMB revenue grew by an impressive 18.7% to $58.5 million. On February 24^th, AVG competitor Avast announced their free Avast for Business.  This product is designed to protect small and medium-sized businesses (SMBs) against viruses and cyber attacks.   

Avast pointed out as part of the introduction  that it plans to introduce programs for MSPs and resellers that enable them "to benefit from the power of free." This could pose a risk to AVG’s growth with their SMB product.  To build their presence in the business marketplace, Avast recruited AVG’s VP of Sales and Operations in June, 2014.

In the Desktop and Android Market

• AVG has not tested well in some product tests by well known vendors.  This could impact market share growth.
• AV-Test (www.av-test.org) released a report in December on “The best antivirus software for Windows Home Users”.   AVG’s products tested came in 18 and 22 out of the 27 tested.
• AV-Comparatives (www.av-comparatives.org ) - In AV-Comparatives’ September “File Detection Test”, AVG was awarded 1 star. 18 products were awarded 2 or 3 stars.
• However,  in the AV-Compararatives.org summary report for 2014, AVG  was one of nine vendors to receive a Top Rated designation. Bitdefender won Product of the Year.
• Av-Test (www.av-test.org ) released a report on “The Best Antivirus SW for Android”.  31 products are in the report.  28 products scored higher the free AVG offering that was tested.
• AVG was not part of the AV-Compasrative September “Mobile Security Review”.

To jump start even further installations on mobiles, AVG may need to do something like they did with Huawei  and give away paid AVG product. They did this with   Huawei mobiles in the India market, and with Samsung phones in the UK market. This was a  couple of years ago. 

   

AVG ME

The rumor mill has AVG Introducing “AVG ME”  sometime in the first ½ of this year , potentially as soon as March.   With this product, AVG ME will be providing publishers and advertisers access to validated user data (gathered with customer permission).  Revenue from this is TBD.

The Usual Acquisition Stories

In November, the Wall Street Journal reported that AVG Technologies had been approached by potential buyers.  Nothing has really been in the press about this since then.

http://www.wsj.com/articles/avg-technologies-approached-by-potential-buyers-1415316140

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

 

AVG updates its AntiVirus for Android

On November 28, AVG Technologies announced the latest update for their AVG AntiVirus for Android.  Features  being promoted in the latest update include:

• New design: sleeker & easier-to-use interface
• Faster and more efficient access to features, tools, and sub-categories
• New dashboard
• New categories & menus
• A “widget” feature  allowing users to monitor and interact with features of the product without having to open the app 
  

 AVG offers both   free and paid versions of antivirus for smartphones.  You can learn more about their mobile solutions at http://www.avg.com/us-en/for-mobile

 

AVG Technologies gained entry into the Android mobile security space in November 2010 with its $4.1 million acquisition of Droidsecurity (www.droidsecurity.com ) from Maayan Ventures, a group of private investors and DroidSecurity’s managers.  At the time, Droidsecurity offered both  free and paid versions of their products.  DroidSecurity was the  maker  of the first full-featured Android anti-malware application DroidSecurity mobile Security Suite The company was  founded in 2009 in Tel Aviv, Israel.  By August 2010, they had hit the 2.5 million-user mark. 

You can't claim  to be the first to offer the first free product on Android by buying the company that has a more legitimate claim.  Transitivity doesn't count here.  Check the dates.  Perhaps the first 2.5 million doesn't count. 

http://www.avg.com/ww-en/avg-acquires-droidsecurity

http://mediacenter.avg.com/content/mediacenter/en/news/avg-updates-its-antivirus-for-android-and-introduces-new-avg-safe-browser-for-ipad-and-iphone.html

Trustwave to Acquire M86 Security

Trustwave, a Chicago cloud based, provider of on-demand data security and payment card industry compliance management solutions, has come to an agreement to acquire M86 Security. M86 Security, based in Irvine, CA, is a combination of what were four separate companies several years ago. They may still be better known for some of their parts, Marshal, Avinti, 8e6, and Finjan than they are for the M86 Security name.

M86 Security is one of two Visionaries in the 2011 Gartner Magic Quadrant for Secure Web Gateways, competing against leaders Cisco, Blue Coat Systems (taken private by Thoma Bravo in February), Websense, McAfee, and Zscaler. They offer solutions in Web Security, email security, and have an SMB Security Suite. M86 does not offer the real time defense solution and web application controls that some of their competitors provide. However, they were the first company to deliver a hybrid cloud Web security service. M86 Security’s email security solution is one of the Visionaries in Gartner’s Magic Quadrant for Secure Email Gateways.

This is a nice acquisition for Trustwave. They gain 26,000 customers. It broadens their already extensive security portfolio. It gives them great brand recognition and entrees in the Secure Web Gateway and Secure email Gateway marketplace. The nice thing about the M86 Secure Web Gateway solution is that it can be deployed as a traditional appliance, virtual appliance, or a hybrid cloud option. Of course, companies like Zscaler, would beg to differ, stating that a cloud solution is the only way to go. Nonetheless, hybrid solutions are nice for companies considering the cloud without having to drink the cloud kool-aid (bit of a mixed metaphor).

M86 Security – Irvine, CA. Trustwave - Chicago. I see the Irvine office remaining.

To learn more about the respective companies - http://www.trustwave.com and http://m86security.com

Blue Coat Systems to Operate as a Privately Held Company under Thoma Bravo

Blue Coat Systems, founded as Cacheflow, is no more on the NASDAQ. The private equity firm, Thoma Bravo completed its $1.3 billion acquisition of Blue Coat Systems on February 15.

“This marks our fifth platform investment in the security technology sector and our fourth in networking,” said Seth Boro, partner at Thoma Bravo. “We’re confident our approach and experience in identifying strategic opportunities, coupled with Blue Coat’s innovative solutions and proven leadership in Web security and WAN optimization, establishes a platform for the company’s continued success.”

Thoma Bravo (www.thomabravo.com) has a nice stable of technology companies. These include Blue Coat Systems, SonicWall, Attachmate Corporation Embarcadero Technologies, Inc., Entrust, Inc., Hyland Software, Inc., LANDesk Software, Inc., Roadnet Technologies, Inc., Sirius Computer Solutions, Inc., SonicWALL, Inc., Tripwire Inc., Vision Solutions, Inc.

The nice thing about being private is you can literally say as much or as little as you want to the public (incidents such as equipment ending up in Syria notwithstanding (a rogue reseller)) Missing earnings targets may involve the management team being given a talking to, but it won’t result in dramatic swings in stock price/market capitalization, because there is no stock. No Henry Vanderbilt like quotes, "The public be damned! I am working for my stockholders." will be issued.

Blue Coat has remained in the Leaders portion of the Gartner Secure Web and WAN Optimization Magic Quadrants over the last several years. However, companies like Zscaler, a cloud based web security solution (www.zscaler.com) “providing a high performance solution at low TCO” and Riverbed Technology (www.riverbedtechnology.com) have gotten a good share of buzz and market share recently. Riverbed Technology pulled away slightly from others in the most recent Magic Quadrant for WAN Optimization Controllers.

http://kensek.blogspot.com/2012/02/riverbed-technology-leader-in-2012.html .

Riverbed Technology (and who doesn’t) has an announcement planned with a partner during RSA San Francisco later this month. Something to do with best-of-breed wide area network (WAN) optimization and public Internet optimization.

"We were under a microscope, and when you are a public company you invest and have to know what the impact is going to be three or four quarters later," said Steve Daheb, Blue Coat's chief marketing officer and senior vice president of corporate and business development. "Now we have the kind of freedom to move quickly and invest where we need to.”

So what is the future for Blue Coat? They brought aboard Gregory Clark as their CEO in September, replacing Michael Borman. In November, they announced that total net revenue for the second quarter of fiscal 2012 was $114.1 million compared with net revenue of $109.5 million in the first quarter of fiscal 2012 and $121.0 million in the second quarter of fiscal 2011. Blue Coat Systems fiscal year isn’t the normal calendar year.

There could be another earnings announcement any day, now. The Thoma Bravo press release trumped an anticipated earnings announcement this week, it appears.

http://www.bluecoat.com/company/press-releases/blue-coat-operate-privately-held-company-and-aggressively-advance-its

Time for Hewlett Packard to (wo)man Up on the WebOS Deal

After moving over from a board member position to take on the CEO role on September 22, Meg Whitman and Hewlett Packard moved relatively quickly on deciding what to do about their $40 billion plus PC/laptop division. They hedged their bets and decided to keep it around for a while. Must have been a difficult choice! Admittedly, margins are slipping in this business.

The next burning issue on the plate is what to do with Palm and WebOS. This acquisition took place in spring 2012 to the tune of about $1.2 billion. Then in the intervening months, Hewlett Packard, introduced a tablet, decided to get rid of the tablet and have a fire sale, and then decided to keep the tablet around for a while with an OS from Microsoft. So much for my decision to use these tablets as coasters.

For the time being, Whitman and Hewlett Packard have decided to do “nothing” about WebOS. Do nothing is always easier and much more reversible than sell. It doesn't rank high on the daring scale, though. A couple of potential suitors, including Oracle(?) have been mentioned.

It probably makes no sense to have two tablets running on two different OS’s. That’ll confuse the public and the investor marketplace. Assuming HP’s fiscal year is the same as the calendar year, they have less than two months to sell the company (if that’s their decision) and let it hit the 2011 books.

Great article on “Behind the Woes at H.P., Wall St. Banks Lurk”.
http://dealbook.nytimes.com/2011/11/07/as-h-p-shops-its-bankers-do-very-nicely/

According to the article, it turns out that Hewlett Packard has paid out about $81 million in fees to investment bankers related to the acquisitions they have made over the last two years.

That’s how much Hewlett-Packard is estimated to have paid out in fees to its investment bankers in the last two years for advising it on a series of acquisitions including ArcSight and 3Par (premium of 242%!). According to the article, Hewlett-Packard’s market value has fallen by more than $40 billion during this period of time.

With respect to the decision to keep the PC division, “The costs and the risks of separation are simply greater than any value we could create,” Ms. Whitman said by way of explanation.

Meanwhile, the shareholders are losing out. One redeeming thing about the above; Whitman is taking a base salary of $1 for the upcoming year. Any further pay will be in bonuses and stock appreciation.

An Interesting Time in the Internet Security Suite and Antivirus World

So, Intel announces that they are going to be putting more security on their chip with software supplied by wholly owned subsidiary McAfee. This has to be interesting to the EU. At the same time, McAfee failed the most recent test by AV-test.org. Look for DeepSafe later this year http://online.wsj.com/article/BT-CO-20110914-708402.html

Microsoft has started writing about Windows 8 and how they plan to add more security to the software. Can you say Microsoft Security Essentials? Microsoft Security Essentials has acquired nice market share on the www.opswat.com market share reports, but they have not been receiving stellar reviews. I asked ESET employees about this at a recent security show. They didn’t have anything in particular to say.

PC Magazine has been busy for the last couple of months since consumer internet security vendors have been releasing their paid and free antivirus 2012 and internet security 2012 solutions.

You look at downloads on www.download.com and the number of downloads from the top free vendors has dropped by “a lot”. There are a number of reasons for this, including switching where the downloads are coming from, to different servers, fewer malware attacks, less product churn, more upgrades... AVG Technologies and Avast are within 56k downloads on this site for the week ending September 17.

It’s hard to tell how the internet security suite vendors feel about reviews from www.download .com. Doing a search on the first 10 under “Free Antivirus” based on downloads last week: Two 5 star reviews, PC Tools and Threatfire, four 4.5 stars, AVG Antivirus Free Edition 2012, Avast Free Antivirus, Avira Antivir Personal, and Panda Cloud Antivirus Free Edition are up there. Some paid versions seem to have worked their way in. You’ll have to read the extensive reviews to determine how one 4.5 star product is better than another. It's worth the effort.

Of course, you can’t tell a lot from an internet security provider’s fan page. The fans have never met a like button they could not hit.

It will probably be another month or two before av-comparatives.org will release a test involving the 2012 products.

Avast, F-Secure, McAfee, Sophos, and Webroot (alphabetical order) cannot be happy about how they finished in www.av-test.org ‘s Whole Product Dynamic Tests for the month of August. Trend Micro, on the other hand, has to be quite pleased.

Some of the antivirus and internet security vendors are respectfully not participating in some third party tests. I would conjecture on this in more detail in that they disagree with the test methodology but my humble budget does not include paying for a food tester.

UK publication PC Pro (www.pcpro.co.uk) hasn’t done a lot with 2012 internet security and antivirus products yet. Perhaps in a few months.

Over the past year, reviewers have started to incorporate more data from www.av-test.org, www.av-comparatives.org and www.virusbtn.org . Imitation is the sincerest form of flattery. This must be purely coincidental ;). Cross-tabs and combining results from multiple test organizations can be enlightening.

So what does the above mean, besides that there's a reason not to have had caffeinated coffee at Starbucks after 8pm? Time to spend some musings in other areas like virtual appliances, higher level strategies, why HP has hired Meg Whitman, the recent SecureWorld expo, and will Intel’s Dave Dewalt make an appearance at McAfee’s event in Vegas (you can probably take that one to the bank, baby!). Theatre reviews written recently won’t be ported to this blog.

European Commission (EC) Approves Intel Acquisition of McAfee

Five weeks after the FTC gave Intel approval of its $7.68 billion (US) acquisition of McAfee, the European Commission, watchdog for the European Union (EU, ) did the same.

"The commitments submitted by Intel strike the right balance, as they allow preserving both competition and the beneficial effects of the merger. These changes will ensure that vigorous competition is maintained and that consumers get the best result in terms of price, choice and quality of the IT security products," said Commission Vice-President in charge of competition policy Joaquin Almunia.

Among the commitments Intel made to the European Commission:

• McAfee competitors will have access to all necessary information to use functionalities of Intel's CPUs and chipsets in the same way as those functionalities used by McAfee.
• Intel will not to actively impede competitors' security solutions from running on Intel CPUs or chipsets.
• Intel will avoid hampering the operation of McAfee's security solutions when running on personal computers containing CPUs or chipsets sold by Intel's competitors (AMD, etc).

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/70

It will be interesting to read any comments McAfee’s internet security competitors (Symantec, Trend Micro, Kaspersky, Sophos, etc) regarding this decision. They have to be happy that they will have access to the same functionalities on the chip that McAfee will have. Whether McAfee will have any sort of early access is an interesting question.

Intel has had disagreements with the EC before. In 2009, Intel was fined $1.45 billion for engaging in illegal anticompetitive practices to exclude competitors from the market for X86 computer chips.

http://venturebeat.com/2009/05/13/intel-slapped-with-145-billion-fine-for-antitrust-violations/

Let the monitoring begin.

Meanwhile, on Tuesday, Intel’s chief technology officer Justin Rattner announced that scientists at Intel are working on security technology that will stop all zero-day attacks*. The technology could be ready this year. He stated that the technology won’t be signature based. This could mean that heuristic or behavior based capabilities will be put on Intel’s chips. McAfee’s contribution to this project (if any) wasn’t mentioned.

http://www.computerworld.com/s/article/9206366/Intel_developing_security_game_changer_

*One definition of a zero day attack - A zero day attack capitalizes on vulnerabilities right after their discovery. Thus, zero-day attacks occur before the security community or the vendor of the software knows about the vulnerability or has been able to distribute patches to repair it.