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.  

Good Apple? Bad Apple? Very Profitable Apple! And Great at Minimizing Taxes.

Apple CEO Tim  Cook has been in the press a lot lately about the organization’s aggressive stance on taxes.  In front of a somewhat hostile Senate panel in Washington, he said, “We pay all the taxes we owe, every single dollar,” Cook told the Senate Permanent Subcommittee on Investigations, noting that Apple may now be the largest U.S. corporate taxpayer.  “We not only comply with the laws, but we comply with the spirit of the laws.  We don’t depend on tax gimmicks.  We don’t move intellectual property offshore and use it to sell our products back to the United States to avoid taxes.  We don’t stash money on some Caribbean island.  We don’t move our money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax.”  In all discussions, you have to enjoy how Apple has focused on taxes paid while the other side has focused on potential other taxes owed.

One claim made in numerous papers is that Apple negotiated a special 2% tax rate from Ireland.  Both Apple and Ireland dispute these claims.

With respect to the above, the operative part of  Tim Cook’s quote is, “We pay all the taxes, and we owe, every single dollar.”  His general tenet is that Apple isn’t breaking any tax laws.  They are being aggressive in minimizing, legally, the amount of taxes they pay.

In a May Mercury News  editorial,   “Apple showing a blatant lack of respect for the law”, Santa Clara University professor of law had a   different interpretation.  In the article he states, “While the tax law permits businesses and individuals to arrange their actual affairs to minimize tax, it does not respect agreements that have no independent economic significance apart from purported tax reduction."  The article states that in 2011 Apple did pay $10 million total tax on $22 billion of income of one of its subsidiaries.  This equates to a tax rate of .05%.  Not 5%.  .05%.

The above about Apple minimizing US taxes  is not news!  The New York Times wrote an article “Double Irish with a Dutch Sandwich” about tax avoidance strategies and Apple (other companies as well) in April 2012.

Domestically, Apple manages much of its investments to minimize state taxes by doing these  through its Apple's Braeburn Capital subsidiary  in Reno, Nevada. This way, they  avoid California 9% state income tax.

Apple’s   2012 “Project Jonathan”,  will enable Apple to save millions in Nevada taxes.  They are  building a data center outside of Reno and putting in almost $1 billion in servers.  The state will waive all but 2 percent of the sales tax rate for the server equipment Apple purchases for the data center.  “But by opening a second location in a special tourism improvement district in downtown Reno — an office meant simply to receive shipment of those servers — Apple is eligible to be reimbursed 75 percent of the 2 percent sales tax it still owes.”  This means that the overall sales tax Apple pays will be 0.5% rather than 7.5%.  Quite impressive and good negotiating on Apple’s part.  That part about the second office that will do little more than receive the servers?  A bit dicey.

Once again, minimizing taxes isn’t illegal.   

Perhaps there should be an  INC test (a new acronym!) that the IRS looks at for companies.  Dealings with Ireland, the Netherlands, and the Cayman Islands.

http://kensek.blogspot.com/2012/06/reno-agrees-to-tax-breaks-to-attract.html

 

http://www.forbes.com/sites/connieguglielmo/2013/05/21/apple-called-a-tax-dodger-by-senate-committee-apple-says-system-needs-to-be-dramatically-simplified

 

http://www.mercurynews.com/opinion/ci_23310792/david-hasen-apple-demonstrating-blatant-lack-respect-tax

 

http://kensek.blogspot.com/2012/04/double-irish-with-dutch-sandwich-yummy.html