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

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.  

What is Facebook worth Revisited - Latest Earnings Report - Employee Stock Lock-Up Expiring Shortly

Facebook released their financial results on Thursday.  Facebook’s  growth figures in their first quarter   as a public company following their IPO would have been impressive for most companies.  Nonetheless,    

Facebook stock took ­­ a  face plant following   the earnings release.  Below is a second quarter summary of their financial results. On Friday, Facebook closed at $23.71.  This gives them a market capitalization of $44.5 billion.  Click to enlarge the table.  CEO Zuckerberg may stay under the radar for the next several weeks.  

 

 The $95 to $100 billion  IPO pundits are taking a low profile.  Probably focusing on their tweeting.

In May, GreenCrest Capital’s Max Wolf felt that Facebook's  financial numbers suggested a valuation of $60 billion.  This is 37%   less than the $96 billion Facebook was thinking of.  His figure as of July 27, is off by only $15 billion, on the high side. 

Also in May,  Anup Srivastava, an assistant professor of accounting information and management, Kellogg School of Management, ran a valuation model and arrived at  a base case valuation  of $25 billion.  “This is based on the firm’s revenues reaching approximately $21 billion in ten years’ time from approximately $4 billion today, and the firm maintaining a high return on assets of approximately 20 percent.”   His model, as of July 27, is off by only $19 billion, on the low side.  The last link at the bottom of this blog leads to Srivastava’s original article in “Expertly Wrapped” an online publication by Kellogg faculty. This also provides  a link to his valuation model.  Discounted cash flow analyses can be a good thing!

As an amusing aside, average the two figures above by these individuals - $44.8 billion, off by only $0.3 billion !  A sample of two smartest guys in the room probably doesn’t qualify for wisdom of crowds status. 

Facebook will free up nearly 1.7 billion shares -  four times the number now trading,  beginning in August.  Provisions   currently barring  employees from selling their holdings will start.  Unfortunately for the employees, if they execute these immediately, they are taxed as regular income. 

Shares of online coupon purveyor Groupon Inc. declined 8.9% when its lock-up expired on June 1.  The stock dropped nearly 20% that week. Likewise, shares of online gaming company Zynga Inc. fell 7.9% when its lock-up expired on May 29. The stock price ended up falling    9.1% for the week.  Look for some sort of dip as Facebook employees start selling some of their stock,  and people continue accessing Facebook on their mobiles. No revenue for Facebook when they do this.

Real estate agents in Palo Alto,  Atherton, and Menlo Park (where Facebook is headquartered), are probably looking at Facebook’s stock price a lot more than mortgage lending rates. 

http://www.latimes.com/business/la-fi-facebook-shares-20120728,0,1045145.story

http://kensek.blogspot.com/2012/05/is-facebook-really-worth-96-billion-in.html

 

http://kensek.blogspot.com/2012/02/is-facebook-really-worth-100-billion-in.html