AVG breaks out

By bne IntelliNews November 2, 2012

Nicholas Watson in Prague -

AVG Technologies' shares have not had a happy time since the antivirus software maker IPO'd in New York at the start of this year, but the 15% surge in its shares following strong earnings results indicates that investors are starting to look at the Czech-based company in a new light.

The shares closed November 1 at $12, up 15% from the closing price on October 30. The following day, the company announced that its net profit for the third quarter rose more than fourfold to $18.96m from $3.64m a year earlier while revenues hit $95.25m, up 34%.

With fourth-quarter 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 in the range of $354m to $358m, up from the previous outlook of $336m to $344m.

The shares are now up 27% 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 stock market debut, which saw the shares drop by over 15%, 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 as investors ploughed money into these high-flying stocks.

There were also concerns with the way that AVG had used its cash pile prior to the IPO, by making a $550m dividend payout to its investors, which Francis Gaskins, head of the IPO database and research firm IPO Desktop, called 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 the first to change their business model to offer a basic, free anti-virus programme to protect a PC and then charge clients for upgrades and premium services. AVG now claims 135m active users worldwide.

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 and well respected the company's products are, but also how its been pigeon-holed into that category of makers of free, now largely commoditized software, which many investors clearly doubt is sustainable in the long term.

J.R. Smith, CEO 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 what he calls a "peace-of-mind" product across multiple 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 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 bne. "Focusing on security alone in a market that's highly commoditized between us, other premium companies, and with new players like Microsoft coming into the market, and added to that the growth rate of shipments of computers is declining, is a problem."

"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 in a sly dig at Avast.

The release this summer of AVG's 2013 product suite, which moved the company firmly outside the pure internet security business, epitomizes 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."

Further, 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."

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