Invest in cybersecurity with Avast

Avast runs a ‘freemium’ platform model, where it offers consumers a free product and then attempts to up-sell and cross-sell its paid products and services: consumer direct; consumer indirect, where partners pay Avast; and small-to-mid-sized businesses (SMB). These three divisions respectively accounted for 81 per cent, 12 per cent and 5 per cent of revenue in 2019. 

While the direct consumer business has been bolstered by lockdown home working, the group’s other smaller streams of income were more mixed in the first quarter. The indirect channel has been hit by lower advertising spend and the group also noted weaker trends in SMB, as smaller businesses struggled to cope with the coronavirus fallout. But the strength of its direct consumer desktop channel still pushed up billings and left forecasts for profits largely unchanged.  

Avast has built up its client base to more than 435m users globally – and each one is steadily generating more income, with average revenue per customer up 3.6 per cent to $51.02 in 2020. This progress had driven strong share price momentum since its flotation in 2018. However, in January the shares shed a quarter of their value in the three days following a joint investigation published by PCMag and Motherboard, which alleged that its Jumpshot subsidiary had been selling browser history data. The report also found that the data, which should have been anonymised, could be linked back to individual Avast users. 

The group terminated the Jumpshot business at the end of January, which it expects will cost around $15m-$25m, on top of returning investments made by Ascential (ASCL) into the business, along with associated exit costs that amount to $73m. While the controversy certainly harmed Avast’s reputation, a spike in uninstallations in late January is now back at the six-month average level and the share price has regained the ground it lost following the allegations. 

In the long term, the group’s growth prospects should have been bolstered by the launch of its new ‘BreachGuard’ consumer privacy product, which detects and notifies users of data breaches that affect their credentials and helps to remove personal information from unwanted third-party databases. An expanding suite of software products will help to strengthen its already strong cash conversion rate of 82 per cent, which it measures as free cash flow before interest and lease payments as a percentage of adjusted cash profits (Ebitda). 

The group looks in a decent financial position with net debt equivalent to 1.7 times cash profits. Its annual debt service costs total approximately $90m and it has minimal working capital and capital expenditure requirements at around 2 per cent of revenue.