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AVG Reports First Quarter 2012 Financial Results
Thursday, May 10, 2012, 4:15:00 PM ET
AVG Technologies N.V. (AVG) today reported results for the first quarter ended March 31, 2012.
"AVGs solid execution across the board drove strong first quarter financial results and marked a healthy start to 2012. We are pleased with our financial performance and the fact that we have exceeded our Q1 expectations," stated J.R. Smith, chief executive officer of AVG. "During the quarter, we grew our user base, increased our revenue per average active user and enhanced our portfolio of products and services, adding new features, such as Do Not Track."
Revenue for the first quarter of 2012 was $83.0 million, compared with $60.8 million for the first quarter of 2011, an increase of 37 percent.
Net income for the first quarter of 2012 was $10.9 million, or $0.21 per diluted ordinary share, compared to net income of $18.0 million, or $0.32 per diluted ordinary share in the first quarter of 2011. First quarter 2012 net income reflects increased stock compensation charges and interest costs as well as investments made in the business compared to the first quarter of 2011. Compared to the fourth quarter of 2011, net income for the first quarter of 2012 increased by $10.2 million.
Non-GAAP adjusted net income for the first quarter of 2012 was $18.2 million, or $0.34 per diluted share. This compares to non-GAAP adjusted net income of $19.2 million, or $0.38 per diluted share, for the same period of the prior year. Non-GAAP adjusted net income for the first quarter of 2012 excludes $4.3 million in share-based compensation expense and $2.1 million in acquisition amortization and reflects a $0.9 million adjustment to normalize to a tax rate of 14 percent.
Deferred revenue as of March 31, 2012 was $157.7 million, an increase of $6.6 million, or 4 percent, compared to $151.1 million at December 31, 2011. Cash and cash equivalents totaled $107.5 million as of March 31, 2012.
AVG generated $20.6 million in cash from operating activities in the first quarter of 2012, and $22.8 million in non-GAAP unlevered free cash flow. This represents a 28 percent revenue to non-GAAP unlevered free cash flow conversion rate.
 Earnings per diluted ordinary share excluded preferred share dividends and earnings attributable to preferred shares in 2011 as these were anti-dilutive over that period. Over Q1 2012 these were included as being dilutive.
 Non-GAAP adjusted net income per non-GAAP diluted share is calculated based on adjusted net income including earnings attributable to preferred shares. For further details, see the reconciliation note at the end of this press release.
Based on information available as of May 10, 2012, AVG is providing the following financial outlook for the second quarter of 2012:
Revenue is expected to be in the range of $80.0 million to $82.0 million.
Net income is expected to be in the range of $8.5 million to $9.5 million; EPS is expected to be in the range of $0.15 to $0.17.
Non-GAAP adjusted net income is expected to be in the range of $14.5 million to $15.5 million; non-GAAP EPS is expected to be in the range of $0.26 to $0.28.
AVGs expectation of non-GAAP adjusted net income for the second quarter of 2012 excludes share-based compensation expense and acquisition amortization and assumes a tax rate of approximately 14 percent. For the purpose of calculating diluted EPS and non-GAAP EPS in the second quarter, the company assumes approximately 55 million weighted average shares outstanding.
Based on information available as of May 10, 2012, AVG is increasing its financial outlook for fiscal year 2012 as follows:
Revenue is expected to be in the range of $327.0 million to $335.0 million, up from the previous outlook of $317 million to $325.0 million.
Net income is expected to be in the range of $38.0 million to $41.0 million, up from the previous outlook of $30.0 million to $33.0 million; EPS is expected to be in the range of $0.68 to $0.74.
Non-GAAP adjusted net income is expected to be in the range of $60.0 million to $63.0 million, up from the previous outlook of $52.0 million to $55.0 million; non-GAAP EPS is expected to be in the range of $1.08 to $1.14.
Operating cash flow is expected to be in the range of $102.0 million to $106.0 million, up from the previous outlook of $99.0 million to $103.0 million; non-GAAP unlevered free cash flow is expected to be in the range of $103.0 million to $107.0 million, up from the previous outlook of $100.0 million to $104.0 million.
AVGs expectation of non-GAAP adjusted net income for the fiscal year 2012 excludes share-based compensation expense and acquisition amortization and assumes a tax rate of approximately 14 percent. For the purpose of calculating diluted EPS and non-GAAP EPS for 2012, the company assumes approximately 55.5 million weighted average shares outstanding.
Conference Call Information
AVG will hold its quarterly conference call today at 23:00 CET/5:00 p.m. ET/2:00 p.m. PT to discuss its first quarter financial results, business highlights and outlook. The conference call may be accessed via webcast at http://investors.avg.com or by calling +1 (888) 846-5003 (United States and Canada) or +1 (480) 629-9856 (International).
A replay of the webcast can be accessed via http://investors.avg.com. Additionally, an audio replay of the conference call will be available through May 17, 2012 by calling +1 (800) 406-7325 (United States and Canada) or +1 (303) 590-3030 (International), (conference passcode required: 4533182#).
Use of Non-GAAP Financial Information
This press release contains supplemental non-GAAP financial measures including the following: non-GAAP adjusted net income, non-GAAP adjusted net income per diluted share and non-GAAP unlevered free cash flow. The presentation of this supplemental non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with generally accepted accounting principles in the United States. In particular, adjusted net income, adjusted net income per diluted share and unlevered free cash flow should not be considered as measurements of the companys financial performance or liquidity under U.S. GAAP, as alternatives to income, operating income, cash flow from operations or any other performance measures derived in accordance with U.S. GAAP or as alternatives to cash flow from operating activities as a measure of the companys liquidity. Adjusted net income, adjusted net income per diluted share and unlevered free cash flow have limitations as analytical tools and should not be considered in isolation from, or as substitutes for, analysis of AVGs results of operations, including its cash flows, as reported under U.S. GAAP. Some of the limitations of adjusted net income, adjusted net income per diluted share and unlevered free cash flow as financial measures are:
they do not reflect the companys future requirements for capital expenditure or contractual commitments, nor, in the case of the income measures, do they reflect the actual cash contributions received from customers;
except in the case of free cash flow, they do not reflect changes in, or cash requirements for, the companys working capital needs;
they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on the companys debt;
although amortization and share-based compensation are non-cash charges, the assets being amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
other companies in AVGs industry may calculate these measures differently than AVG does, limiting their usefulness as comparative measures.
Because of these limitations, investors should rely on AVGs consolidated financial statements prepared in accordance with U.S. GAAP and treat the companys non-GAAP financial measures as supplemental information only.
AVG is providing these non-GAAP financial measures because it believes that such measures provide important supplemental information to management and investors about the companys core operating results, primarily because the non-GAAP financial measures exclude certain expenses and other amounts that management does not consider to be indicative of the companys core operating results or business outlook. AVG management uses these non-GAAP financial measures, in addition to the corresponding U.S. GAAP financial measures, in evaluating the companys operating performance, in planning and forecasting future periods, in making decisions regarding business operations and allocation of resources, and in comparing the companys performance against its historical performance.
For a reconciliation of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with U.S. GAAP, please see "Reconciliation of U.S. GAAP to non-GAAP Financial Measures." All non-GAAP financial measures should be read in conjunction with the comparable information presented in accordance with U.S. GAAP.
This press release contains forward-looking statements within the Private Securities Litigation Reform Act of 1995, including those relating to an expected range of revenue, net income, EPS, non-GAAP adjusted net income, non-GAAP EPS and non-GAAP unlevered free cash flow for the three-month period ending June 30, 2012 and/or the fiscal year ending December 31, 2012. Words such as "expects," "expectation," "intends," "assumes," "believes" and "estimates," variations of such words and similar expressions are also intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those contemplated herein. Factors that could cause or contribute to such differences include but are not limited to: changes in the companys growth strategies; changes in the companys future prospects, business development, results of operations and financial condition; changes to the online and computer threat environment and the endpoint security industry; competition from local and international companies, new entrants in the market and changes to the competitive landscape; the adoption of new, or changes to existing, laws and regulations; flaws in the assumptions underlying the calculation of the number of the companys active users; the termination of or changes to the companys relationships with its partners and other third parties; the companys plans to launch new products and online services and monetize its full user base; the companys ability to attract and retain active and subscription users; the companys ability to retain key personnel and attract new talent; the companys ability to adequately protect its intellectual property; flaws in the companys internal controls or IT systems; the companys geographic expansion plans; the anticipated costs and benefits of the companys acquisitions; the outcome of ongoing or any future litigation or arbitration, including litigation or arbitration relating to intellectual property rights; the companys legal and regulatory compliance efforts; and worldwide economic conditions and their impact on demand for the companys products and services. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.
Further information on these factors and other risks that may affect the companys business is included in filings AVG makes with the Securities and Exchange Commission (SEC) from time to time, including its Annual Report on Form 20-F, particularly under the heading "Risk Factors".
The financial information contained in this press release should be read in conjunction with the consolidated financial statements and notes thereto to be included in the companys report on Form 6-K. The companys results of operations for the first quarter ended March 31, 2012 are not necessarily indicative of the companys operating results for any future periods.
These documents are available online from the SEC or in the Investor Relations section of our website at http://investors.avg.com. Information on our website is not part of this release. All forward-looking statements in this press release are based on information currently available to us, and we assume no obligation to update these forward-looking statements in light of new information or future events.
Election to Comply with New or Revised Accounting Standards
The company is an "emerging growth company" that has irrevocably elected not to take advantage of the extended transition period provided in section 13(a) of the Exchange Act for complying with new or revised accounting standards.
AVGs mission is to simplify, optimize and secure the Internet experience, providing peace of mind to a connected world. AVGs powerful yet easy-to-use software and online services put users in control of their Internet experience. By choosing AVGs software and services, users become part of a trusted global community that benefits from inherent network effects, mutual protection and support. AVG has grown its user base to 114 million active users as of March 31, 2012 and offers a product portfolio that targets the consumer and small business markets and includes Internet security, PC performance optimization, online backup, mobile security, identity protection and family safety software.
AVG Technologies N.V. Condensed Consolidated Balance Sheets (In Thousands) December 31, March 31, 2011 2012 ASSETS Current assets: Cash and cash equivalents $ 60,740 $ 107,529 Trade accounts receivable, net 25,363 28,721 Inventories 883 832 Deferred income taxes 18,394 18,394 Prepaid expenses 3,975 4,813 Prepaid share issuance cost 6,820 - Other current assets 6,363 7,547 Total current assets 122,538 167,836 Property and equipment, net 12,436 12,396 Deferred income taxes 59,750 63,864 Intangible assets, net 35,035 37,323 Goodwill 71,367 73,831 Investment in equity affiliate 511 471 Investments 9,750 9,750 Other assets 248 1,176 Total assets $ 311,635 $ 366,647 LIABILITIES, PREFERRED SHARES AND SHAREHOLDERS DEFICIT Current liabilities: Accounts payable $ 11,035 $ 8,434 Accrued compensation and benefits 15,941 16,702 Accrued expenses and other current liabilities 30,878 36,070 Current portion of long term debt 41,125 23,500 Income taxes payable 4,161 2,215 Deferred revenue 120,269 126,335 Total current liabilities 223,409 213,256 Long-term debt, less current portion 184,315 178,994 Deferred revenue, less current portion 30,839 31,393 Other non-current liabilities 3,397 3,970 Total liabilities 441,960 427,613 Class D preferred shares 191,954 - Ordinary shares 476 722 Additional paid-in capital (Distributions in excess of capital) (388,225) (136,584) Accumulated other comprehensive loss (6,324) (5,250) Retained earnings 71,794 80,146 Total shareholders deficit (322,279) (60,966) Total liabilities, preferred shares and shareholders deficit $ 311,635 $ 366,647
AVG Technologies N.V. Condensed Consolidated Statements of Comprehensive Income (In thousands, except share data and per share data) Three months ended March 31, 2011 2012 Revenue: Subscription $ 43,080 $ 46,630 Platform-derived 17,694 36,355 Total revenue 60,774 82,985 Cost of revenue: Subscription 5,833 7,191 Platform-derived 1,381 3,374 Total cost of revenue 7,214 10,565 Gross profit 53,560 72,420 Operating expenses: Sales and marketing 16,555 21,016 Research and development 7,459 14,019 General and administrative 6,605 16,339 Total operating expenses 30,619 51,374 Operating income 22,941 21,046 Other expense, net (1991) (6,181) Income before income taxes and loss from investment in equity affiliate 20,950 14,865 Provision for income taxes (2,911) (3,918) Loss from investment in equity affiliate (62) (40) Net income $ 17,977 $ 10,907 Comprehensive income $ 17,833 $ 11,981 Net income 17,977 10,907 Preferred share dividends (1,802) (753) Distributed and undistributed earnings to participating securities (4,048) - Net income available to ordinary shareholders - basic $ 12,127 $ 10,154 Net income available to ordinary shareholders - basic $ 12,127 $ 10,154 Net income available to ordinary shareholders - diluted $ 12,127 $ 10,907 Earnings per ordinary share - basic $ 0.34 $ 0.22 Earnings per ordinary share - diluted $ 0.32 $ 0.21 Weighted-average shares outstanding - basic 36,000,000 46,706,344 Weighted-average shares outstanding - diluted 38,525,303 52,964,620
AVG Technologies N.V. Condensed Consolidated Statements of Cash Flows (In thousands) Three months ended March 31, 2011 2012 OPERATING ACTIVITIES: Net income $ 17,977 $ 10,907 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,458 4,117 Share-based compensation 668 4,331 Deferred income taxes 1,835 847 Change in the fair value of contingent consideration liabilities 142 152 Amortization of financing costs and loan discount 109 704 Loss from investment in equity affiliate 62 40 Loss (gain) on sale of property and equipment 92 (14) Net change in assets and liabilities, excluding effects of acquisitions: Trade accounts receivable, net 1,978 (2,015) Inventories 20 65 Accounts payable and accrued liabilities 1,211 651 Accrued compensation and benefits (1,724) 149 Deferred revenue 6,115 4,050 Income taxes payable 1,544 (1,625) Other assets (3,371) (875) Other liabilities 253 (884) Net cash provided by operating activities 29,369 20,600 INVESTING ACTIVITIES: Purchase of property and equipment and intangible assets (2,887) (1,872) Proceeds from sale of property and equipment 52 33 Cash payments for acquisitions, net of cash acquired (3,875) (3,947) Net cash used in investing activities (6,710) (5,786) FINANCING ACTIVITIES: Payment of contingent consideration (2,330) - Proceeds from long-term debt, net of discount 230,285 - Debt issuance costs (6,506) - Proceeds from issuance of ordinary shares - 64,000 Share issuance costs - (6,970) Proceeds from exercise of share options - 318 Repayment of principal on long-term borrowings (1,125) (23,500) Decrease in restricted cash 1,333 - Dividends paid (219,232) (2,555) Repurchases of share options from employees - (845) Net cash provided by financing activities 2,425 30,448 Effect of exchange rate fluctuations on cash and cash equivalents 2,166 1,527 Change in cash and cash equivalents 27,250 46,789 Beginning cash and cash equivalents 63,146 60,740 Ending cash and cash equivalents $ 90,396 $ 107,529 Supplemental cash flow disclosures: Income taxes paid $ 1,936 $ 2,400 Interest paid $ - $ 4,539 Supplemental non-cash disclosures: Issuance of ordinary shares on conversion of Class D preferred shares $ - $ 191,954
AVG Technologies N.V. Reconciliation of GAAP Measures to Non-GAAP Measures (In thousands, except revenue per average active user data) Three months ended March 31, 2011 2012 Net cash provided by operating activities $ 29,369 $ 20,600 Less: Payments for property and equipment and intangible assets (2,887) (1,872) Add: Interest expense, net (1) 885 4,093 Unlevered free cash flow $ 27,367 $ 22,821 (1) The tax adjustment for interest expense is based on an assumed tax rate of approximately 10%, which is a blended rate based on internal estimates of what the Companys effective tax rate will be for the respective periods. Beginning in the quarter ended March 31, 2012, for interest expense the Company is using interest paid from the cash flow statement to calculate unlevered free cash flow. For prior periods, for interest expense the Company has continued to use interest expense from the income statement (which includes amortization of financing costs and loan discount). The Company has not adjusted the presentation for prior periods as this change in presentation of unlevered free cash flow would not have had a material impact. Revenue $ 60,774 $ 82,985 Unlevered free cash flow 27,367 22,821 Cash conversion 45% 28% Total revenue (in thousands) $ 60,774 $ 82,985 Active users at period end (in millions) 101 114 Average active users (in millions) (1) 99 111 Quarterly revenue per average active user $ 0.61 $ 0.75 Twelve months ended December 31, March 31, 2011 2012 Total revenue (in thousands) $ 272,392 $ 294,603 Active users at period end (in millions) 108 114 Average active users (in millions) (1) 103 107 Rolling twelve months revenue per average active user $ 2.65 $ 2.75 (1) The number of average active users is calculated as the simple average of active users at the beginning of a period and the end of a period
AVG Technologies N.V. Reconciliation of GAAP Measures to Non-GAAP Measures (In thousands except per share data) Three months ended March 31, 2011 2012 Gross profit $ 53,560 $ 72,420 Add back: - Share-based compensation 6 8 - Acquisition amortization 457 1,152 Non-GAAP adjusted gross profit $ 54,023 $ 73,580 Revenue $ 60,774 $ 82,985 Non-GAAP adjusted gross profit margin 89% 89% Operating expenses $ 30,619 $ 51,374 Less: - Share-based compensation (662) (4,323) - Acquisition amortization (349) (902) Non-GAAP adjusted operating expenses $ 29,608 $ 46,149 Operating income $ 22,941 $ 21,046 Add back: - Share-based compensation 668 4,331 - Acquisition amortization 806 2,054 Non-GAAP adjusted operating income $ 24,415 $ 27,431 Revenue $ 60,774 $ 82,985 Non-GAAP adjusted operating income margin 40% 33% Net income $ 17,977 $ 10,907 Add back: - Share-based compensation 668 4,331 - Acquisition amortization 806 2,054 - Provision for income taxes 2,911 3,918 Adjusted profit before taxes 22,362 21,210 Less: Tax effect (1) (3,139) (2,975) Non-GAAP adjusted net income $ 19,223 $ 18,235 (1) Adjusted for impact of normalized tax rate of approximately 14% Weighted-average shares outstanding - diluted 38,525 52,965 Add back: Class D preferred shares 12,000 - Non-GAAP fully diluted shares 50,525 52,965 Non-GAAP adjusted net income $ 19,223 $ 18,235 Non-GAAP EPS, diluted $ 0.38 $ 0.34
Share-Based Compensation (In thousands) Three months ended March 31, 2011 2012 Cost of revenue $ 6 $ 8 Sales and marketing 720 592 Research and development 425 688 General and administrative (483) 3,043 Share-based compensation $ 668 $ 4,331 Acquisition Amortization (In thousands) Three months ended March 31, 2011 2012 Cost of revenue $ 457 $ 1,152 Sales and marketing 321 902 Research and development 28 - Acquisition amortization $ 806 $ 2,054
AVG Technologies N.V. Reconciliation of GAAP Measures to Non-GAAP Measures Notes to Non-GAAP Adjustments Tax adjustment The Companys profit and loss tax charge varies from period to period and has shown significant variations from its cash tax charge. In particular, the Companys entry into an innovation tax regime in the Netherlands resulted in a significant tax credit in June 2011, which will be reversed in future periods. In order to remove the period to period impact of these variations, the Company has used an estimated normalized tax rate of approximately 14% in its historic financial reporting and future projections to better reflect the core operational changes in the business. The normalized tax rate of approximately 14% is based on an estimate of the Companys future cash tax rate as well as its recent cash and income statement tax charges. The tax rate reflected on the income statement for 2009 and 2010 was on average approximately 12.7% and the tax paid reflected on the cash flow statement in 2011 was approximately 13% with the tax rate reflected on the cash flow statement over the last three full fiscal years being approximately 17%. Preferred Share Adjustment During the 2011 fiscal year the Company had 12 million preferred shares which were entitled to a preferred dividend of approximately $1.8 million per calendar quarter, as well as their pro rata amount of net income assuming distribution to each separate class of shareholder. These shares were excluded from calculations of net income available to ordinary shareholders. At the time of the Initial Public Offering these shares converted to ordinary shares on a 1 for 1 basis, and preferred dividends are no longer payable. In order to reflect the underlying income attributable to ordinary shareholders in the non-GAAP calculation of adjusted net income per diluted share, the Company has included net income available to all shareholders, including the holders of preferred shares. The Company believes that these non-GAAP adjustments will allow it to present core financial trends more consistently during the periods before and after conversion of the preferred shares to ordinary shares.
SOURCE AVG Technologies N.V.