AVG Announces First Quarter 2016 Financial Results

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Total Mobile Revenues Grow 38 Percent Annually

April 27, 2016 4:03 PM EDT

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AMSTERDAM, April 27, 2016 /PRNewswire/ -- AVG Technologies N.V. (NYSE: AVG), the online security company™ providing leading software and services to secure devices, data and people, today reported results for the first quarter ended March 31, 2016.

First Quarter 2016 Highlights

Achieved quarterly revenue of $107.9 million; Non-GAAP adjusted EPS was $0.44.
Revenue from Emerging Businesses, which includes Mobile, VPN and hosted-SMB, grew 57 percent over last year, comprising 28 percent of total revenue.
Subscription revenue grew 9 percent over the same period last year.
ZEN user base at 53 million.

First quarter 2016 financial results

Revenue for the first quarter of 2016 grew 5 percent to $107.9 million, compared with $102.8 million in the first quarter of 2015.

Non-GAAP adjusted net income for the quarter was $22.9 million, or $0.44 per diluted ordinary share. This compares with non-GAAP adjusted net income of $23.9 million, or $0.46 per diluted ordinary share for the first quarter of 2015. GAAP net income for the quarter was $11.3 million, or $0.22 per diluted ordinary share. This compares with GAAP net income of $11.9 million, or $0.22 per diluted ordinary share in the prior year's first quarter1.

Non-GAAP adjusted operating income was $29.4 million for the quarter, compared with $31.7 million for the first quarter of 2015. GAAP operating income was $16.3 million for the quarter, compared with $19.8 million for the first quarter of 2015. Operating cash flow was $21.5 million for the quarter, compared with $22.2 million for the first quarter of last year. Free cash flow was $16.2 million for the quarter, compared with $19.9 million for the first quarter of 2015.

"The results for the first quarter reflect our continued progress on our operating and strategic plans, particularly in light of current market conditions," said Gary Kovacs, chief executive officer. "Revenues from our emerging businesses which includes Mobile, VPN and hosted-SMB, grew 57 percent over the same period last year, comprising 28 percent of total revenue, while search represented just 16 percent. I am also pleased to report that the user migration to ZEN, our cross-platform, multi-device software reached 53 million and we are on track to turn on the monetization engine in the middle of the year. Based on early testing, we remain confident that ZEN will be a key component of our future growth strategy, protecting our users on any device anywhere and anytime they go online."

Financial Outlook

Based on information available as of April 27, 2016, AVG is providing the following outlook for fiscal year 2016 as follows:

Revenue outlook is reconfirmed to be in the range of $440 million to $460 million.
Non-GAAP adjusted net income is expected to be in the range of $100 million to $104 million; non-GAAP adjusted net income per diluted ordinary share is expected to be in the range of $1.90 to $1.96.
GAAP net income is expected to be in the range of $43 million to $49 million; GAAP net income per diluted ordinary share is expected to be in the range of $0.81 to $0.93.

AVG's expectation of non-GAAP adjusted net income for fiscal year 2016 excludes share-based compensation expense, acquisition amortization and certain other adjustments, and assumes a normalized tax rate of 12.5 percent. For the purpose of calculating GAAP net income per diluted ordinary share and non-GAAP adjusted net income per diluted ordinary share, the Company assumes approximately 53 million weighted-average diluted ordinary shares outstanding for the full year.

The financial information presented in this press release is neither audited nor reviewed.

Conference Call Information

AVG will hold its quarterly conference call today at 4:30 p.m. ET/1:30 p.m. PT/ 10:30 PM CET to discuss its first quarter 2016 financial results, business highlights and outlook. The conference call may be accessed via webcast at http://investors.avg.com or using the following phone numbers and conference ID: +1 718 971 5738 (USA); +1 514 841 2153 (Canada); +420 225 376 428 (CZ); +44 20 3140 8286 (UK); Conference ID: 1924692.

Live and replay versions of the webcast can be accessed via http://investors.avg.com.

Use of Non-GAAP Financial Information

This press release contains supplemental non-GAAP financial measures that are not calculated in accordance with U.S. GAAP. These non-GAAP measures provide additional information on the performance or liquidity of our business that we believe are useful for investors.

Adjusted net income, net debt, free cash flow, cash conversion and their related ratios are non-GAAP measures and should not be considered alternatives to the applicable U.S. GAAP measures. In particular, adjusted net income, net debt, free cash flow, cash conversion and their related ratios, should not be considered as measurements of our financial performance or liquidity under U.S. GAAP, as alternatives to income, operating income 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 our liquidity.

Adjusted net income, net debt, free cash flow and cash conversion are measures of financial performance and liquidity, and have limitations as analytical tools, and should not be considered in isolation from, or as substitutes for, an analysis of our results of operations, including our operating income and cash flows, as reported under U.S. GAAP. We provide these non-GAAP financial measures because we believe that such measures provide important supplemental information to management and investors about the Company's core operating results and liquidity, primarily because the non-GAAP financial measures exclude certain expenses and other amounts that management does not consider to be indicative of the Company's core operating results or business outlook or liquidity. Management uses these non-GAAP financial measures, in addition to the corresponding U.S. GAAP financial measures, in evaluating the Company's operating performance, in planning and forecasting future periods, in making decisions regarding business operations and allocation of resources, and in comparing the Company's performance against its historical performance. Some of the limitations of adjusted net income and free cash flow and their related ratios as measures are:

they do not reflect our cash expenditure or future requirements for capital expenditure or contractual commitments, nor do they reflect the actual cash contributions received from customers;
they do not reflect changes in, or cash requirements for, our working capital needs;
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 our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, investors should rely on AVG's consolidated financial statements prepared in accordance with U.S. GAAP and treat the Company's non-GAAP financial measures as supplemental information only.

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 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.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including those relating to an expected range of revenue, net income, diluted EPS, non-GAAP adjusted net income and non-GAAP diluted EPS for the fiscal year ending December 31, 2016 and/or future periods, as well as those relating to the future prospects of AVG. 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 our growth strategies; changes in our future prospects, business development, results of operations and financial condition; the anticipated costs and benefits of our acquisitions; our ability to maintain effective internal controls and procedures; our ability to comply with our credit agreements; 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; changes in international or national tax regulations and related proposals; the assumptions underlying the calculation of our key metrics, including the number of our active users, revenue per average active user, subscription revenue per subscriber and platform revenue per thousand searches; potential effects of changes in the applicable search guidelines of our search partners; the status of or changes to our relationships with our partners, including Yahoo!, Google, and other third parties; changes in our and our partners' responses to privacy concerns; our plans to launch new products and online services and monetize our full user base; the performance of our products, including AVG ZEN; our ability to attract and retain active and subscription users; our ability to retain key personnel and attract new talent; our ability to adequately protect our intellectual property; our geographic expansion plans; the outcome of ongoing or any future litigation or arbitration, including litigation or arbitration relating to intellectual property rights; our legal and regulatory compliance efforts, including with respect to PCI compliance; and worldwide economic conditions and their impact on demand for our 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 Company's business is included in filings AVG makes with the U.S. 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 Company's reports on Form 6-K and Form 20-F. The Company's results of operations for the first quarter ended March 31, 2016 are not necessarily indicative of the Company's operating results for any future periods.

These documents are available online from the SEC or in the Investor Relations section of the Company's website at http://investors.avg.com. Information on the AVG website is not part of this release. All forward-looking statements in this press release are based on information currently available to the Company, and AVG assumes no obligation to update these forward looking statements in light of new information or future events.

About AVG

AVG is the leading provider of software services to secure devices, data and people. AVG's award-winning consumer portfolio includes internet security, performance optimization, location services, data controls and insights, and privacy and identity protection, for mobile devices and desktops. The AVG Business portfolio, delivered through a global partner network, provides cloud security and remote monitoring and management solutions that protect small and medium businesses around the world.

All trademarks are the property of their respective owners.

1 Non-GAAP results for the first quarter of 2016 exclude $3.4 million in share based compensation expense and $8.0 million in acquisition amortization and other adjustments that comprised $0.3 million in acquisition related charges, $0.4 million in charges related to the unwinding of discounts and changes in fair value, $1.1 million in charges associated with the rationalization of the Company's global operations, and $0.6 million in charges with the Company's global IT landscape transformation, less $0.7 million in net reversals of capitalized development charges, and adjusted for impact of normalized tax rate of 12.5% as described in the Reconciliation of GAAP measures to non-GAAP measures.

AVG Technologies N.V.
Unaudited condensed consolidated balance sheets
(in thousands of U.S. dollars)

	December 31,		March 31,
	2015		2016
ASSETS
Current assets:
Cash and cash equivalents	$	123,767	$	123,372
Restricted cash		26,858		10,011
Trade accounts receivable, net		35,717		36,475
Inventories		1,027		761
Prepaid expenses		7,501		10,557
Other current assets		14,888		13,590
Total current assets		209,758		194,766
Non-current restricted cash		226		237
Property and equipment, net		23,508		23,322
Deferred income taxes		38,181		37,912
Intangible assets, net		105,719		98,136
Goodwill		297,434		298,455
Investment		660		660
Other assets		1,728		1,731
Total assets	$	677,214	$	655,219

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	11,763	$	8,900
Accrued compensation and benefits		18,028		19,231
Accrued expenses and other current liabilities		82,887		62,743
Current portion of long-term debt		2,300		2,300
Income taxes payable		1,200		5,946
Deferred revenue		167,123		164,517
Total current liabilities		283,301		263,637
Long-term debt, less current portion		216,695		216,518
Deferred revenue, less current portion		33,004		32,489
Deferred tax liabilities		29,494		27,044
Other non-current liabilities		7,302		7,449
Total liabilities		569,796		547,137
Redeemable noncontrolling interest		16,800		16,800
Ordinary shares		727		727
Distributions in excess of capital		(113,211)		(110,819)
Treasury shares		(61,297)		(76,921)
Accumulated other comprehensive loss		(15,181)		(12,540)
Retained earnings		279,580		290,835
Total shareholders' equity		90,618		91,282
Total liabilities and shareholders' equity	$	677,214	$	655,219

AVG Technologies N.V.
Unaudited condensed consolidated statements of comprehensive income
(in thousands of U.S. dollars, except for share data and per share data)
	Three months ended
		March 31,
	2015		2016
	(in thousands of U.S. dollars)
Revenue:
Licenses	$	66,486	$	65,433
SaaS		15,095		23,383
Search		20,329		17,228
Other		900		1,827
Total revenue		102,810		107,871
Cost of revenue:
Software sales		(12,480)		(17,334)
Search and other		(1,332)		(1,270)
Total cost of revenue		(13,812)		(18,604)
Gross profit		88,998		89,267
Operating expenses:
Research and development		(20,677)		(23,723)
Sales and marketing		(28,797)		(28,664)
General and administrative		(19,750)		(20,548)
Total operating expenses		(69,224)		(72,935)
Operating income		19,774		16,332
Other expense, net		(4,390)		(3,170)
Income before income taxes		15,384		13,162
Income tax provision		(3,462)		(1,907)
Net income	$	11,922	$	11,255
Less: Net income attributable to redeemable noncontrolling interest		(3)		(8)
Net income attributable to AVG Technologies N.V.	$	11,919	$	11,247
Comprehensive income		9,803		13,896

Less: Comprehensive income attributable to redeemable noncontrolling interest		(479)		(8)
Comprehensive income attributable to AVG Technologies N.V.	$	9,324	$	13,888
Earnings per share attributable to AVG Technologies N.V. ordinary shareholders:
Net income	$	11,919	$	11,247
Redeemable noncontrolling interest		(479)		8
Net income available to ordinary shareholders - basic	$	11,440	$	11,255
Net income available to ordinary shareholders - diluted	$	11,440	$	11,255
Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders– basic	$	0.22	$	0.22
Earnings per share attributable to AVG Technologies N.V. Ordinary shareholders – diluted	$	0.22	$	0.22
Weighted-average shares outstanding – basic		51,599,964		51,018,326
Weighted-average shares outstanding – diluted		52,254,969		51,796,688

AVG Technologies N.V.
Unaudited condensed consolidated statements of cash flows
(in thousands of U.S. dollars)
	Three months ended
	March 31,
		2015		2016
OPERATING ACTIVITIES:
Net income	$	11,922	$	11,255
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		10,750		11,908
Share-based compensation		3,108		3,362
Deferred income taxes		2,941		(2,411)
Change in the fair value of contingent consideration liabilities		820		356
Amortization of financing costs and loan discount		430		491
Loss (gain) on sale of property and equipment		(56)		(98)
Net change in assets and liabilities, excluding effects of acquisitions and deferred revenue		(10,099)		214
Net change in deferred revenue		2,415		(3,605)
Net cash provided by operating activities		22,231		21,472
INVESTING ACTIVITIES:
Purchase of property and equipment and intangible assets		(2,302)		(5,227)
Proceeds from sale of property and equipment		57		156
Decrease (increase) in restricted cash		270		(12)
Net cash used in investing activities		(1,975)		(5,083)
FINANCING ACTIVITIES:
Payment of capitalized lease obligation		-		(19)
Debt issuance costs		(173)		(21)
Repayments of principal on current credit agreement		(575)		(575)
Proceeds from exercise of share options		1,818		1,792
Excess tax benefit		-		27
Repurchase of own shares		-		(18,307)
Net cash used in financing activities		1,070		(17,103)
Effect of exchange rate fluctuations on cash and cash equivalents		(577)		319
Change in cash and cash equivalents		20,749		(395)
Beginning cash and cash equivalents		138,907		123,767
Ending cash and cash equivalents	$	159,656	$	123,372


	Three months ended
	March 31,
		2015		2016
Supplemental cash flow disclosures:
Income taxes (paid)/received	$	(1,214)	$	(1,059)
Interest paid	$	(3,614)	$	(3,389)

AVG Technologies N.V.
Reconciliation of GAAP measures to non-GAAP measures
(in thousands of U.S. dollars)
	Three months ended
	March 31,
	2015		2016
Gross profit	$	88,998	$	89,267
Add back:
- Share-based compensation		12		47
- Acquisition amortization(1)		2,361		2,462
- Other adjustments(2)		44		435
Non-GAAP adjusted gross profit	$	91,415	$	92,211
Revenue		102,810		107,871
Non-GAAP adjusted gross profit margin		89%		85%

Operating expenses	$	(69,224)	$	(72,935)
Less:
- Share-based compensation		3,096		3,315
- Acquisition amortization(1)		4,341		5,533
- Other adjustments(2)		2,099		1,242
Non-GAAP adjusted operating expenses	$	(59,688)	$	(62,845)

Operating income	$	19,774	$	16,332
Add back:
- Share-based compensation		3,108		3,362
- Acquisition amortization(1)		6,702		7,995
- Other adjustments(2)		2,143		1,677
Non-GAAP adjusted operating income	$	31,727	$	29,366
Revenue		102,810		107,871
Non-GAAP adjusted operating income margin		31%		27%

AVG Technologies N.V.
Reconciliation of GAAP measures to non-GAAP measures
(in thousands of U.S. dollars, except for share data and per share data)
	Three months ended
	March 31,
	2015		2016
Net income	$	11,922	$	11,255
Add back:
- Share-based compensation		3,108		3,362
- Acquisition amortization(1)		6,702		7,995
- Other adjustments(2)		2,143		1,677
- Provision (Benefit) for income taxes		3,462		1,907
Non-GAAP adjusted profit before taxes	$	27,337	$	26,196
Less: Estimated provision for income taxes(3)		(3,417)		(3,275)
Non-GAAP adjusted net income	$	23,920	$	22,921

Weighted-average shares outstanding - diluted (in thousands)		52,255		51,797
Non-GAAP adjusted net income		23,920		22,921
Non-GAAP diluted EPS	$	0.46	$	0.44

	December 31,		March 31,
	2015		2016
Cash and cash equivalents	$	123,767	$	123,372
Current portion of long-term debt		(2,300)		(2,300)
Long-term debt, less current portion		(216,695)		(216,518)
Net debt	$	(95,228)	$	(95,446)

	Three months ended
	March 31,
	2015		2016
Net cash provided by operating activities	$	22,231	$	21,472
Less: payments for property and equipment and intangible assets		(2,302)		(5,227)
Free cash flow(6)	$	19,929	$	16,245

	Three months ended
	March 31,
	2015		2016
Revenue	$	102,810	$	107,871
Free cash flow		19,929		16,246
Cash conversion		19%		15%

	Twelve months ended
	March 31,		March 31,
	2015		2016
Total revenue (trailing 12 months)	$	383,337	$	433,372
Active users at period end (in millions)(4)		202		183
Average active users (in millions)(5)		195		193
Twelve months trailing revenue per average active user	$	1.97	$	2.25

	Three months ended
	March 31,
	2015		2016
Cost of revenue	$	(12)	$	(47)
Research and development		(731)		(624)
Sales and marketing		(549)		(516)
General and administrative		(1,816)		(2,175)
Share-based compensation	$	(3,108)	$	(3,362)

	Three months ended
	March 31,
	2015		2016
Cost of revenue	$	(2,361)	$	(2,462)
Research and development		(175)		(191)
Sales and marketing		(3,831)		(5,337)
General and administrative		(335)		(5)
Acquisition amortization	$	(6,702)	$	(7,995)

	Three months ended
	March 31,
	2015		2016
Cost of revenue	$	(44)	$	(435)
Research and development		296		444
Sales and marketing		(492)		(996)
General and administrative		(1,903)		(690)
Other adjustments	$	(2,143)	$	(1,677)