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AVG Technologies N.V. (NYSE:AVG)

Q4 2013 Earnings Conference Call

February 19, 2014; 05:00 p.m. ET

Executives

Gary Kovacs - Chief Executive Officer

John Little - Chief Financial Officer

Erica Abrams - The Blueshirt Group for AVG

Analysts

John DiFucci - JP Morgan

Melissa Gorham - Morgan Stanley

Greg Dunham - Goldman Sachs

Gregg Moskowitz - Cowen & Co.

Fred Grieb - Nomura Securities

Hamed Khorsand - BWS Financial Inc.

Peter Lowry - JMP Securities

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to AVG's fourth quarter and 2013 financial results conference call.

During today’s presentation all participants will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, February 19, 2014.

And I would now like to turn the conference over to Erica Abrams. Please go ahead.

Erica Abrams

Thank you, Katya. Thank you all for joining us today for AVG's fourth quarter and 2013 financial results conference call. Joining me on the call today are Gary Kovacs, CEO; and John Little, CFO of AVG.

Before we get started today, I would like to remind you that this call is being webcast and recorded. The webcast can be accessed live on the Investor Relations section of our website and via replay on our website shortly after the conclusion of the call. The website can be accessed at investors.avg.com.

On this call today we will provide you with details about our performance in Q4 and fiscal year 2013. Some of our comments may include forward-looking statements such as statements regarding our outlook for 2014.

These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties. Actual results may vary materially. Please refer to the section entitled Forward-Looking Statements in our earnings release and read the risk factors included in our filings with the SEC, most recently, our 20-F on April 5, 2013.

I would also like to point out that the results reported today include certain non-GAAP financial measures, and that the numbers discussed on this call will be non-GAAP unless stated otherwise. We provide non-GAAP financial measures because we believe that they are the most valuable way to review our core operating results.

We have provided a reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our website and has also been filed on Form 6-K.

The forward-looking statements and risks stated in this conference call are based on current expectations as of today, and AVG assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

Now, I'll turn the call over to Gary for his remarks.

Gary Kovacs

Well, thank you Erica, and hello everybody and thanks to all of you for joining us today as we report fourth quarter and 2013 financial results.

One quarter ago we announced major changes in areas of our business and I am please to say that we delivered great results this quarter, while we successfully executed on these changes and we have now completed our pivot of the business.

I want to walk you through the high level of our quarter and year, and then I will turn the call over to John Little for a deeper review of the financials, as well as the outlook for 2014. I will then return to share with you our strategic direction for the remainder of the year.

Overall, I am very pleased with the results for the fourth quarter with revenue at nearly $102 million and earnings per share at $0.52, both of these above the outlook we provided last quarter.

Our results are especially good as we began our exit from the third party toolbar business as discussed with all of you last quarter and as we focus on increasing the predictability and sustainability of our overall business.

For 2013, we reported total revenue of just over $407 million and earnings per share of $2.16, and in addition a measure that’s important to all of us and will continue to be important to us is our Overall User Count.

Our Active User Count increased to over 177 million in 2013, with 68 million of these users from mobile alone. This represents a beautiful sign of the shift we and the world are making to mobile.

When I spoke to you last quarter, I said that in addition to operational excellence, we would also turn our attention to innovation in each of our business units. To that end, let me share with you some of the highlights.

In the consumer business, we continue to effectively monetize our user traffic and we demonstrated strength in our core antivirus products, driven by renewals as well as some of our new products including PC TuneUp, which was really driven by first purchases. We also continued to make significant investments, including the release of major new products for our Mac users.

In our mobile business, I am delighted to report that we retained our number one spot as the number one downloaded security application on the Google Play store. We also released WiFi Do Not Track, which is aimed at giving consumers the choice to block tracking of their location, which can be picked up by WiFi networks in retail stores and other public venues. This represented a significant advancement in our privacy initiatives.

And something that we are really focused on is making it easier for all of our users to incorporate more of our products into their lives. To this end, we are seeing encouraging signs of users downloading more than one of our applications to their devices and with the next set of application releases that I will discuss a little later in the call, we expect this trend to continue.

Today, we have more than 70 million applications in use with over 10 million of these not tied to our core antivirus product. In fact, four of AVG’s mobile applications now each have more than 1 million users alone.

In the small- and medium-business segment in the fourth quarter, we completed the integration of level platforms and are focused on execution and integration of our channel partner relationships. We were successful in selling CloudCare and AVG Managed Workplace solutions into our MSP channel throughout the quarter. This contributed to year-over-year revenue growth.

This business is beginning to make an important contribution to overall subscription growth and clearly has opportunity for further acceleration and execution in 2014.

Turning finally to the platform business and as I previously mentioned, we began our controlled exit from the third-party search business and this went better than expected throughout the quarter. John will discuss the impact of this in more detail in just a few minutes, but I want to stress that indirect monetization continues to be a strategic asset for AVG, and I am personally focused on taking our partnerships to new levels and expanding the platform business outside of search.

In summary, the fourth quarter wraps up the year of significant change, and I am very pleased with how we ended. With 2013 behind us, we have set in motion a number of initiatives that position AVG for a strong and sustainable future in an important and growing market.

I will elaborate more on these following John’s detailed review of the quarter and our outlook for 2014. Let me now turn the call to John Little.

John Little

Thanks Gary. Hello everybody. For the fourth quarter of 2013, we reported total revenue of $101.9 million and earnings per share of $0.52. AVG subscription business delivered revenue of $67.3 million in the quarter or 66% of total revenue, and our platform business was stronger than expected at $34.6 million. Unlevered free cash flow was $32.6 million or $0.60 a share, and free cash flow conversion was 32%.

Our customer base grew sequentially and year-over-year, and we ended the quarter with a 177 million active users. Mobile was a key driver of this growth, and is now 68 million users or approximately 38% of our total count. Paid user count remained at approximately 16 million.

As we committed last time, we started the exit from the third-party search distribution business. This strategic change led to a number of actions in Q4, and as we set goals for 2014, we examined our resource allocation and removed 52 heads as an initial step.

We expect the change to continue through 2014 and given though that its early in the year and that we are at the early stages at some of our initiatives, we are broadening our outlook for 2014 with revenue in the range of $365 million to $405 million, with the second half expected to represent a proportionally larger share of annual revenue.

We remain focused on a target of at lease 30% operating margins throughout 2014 and at the same time as we increase our spending on strategic growth areas. This would equate to net income of $96 million to $112 million, and EPS in the range of $1.80 to $2.10. We put a relatively wide range on the bottom line in order to take account of investment opportunities that may occur during the year.

Turning to more detail of our fourth quarter performance. In our platform business, revenue was $34.6 million, higher than we had expected as this benefited from better results from retention of partners in the third-party business. Organic search revenues were $23 million in Q4. Overall, we saw the number of searches decline to 1.2 billion as compared to 1.3 billion in the prior quarter. This contained a higher proposition of U.S. searches.

Yahoo represented 41% of platform revenue, up from 30% in the prior quarter. Platform business contributed $25.2 million of gross profit at a 73% gross margin in fourth quarter. We expect to see the impact of the exit from the third party business being more significant in Q1.

Subscription revenue increased 25% over the prior year to $67.3 million; both the consumer and SMB business grew in excess of 20% in the fourth quarter. For 2014, we expect subscription revenue to represent about 75% to 80% of total revenue. We think this revenue mix delivering predictable, sustainable revenue is a positive move for the business. Overall, our initial guide to 2014 is the subscription revenue growth of mid-to-high teens.

In the mobile business, Active User Count increased from 57 million to 68 million in the quarter, as the viral uptake of AVG’s mobile product continues, and mobile users now represents 38% of our base.

As Gary noted, we are seeing expansion outside of core AVG products on mobile and now more than 5% of the users have more than one application which we believe will drive long term stickiness.

On the PC use number, we saw a seasonal reduction driven by the campaign for our trial base following that Q3 product launch and a significant reduction in stand-alone search users, again following the start of the exit from the search distribution business.

Turning to more details of the income statement, gross profit for the quarter was $85.3 million at an 84% margin as compared to 86% in the prior year. Subscription margin remain very strong at 89%, while platform margins lower year-over-year improved sequentially to 73%. Operating income was $32.4 million and operating margin 32%. Interest and other expense in the quarter was $200,000 versus $5.2 million a year ago, as a result net income improved 63% to $28.2 million.

Turning to the balance sheet, deferred revenue at December 31 was $197.2 million, up $7.7 million from the prior quarter. In Q1 we expect to see flat sequential subscription revenue, resulting from an atypical differed revenue release, because of a historic shift in license fell from two year to one year in one of their product line. Cash and cash equivalents totaled $42.3 million at December 31, and net cash of $12.3 million.

Turning to cash flow, we generated $139 million of un-levered cash flow or $2.64 per diluted share during the year, a conversion rate of 34%. In the quarter we repurchased 1.3 million shares under our anti-diluted repurchase program deploying $26.8 million. We also reduced debt by $9.2 million. We expect our cash deployment to be more focused on other strategic users in 2014.

We paid $6.6 million in taxes for the quarter and $16 million for the year. Interest paid in the fourth quarter was $300,000 compared to prior year of $2.9 million, primarily due to lower debt.

As we look into 2014, we remain focused on delivering growth in our predictable subscription business, continuing to add new active users to support our indirect platform business. Innovating on our product opportunities in SMB and consumer, using the cloud as a delivery method and combining it with operational leverage that provides sustainable operating and cash flow performance.

We will provide more detail on our strategy and 2014 initiatives during our Analyst Day on March 13, in New York. But now I’d like to hand the call back to Gary to provide additional information on our expectations for 2014.

Gary Kovacs

Well, thank you John. So we talked about Q4 in 2013 and we have given you our financial guidance for the coming year. Now I want to tell you what all this means for our future and lets start with the people. Because we have made some important strategic and executive changes designed to help us focus and execute more quickly going forward around the key areas including cloud and mobile.

These changes include hiring Todd Simpson as Chief Strategy Officer to align AVG’s strategy with market innovation, corporate development, strategic partners and other new initiatives. Todd is a well-regarded and deep technologist with a wealth experience in mobile, as well as cloud and will lead our initiatives in this area.

We have also recently appointed, and I’m delighted to announce that Harvey Anderson is joining as Chief Legal Counsel. Harvey will focus not only on our global legal compliance and ethical matters, but also on speeding our transactions, IP partnerships, innovation efforts and leading AVGs privacy initiatives worldwide. Harvey also has a depth of experience in mobile and has deep industry relationships that will help grow our growth and partnerships in these areas.

With Harvey’s appointment I’m delighted to report that Christophe François, former General Counsel has taken the helm of Chief of Staff, reporting directly to me. Christophe will ensure the CEO committed deliverables, including business transformation and execution excellence are completed successfully on time and on budget and he will play a senior role in also managing our European operations. These are changes that are effective immediately and add significant leaps to an already great senior team.

Now, lets talk about the direction that we are going as a team. Our objective is to be The Online Security Company, and security means the devices that people carry, the data on the devices and that we rely on and of course at the end of each of these devices, the people, and we are well on our way to achieving this vision.

AVG began as a PC based antivirus company and we have come a long way since, marked by the achievement, but in the last year we grew our mobile user cap to $68 million from $26 million in the previous year.

With this, we have again achieved the number one spot in Mobile Security Downloads on the Google Play store, and we have done this by the power of our brand; the growth here has been viral. We’ve also grown our product set well outside of antivirus with one example being TuneUp that is now available across multiple operating systems.

For over 20 years our PC consumers trusted us to deliver peace of mind in their every day lives and now our mobile customers trust us to do the same. This trust is our invitation to play as The Online Security Company.

Consequently the mobile growth is incremental to the PC base and we expect to be able to driver revenue and cost synergies across both platforms, to deliver growth in the near term. We believe these synergies will be most clearly seen in products that cross these platforms horizontally and by adding additional product to represent cross sell opportunities to our user base.

Our next step in the product evolution is to connect mobile and desktop and by creating that connection, delivering an outcome that is greater than some of the parts for each of our users. That connection is called AVG Zen, a new application that runs from desktop to devices and provides an easy approach for deployment of security products and services across all of each of our connected devices.

We believe AVG Zen will be at the forefront at what needs to be an industry redefinition. Today, put quite simply, securing the few devices we have in our world is just simply too difficult. We have different products from different vendors that seemingly look and feel all very different of each and every platform. It’s a mess and the result is that consumers increasingly spend time online. They are largely unprotected and they are unprotected because they simply don’t know what’s available to them, they don’t know how to protect themselves or if they do, it is just too difficult.

AVG Zen solves this problem. It makes complicated lives much, much more simple. And if lives are complicated now with Smartphones, tables and PCs, imagine how complex things are about to become when the connected devices in our world include cars, refrigerators, TVs, glasses, shoes, and the Internet of things. That is exactly where AVG Zen will shine.

The three core breakthroughs in Zen are a simple integrated view of all devices and the status of each, from any device. Second, it allows you to discover and deploy security product easily and quickly with the click of a button or the touch of the screen; and the third is it allows you to monitor your status across all your devices and therefore your status on the web, including devices belonging to your family, members of your business or any other group, depending on how you want to configure it. AVG Zen is about placing you, me, all of us as consumers and people behind all these smart connected devices back in control of our connected life.

In summary, Zen is an important step in AVG’s evolution. Centering on the application, we see multiple opportunities to build and acquire and integrate new technologies and products and then allow users to easily discover and incorporate them in their day-to-day life. Our strategic roadmap will follow this framework and you should expect to hear much more from us in the coming months.

We are demonstrating AVG Zen to the world for the first time next week at mobile world congress in Barcelona, which is the world’s largest mobile show and we will be following this by officially launching the application at the end of March.

AVG Zen is a new approach, but we will also continue to invest in the developing of standalone applications to serve our customers when and how they need it, and to deliver these products we expect to develop relationships with carriers and handset manufacturers and other component suppliers to deliver these products to market.

To this end, and as some of you may remember, we signed an important deal with Qualcomm Reference Design Group to be one of their reference design partners early in 2013.

In the second half of 2013, as a result of this deal we began signing mobile operators that originated from this contract and we are beginning to now see handsets with AVG preloaded on them, shipping into primarily emerging markets such as South Africa, Brazil and the Middle East.

Now, its early days in these relationships and we know that these delivery and sales cycles can take time as they develop, but they continue to be a very important part of our future and we expect many more of them.

Turning to our small and medium sized business segment, in 2013 we laid the foundation for the transition of our business to a cloud based security model. We started with the internally developed product CloudCare and because we firmly believe in the SMB opportunity, we added a managed workplace later in the year. This gave us access to a larger and much more sophisticated customer base, and as we exit 2013 we have $13 million in annualized monthly recurring revenue from our cloud business alone, and we believe that we will steadily grow this business in 2014 and beyond.

Turning to our platform business, indirect monetization continues to be an important strategic asset for AVG. On the search side of our platform business we are closely working with Google, Yahoo and other partners and we are also working to further diversify the platform revenue stream within search and in markets outside of search in 2014 and beyond.

We continue to see all of this as an important part of our revenue mix going forward and I personally love the present dynamic in the platform business and it increases the competition for our high quality, 177 million and growing user base.

What a quarter! I am extremely pleased that we’ve been able to deliver the results while executing on the changes needed to establish AVG as a leader in an important and growing security market. Certainly it will take some time for all of this change to convert to revenue and user growth, but I am excited about where we are and I look forward to sharing much more about our progress in the coming quarters. Thank you. Operator

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of John DiFucci with JP Morgan. Please go ahead.

John DiFucci - JP Morgan

Hi, thank you. This is a question for John, there are a couple, and then one for Gary. John, this controlled exit of the third-party toolbar business and one of the questions we keep getting asked and we have some idea of what it is, but how much cash flow did that account for on a trailing 12-month basis?

I know that you said you can do it in a controlled manner that its not going to affect EPS or cash flow, meaning you will offset it with other things, but just to give people a sense, how much cash flow – what percent of your cash flow before you started exiting that was coming from that business?

John Little

We haven’t broken that out specifically John, but I think we certainly have said that as far as that business is concerned in Q3, it was a relatively easy financial decision to come out of that business. You’ve seen as we started to withdraw from it, the margin in that particular field has gone up from the mid 60’s to 73% already. So I think that gives you an idea that given that the search distribution was roundabout a quarter of the revenues in Q3. You can see how much of that’s related to gross profit. So again, that particular part of the business was not a significant contributor to cash flow as where we’ve got to in Q3.

Now, we started to of course invest it in that, but I think the changes that we talked about have meant that the business has started to deteriorate as a result of the Google guideline changes, so not significant contributor by the time we got to Q3, 2013.

John DiFucci - JP Morgan

Okay John, that’s helpful, just pointing out the delta in margin. I guess also just a question John on the guidance. It’s a pretty wide range for next year, and I know there’s a lot of moving parts that you and Gary have moving forward here. But last quarter, I think you said that revenue will be at least $400 million, so it’s a range a little bit above that, but also $20 million below that in the low end. So essentially, I just was wondering what would you see right now? I guess, it’s somewhat of a subtle change, but it is a change nevertheless in the guidance on the low end anyway.

John Little

Yes, it’s a fair point John. I mean what we’ve seen is we’re early in the phase with a number of these initiatives and just as we’re looking at them, we want to make sure that we stick by what we said previously, which is that we model what we can see here and given the early stages in a lot of these things and some of the conversion rates and what we are looking at here, the initiatives that Gary’s referred to, there are some relatively wide outcomes right now .

So as you are looking at adoption rates and that type of things, then I think we want it to be, as you say, give that some opportunity within that to give accurate guidance out there. That’s resulted in a pretty wide range as you correctly say, but I think it’s the right way to talk about the new guys.

Probably, most importantly, but we will look at this. There’s probably been a push of the revenue and to look at the adoption rate and the things like Zen coming out, it is probably key for all of this. What we’ll look to do of course as we develop and we test these things and then we run out there, that will tighten out the areas you would expect.

John DiFucci - JP Morgan

Okay, great, fair enough. And if I could, one more for Gary and if John’s response actually feeds into this, and AVG Zen sounds really interesting. Also, I think we’ll sort of lay the groundwork for sort of how you see the company moving forward, and that will sit well with customers and also investors.

So I just want to make sure I got that right, this is new for us. It sounds like you are thinking more about protecting the person versus the device, and I guess how does that – you kind of touched on it and maybe you are not prepared to go into a lot of detail, but how does that go beyond the traditional device security technology?

Gary Kovacs

Yes, it’s a good question. So the way we are defining security is actually a little bit more encompassing than what we talked about. It’s the device, it’s the data, and it’s the people, and the reason why each of those is important is because the device has to remain up and running in performance and free of inbound threat. So that really gets at the core of what we have been delivering antivirus, and a lot of these other products and some of our performance products and TuneUp and so forth.

The data on the device is what’s important for most people. So is it secure, is it encrypted, do we have our passwords in a safe place, do we have our financial transactions in a safe place, do we know what’s happening to them and is it protected just for us. So there’s a series of products under that category as well.

And then of course, at the end of these billions of devices, it’s the people and through these mobile devices and now desktops, we are presenting much more of our self to the world. So our families, our pictures, our privacy, our identity, there’s a bunch of these other things, and how do we ensure that what’s happening to our footprint in the world is within our control, so that leads us to a whole series of products called Identity and Privacy Fix and a Family Care Plan and so forth, so that we can make sure that we as a persona is protected online.

So the three categories device, data, people are equally focused for us, but the reason why Zen is important is because just the definition I gave you there is 10 products and if you get them all for maybe gee, you’ll kind of look and feel the same, but as most people would get them from multiple different vendors and its really difficult and if we do that on four platforms with each of us having our live tablet, a PC or Mac or phone we now have a 4x10 problem. So we’re considering 40 devices multiplied by however many family members or however many business members and it’s a mess, which is why it doesn’t happen.

So Zen is going to be a simple way to discover and integrate each of those products and then manage them across whatever footprint you define, and that’s really the essence of what Zen is.

For AVG kind of turning the table a little bit, it allows us to establish a direct relationship with each user. So rather than have a user have to discover each new product in a Google Play store or the app store, they can be discovered through the interface of Zen and then with one click or the touch of a screen, it can be deployed to all the different devices and that for us obviously has tremendous channel leverage and relationship power, so its good for the user and its good for us.

So that’s the essence of Zen and I’d say a picture is worth a thousand words. So it’s going to be something that when we demonstrate it next week, it will be much clear.

John DiFucci - JP Morgan

Great. No, that’s really helpful. Thanks Gary, thanks John.

Gary Kovacs

Thank you, John.

Operator

Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley. Please go ahead.

Melissa Gorham - Morgan Stanley

Hi, this is Melissa Gorham calling in for Keith. Thanks for taking my questions. I just have a question on the organic search business, just stepping aside from the third party distribution. Did the organic search revenue come in better than expected this quarter as well and can you maybe answer that by discussing the dynamic between search volumes and maybe what you saw from an RPM perspective?

Gary Kovacs

Yes, we continue to see – so the first question is yes, it didn’t over perform as much as the third party, but we were pleased with the results there as well. I think in terms of the RPM, we’ve continue to see that being very strong as you see the mix moving more towards the U.S. and as the guys can seem to optimize that overall. So, I think we saw some positive moves on the base front in Q4.

Melissa Gorham - Morgan Stanley

Okay, great thanks and then just one question on the subscription business. So subscription business accelerated 27% growth in FY’13 and then you are guiding to mid to high teens grossing up by ’14. That’s significantly above what I think the consumer end point market is growing. Just wondering if you can maybe just talk a little bit about the drivers behind that growth and then if you are embedding any expectations for the AVG Zen in that guidance.

John Little

Yes, so the AVG Zen is relatively insignificant at the moment in that guidance as we look it. The fields that we’re looking at are actually the same ones that we’ve seen before with probably one or two additions here, but we’re looking at consumer security renewals. Again we’re looking at the up-take of our auto renew program remaining at around 77% levels, so that’s super strong.

We’re also looking at the first purchases, again continuing on the TuneUp, but of course TuneUp is a product that we’ve had for a couple of years now. So we’re starting to see a significant amount of the renewal pool from that growing and we’ve now got that product onto auto renew and very, very early days, that the uptake for auto renewal and the renewal – and the renewal we’re seeing as a result of that uptake has increased significantly from that product. And that looks like a very strong growth driver.

Consumer security has been also doing well; our campaign this year is also driving more revenue. And the of course we’ve got SMB as we transition into the cloud, as we move onto that subscription base business, I think we’re looking at that business as well with confidence. So those are the three main growth drivers.

And then obviously there’s the additional things that you mentioned with the silo, as Zen takes hold as mobile subscriptions start to come online during the year, as those things come on and then if we can add additional products into this mix and that would give us all opportunity to move on up-site from where we are.

Melissa Gorham - Morgan Stanley

Okay, great. That’s helpful, thank you.

Gary Kovacs

Thank you.

Operator

Your next question comes from the line of Greg Dunham with Goldman Sachs. Please go ahead.

Greg Dunham - Goldman Sachs

Yes guys, thanks for taking my questions. I too wanted to follow up on the subscription business as well. The deferred revenue seemed a little bit lighter. I think we were modeling at 9% growth year-over-year. Was that due to timing in product launches or what explains the slow down there?

John Little

On the deferred revenue, I think with that incentive, how we were looking at the subscription, it was a little bit lighter on booking in Q4 than we’ve expected. On that again we’re going to be running some campaigns in Q1 to follow on from that Greg. But I think in terms of how we were internally expecting that to come out and the campaigns broadly, they were pretty much the same as we were expecting.

Greg Dunham - Goldman Sachs

Okay. So with the strength then of the seasonality of the kind of differed revenue, should it perform relatively consistent with what it did last year from a seasonality perspective?

John Little

Oh! I get it, I’ve got you. What your talking about is that fantastic $18 million slots that we put on in Q4 last year right, where we just kind of had – where a number of things came together and we just had an absolutely blow out quarter.

So you’re absolutely right. In terms of the comparable that we were looking at there, it was a lot tougher this year and things like that, so your right. I’m sorry, I missed the essence of your initial question, but it kind of wasn’t as strong, a really strong quarter pretty much in line with our expectations I would say. Some movement into Q1, but generally having to – just looking at your tough comparative certainly.

Greg Dunham - Goldman Sachs

Okay, and then just a final question. I might have missed this on the call as I’ve been jumping back and forth. I think you guided the mid to high teen subscription growth. Did you mention how that was going to progress throughout the year?

Gary Kovacs

Just in a standard manner. I think we’ve had a lot of affinity in the back end. The revenue generally is in the back end, which was the second half. We didn’t get the sizing but you’ve seen the way the subscriptions been through quarter-over-quarter, so we are expecting it to grow sequentially by quarter here in it, absolutely.

Greg Dunham - Goldman Sachs

Okay, thanks guys.

Gary Kovacs

Thank you Greg.

Operator

Thank you. Our next question comes from the line of Gregg Moskowitz with Cowen & Co. Please go ahead.

Gregg Moskowitz - Cowen & Co.

Okay, thank you and good afternoon guys. Just a follow-up on one of Melissa’s questions regarding the organic search business. I’m wondering if there’s anything you would call out here from a competitive or an execution standpoint in terms of what you saw in Q4?

John Little

In terms of the numbers, while we are seeing a number of people who are talking, we are seeing a number of I would say some pretty mixed results from this area. In terms of our execution of course we continue to be pretty pleased with the way that that’s going and obviously the best team we’re working for we would see is the over performance from the third party distribution and then administer some slight over performance there. So I think from what I’ve seen, we seem to be doing relatively well compared to some of the competition, but probably up to somewhat sort of symmetrical or a repulsive earnings point of view. Gary will do maybe the follow-up.

Gary Kovacs

Searching in direct monetization is represented by our platform business and when we focus, meaning when its organic within our core product, so what’s specific with that is when somebody searches for security product, downloads a security product and gets an offer that is related to security, the contract works and we see good up tick and good stickiness if you will.

And so with the changes we made last quarter, we see of course a movement away from the third party in organic and a much heavier emphasis on our in-product organic, which then we have people freed up to run programs and campaigns against that organic, which then of course we have people freed up to develop our product even further, so we get better and we generally have seen and believed that that focus has created a better experience for our users, which we’re now seeing better results on a proportionate level.

So the industry as you know is kind of shaping out right now and I think there’s going to be a move, sort of a clean up move and we’re just well ahead of the curve and we’re seeing good early results and I think relatively speaking, that’s the difference.

Gregg Moskowitz - Cowen & Co.

Okay, that’s very helpful, thank you. And John, can you elaborate on the reason for the one time release of differed revenue in Q1 and what the amount of that is expected to be.

John Little

It’s probably, I think its impact of the TuneUp product moving from the two year to the one year. Its starts, like its existing, but as that thing relates and effectively that gives us a blip where its flat quarter over quarter, despite having the differed revenue as Greg was pointing out, to maybe $200 million on the balance sheet.

So that gives you an idea. You’ve seen it grow in a sort of subscription revenue line of $2 million to $3 million third quarter and I think what you are going to see is just that one flat quarter. So that gives you a rough idea of the quantum of what I’m talking about there.

Gregg Moskowitz - Cowen & Co.

Okay, that’s perfect John. And if I could ask one last one for Gary. You’ve had some good insight into some of the mobile app uses that you’re seeing across your customer base. Can you talk about some of the experimentation from a mobile monetization standpoint and what you’ve seen so far around that?

Gary Kovacs

Yes, all this was a caveat. Its early, so it haven’t really been factored into our guidance, but the traditional way that the industry has tried to monetize mobile is on a per cent, per app download and that’s kind of clumsy and its very segmented. There might be some revenue in there that grows over time as people become accustomed to it, but instead what we are experimenting with is present it through some of the packages, being able to offer two or three products that are all consistently discovered and offering that as a bundle.

And then where services are rendered, for example in monitoring your children’s location, we are able to offer subscription for those and our early test are encouraging, they are early. But for example if you are a subscription customer on the desktop where you are paying a yearly subscription for your virus definitions, the desire or the willingness to take that up by 10%, to include two or three mobile products that are easily deployed and discovered, there is less resistance for that than somebody spending $5 new on five different applications in the app store.

So we have a bunch of different models in these areas that are running and we are sort of honing in on some of that and it looks encouraging, but that’s too early to tell, but that’s the direction that we’re going to continue.

The second which we are seeing some, again very early tractions around mobile advertising, and again this is not getting advertising for a pair of shoos in the security products, this is in context advertising. And the early results there, they are too early to predict, but we are seeing some traction and the third area too is by using the consumers data footprint to more accurately target whether they are on the web, to using their own data and giving them the power to navigate more cleanly is kind of a big data analytics play and we are seeing some interesting traction there.

So again, all these are – I’m being unnecessarily obtuse in my answer just to not kind of give away our specific product there, but to help you understand a few of the areas that we are pushing deeper in.

Gregg Moskowitz - Cowen & Co.

That’s great. Thanks very much Gary.

Operator

Thank you. Our next question comes from the line of Fred Grieb with Nomura. Please go ahead.

Fred Grieb - Nomura Securities

Hey, nice quarter guys. One question for you John. Just is there any change you can give us some sort of bridge to get from your paying subscriber growth of about 7% year-over-year to the subscription revenue growth, which grew about 25% year-over-year. Basically build us up from that 7% and how much it is, changes in ASPs or additional products being solid to certain customers, something like that.

John Little

Yes, a lot of it currently is the cross sell opportunity and you know what Fred, I think that this is quite an involved one, but it might be something to just push to you guys on the Analyst Day, to just explain what we’ve been doing there. But clearly at the high level you are looking at the big cross sell into the existing base that pushed that out there and then that’s probably the main one rather than looking at any specific raises in ASP.

The second result we talked about during the course of the year remains pretty solid. We have seen during 2013 we saw a decline in our SMB users in the first half of the year and an increase in our consumer users, and the ASP between those guys is very different. So I think those are the two sort of high level to give you, but then I think the list does merit in further details. So we’ll give that to everybody on the Analyst Day, just to provide you with some help on how we are getting there and maybe I’ll give you some idea of where that could be going.

Fred Grieb - Nomura Securities

Got you, that’s helpful. And then in terms of renewal rates, I know you guys don’t give out much information about this, but is there any change you could tell us in the quarter how they trended? Were they better than they have been or kind of in line?

John Little

We got a couple of statistics that vary of the steps into the auto renewal program. That again won’t back off to the sort of 77% level that we saw previously. If you remember last quarter we saw a full length of the 73% level. That is a specific product mix point of use, so that is going strong.

The consumer online renewal rates, which is a key metrics store, again without going into the specifics grew both sequentially and pretty significantly year-over-year, so that’s been pretty strong. And we saw, I don’t want to – as I said on the main, in the prepared remarks, we did see a very significant move in overall renewal rates and particularly the differential there has been with and without auto billing.

It’s a small profile and its an early start for that, but the number is very significant, the increase on that particular thing. So as that develops, then we’ll see if that becomes a longer-term revenue driver for us. In the same way of course it’s directly the antivirus on the consumer side and the internet security on the consumer side became a strong revenue driver that adopted auto billing.

Fred Grieb - Nomura Securities

Got you, all right, thanks. If I can one more; just Intel recently announced that it was retiring the McAfee brand name in favor of Intel security. I know brand name is pretty important in the antivirus market. Is there any chance that you think that that could hurt their brand recognition and market share and potentially to the advantage of competitors like AVG over time.

Gary Kovacs

I don’t know. Thankfully I’m not a branding expert. We have much smarter people at that than me. But what I do know is that the world of mobile has really moved to different chip configuration, with ARM and Qualcomm leading the way. And so we are very focused much more than the Intel platform. Around mobile its on ARM and Qualcomm and so I think that’s an important distinction and an important avenue for us. So I don’t know how this will play out for Intel Security or the fall of McAfee, but I do know that its kind of important to be both of those platforms and I can’t comment on what their plans are or how the brand will effect their movement into those areas.

Fred Grieb - Nomura Securities

Okay. Thanks a lot guys.

Gary Kovacs

Cheers Fred.

Operator

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand - BWS Financial Inc.

Hi. I was wondering is you could provide some insight on how and what the timeline would be in generating material revenue from the mobile sector.

John Little

Again we have something that on the Analyst Day we are planning to just come and give a bit more detail on how that’s working. I think the point that Gary made Hamed is they would bring some revenue from that. Right now in terms of material I think the key thing that we are looking at now is the uptake is then and the ability to cross sell that and in terms of that overall, I would say those are the two main variables on that. Certainly in the projection that we’ve got for 2013, there isn’t a material amount included in those projects to-date, sorry projects for 2014, I’m sorry.

Hamed Khorsand - BWS Financial Inc.

Okay, so you don’t expect it to provide material revenue anytime in the next calendar year?

John Little

We haven’t got any direct mobile material revenues in the forecast that we’ve given you for this year, that’s correct.

Hamed Khorsand - BWS Financial Inc.

Okay, and last question. Could you provide some idea on how customers have reacted so far on and what the attraction has been so far in the first quarter?

John Little

On the first quarter, I mean we haven’t given any commentary on the first quarter at the moment. The product release as Gary said, they are at the end of the quarter.

Hamed Khorsand - BWS Financial Inc.

Okay, so I mean have you noticed any treads where the customers are slowing down, picking up any type of.

Gary Kovacs

No, not at all. Its important to stress that Zen is a not a suite where its going to be heavy. Zen, its an integrated, using a file to approach the discovery. So we are going to see a consistent UI, we are going to see a consistent experience and we are going to see a consistent ability to discover and deploy the technology and as a result though, each individual product will be updated on the next update cycle and they will be tied much close together.

So what we don’t want to do, and I want to stress this is, is have our customers have to think they are going to deploy multiple things, which as you know in mobile is a very heavy download, its very data and bandwidth intensive and is going to meet some resistance. This will be as seamless and quick, but it will add the important element of just being able to cloud aware the rest of your devices and the rest of our ecosystem of devices through this one product.

So its not similar to where an app function is today on a mobile device, where it pulls most of the data and information from the cloud anyway. So this is an integrated approach, not a suite that you are going to be heavily downloaded. So we don’t anticipate any stall in our current update, because whatever they buy, they are just going to get this next version as it goes.

The ability in the upside for the revenue comes as the discovering delivery is much easier and then we move them into some of these suite pricing and combination pricing that I referred to earlier.

Hamed Khorsand - BWS Financial Inc.

Okay, thank you.

Gary Kovacs

Thank you.

John Little

Cheers Hamed.

Operator

Thank you. Our next question comes from the line of Peter Lowry with JMP Securities. Please go ahead.

Peter Lowry - JMP Securities

Great thanks. Hey congratulation on a nice quarter. I guess in providing the broad range of guidance, really some initiatives on both sides of the business. Is the uncertainty early in 2014 more on the subscription side or the platform side and why? If there’s any sort of color or magnitude you could give there, that would be great.

John Little

Yes, I think on the platform side I think as you probably saw there, that’s a couple of things. It’s the speed and that business comes out. I think we’ve said what we are guiding to the last quarter, we are talking about $18 million of gross profit third quarter, sort of an average from that business and that metric pretty much holds. But obviously the top-line can vary according to what the cons maybe on that. So that gives you one element of that coming in.

The second is on just a general initiative to whether it’s the Zen, the subscription services. Again, its just looking up the models and as we can see at the moment and the potential uptake on those things. The core business as it stands, as you would expect there is a model that we are familiar with. We know how they are on and we are pretty confident on how those will hang on and will continue to run within the expectations of that.

And as I said just in response to a couple of questions we were answering Fred, which is to say that the only sort of unusual item we’ve seen there is a very positive move on the TuneUp renewal rates. So generally I think that’s it. So the new initiative; it’s the early days for those and its just an early part of the – and as I said, as we move through the quarter, through the year, they will be tightening their guidance.

Peter Lowry - JMP Securities

Okay, great, thanks. Just one more; I think you gave a couple of reasons why the non-mobile users were down in the quarter. What should we expect long term in terms of growth of non-mobile active users?

John Little

So we are looking at the Q3 base, we would expect as we move more – so again what are looking at there? We are looking at that being a core driver for two things. One is, effectively the lead or the lead generation to the subscription product. The second is that it’s a direct opportunity to get platform revenue from the value. Both of those things are core and key strategic assets for us Pete.

One of the things that we are looking to do is make sure that we grow that PC user base and that we also grow and market again as we said what matters to us, which means high GDP and high GDP per capita.

Now the additional then of course what then comes into it is if that’s got potential cross sell opportunity across mobile and so we would be looking to do that connectivity that’s driven from that and the retention that we would increase, that we would hope to drive from that would again come to – over the longer term we would be looking to driver that PC or non-mobile number up.

We firmly believe that the decline in shipments as you know of the PC is indicative of an aging, but growing PC base and we would expect given the breadth and depth of products that we have, it can be taking, you know continuing to have a significant share of that.

Peter Lowry - JMP Securities

Okay, thanks John.

Gary Kovacs

Thank you.

Operator

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