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Based in Amsterdam, Netherlands, AVG Technologies N.V. (NYSE:AVG) scheduled a $136 million IPO with a market capitalization of $923 million at a price range mid-point of $17 for Thursday, February 2, 2012.

AVG is one of eight IPOs scheduled for this week (see our IPO calendar).

SUMMARY

AVG offers freeware security and other products to a user based of 106 million users in 185 countries. 15 million are paid subscribers. 'Platform' revenue (from 'freeware users') is derived by Google-searches, the benefit of which is expected to top out in May, 2012.

CASH OUT?

AVG has paid out $558 million shareholder holders dividends, mostly financed from recent debt, similar to what private equity companies do (if possible) when they take control, leaving AVG with a negative book value. And half of the IPO will go to shareholders.

FINANCIAL TRENDS ARE DOWN

Profit margins trended down in the last three quarters (March, June, September) as follows: 23%, 17%, 10%, and expected revenue for the December quarter of $71.5 million is flat relative to the September 2011 quarter.

INDUSTRY SLOWDOWN?

"The consumer segment for Symantec's (Norton) PC security software increased only 5 percent compared to a year earlier." eweek January 25, 2012

CONCLUSION

AVG could edge will edge up on the IPO but based on the above we would not chase it in the after market.

COMPETITION

In the 'competition' section AVG was vague, compared to competitor Avast, which filed for an IPO in December 2011. We believe Avast's 'competition' remarks provide better visibility for investors, which is another reason we are negative on AVG after its IPO. See below under 'competition' for the section from our Avast IPOreport, which is in preparation.

BUSINESS

AVG's product portfolio targets the consumer and small business markets and includes Internet security, PC performance optimization, online backup, mobile security, identity protection and family safety software.

While a significant majority of AVG's active users have been users of AVG's free products and online services, AVG also offers products with premium functionality and enhanced customer support when customers purchase an annual or multi-year subscription.

As of September30, 2011, AVT had approximately 15 million subscription users and a total of 106 million (platform) users.

AVG employs a differentiated business model focused on monetizing and expanding its user base through (i) subscription revenue from the sale of premium products and (ii) platform-derived revenue from value-add online services that are free to users.

While users often download AVG's subscription solutions directly from AVG websites, AVG also utilizes resellers and distributors globally, including CNET, Ingram Micro and Wal-Mart. In 2010 and for the nine months ended September 30, 2011, 69.4% and 74.2%, respectively, of AVG's revenue was generated online, with the remainder generated through resellers and distributors. AVG Antivirus Free Edition has been downloaded more times than any other software on CNET's Download.com website.

Today, AVG derives substantially all of its platform-derived revenue through agreements with leading Internet search providers, in particular, Google.

ONLINE REVENUE

In 2010 and for the nine months ended September 30, 2011, 69.4% and 74.2%, respectively, of AVG's revenue was generated online, with the remainder generated through resellers and distributors. AVG Antivirus Free Edition has been downloaded more times than any other software on CNET's Download.com website.

SUBSCRIPTION REVENUE GROWTH

AVG has from 15 million subscribers. The increase in subscription revenue in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was primarily attributable to increased renewals, revenue from which increased by 24.9% to $48.5 million.

The increased renewal level was assisted by the impact of auto-renewal, which had a 30.9% adoption rate from first-time online purchase sales in the first three quarters of 2011. Renewal rates for users who had previously adopted auto-renewal were 64.7% in the first three quarters of 2011.

AVG believes that its subscription revenue growth will be sustainable and may accelerate in the last quarter of 2011 and through 2012 due to the multiple product strategy AVG has started to implement during the first nine months of 2011, which involves expanding AVG's platform beyond internet security to include a variety of other products and online services. This strategy has allowed AVG to grow its user base to 106 million active users as of September 30, 2011, of which 15 million are paid subscribers.

PLATFORM REVENUES FOR SEPTEMBER NINE MONTHS

AVG has 106 million users, of which 15 million are paid subscribers.

The increase in platform-derived revenue in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was primarily due to increased monetization from AVG's dynamic secure search solution.

This increase was driven by AVG's transition from Yahoo! (NASDAQ:YHOO) to Google (NASDAQ:GOOG) as the primary search provider, which AVG successfully completed in May 2011. AVG believes it will see the benefits of the transition to Google until May 2012.

The increase in revenue per average active user in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was driven by the same factors that drove the increases in subscription revenue and platform-derived revenue discussed, offset by the increase in active users of products and services offered by AVG's recent acquisition TuneUp - AVG does not as yet derive revenue from such users.

ONE OF THE TOP TWO

An August 2011 report by Forrester Research Inc. found that, based on online consumer surveys, AVG was one of the top two vendors in user share in the global consumer security market (Consumer Security Market, 2011 And Beyond: Evolving Buyer Behaviors Breed Market Volatility).

SEASONALITY

AVG expects operating results to continue to fluctuate in future quarters. Specific material drivers of these trends are identified in the discussion above with respect to the nine months ended September 30, 2010 and 2011 and the years ended December 31, 2008, 2009 and 2010. The sales seasonality of AVG's business, with increased sales typically on campaign launches in the fourth quarter and lower sales in the summer months, has been mitigated by the pro rata release of AVG's revenue over the license period for each subscription.

As AVG's platform-derived revenues become a larger proportion of total revenues, AVG would anticipate, other things being equal, seeing increased seasonality in revenues with reduced sales in the summer period.

SELF-FINANCED

Other than the initial start-up capital provided by AVG's founder, AVG has not raised equity financing for operations. Net cash provided by operations has been sufficient to fund growth to date.

Principal shareholders became investors principally through the purchase of shares from existing shareholders, either directly or indirectly through their purchase of shares from AVG.

PAID $558 MILLION IN DIVIDENDS

$558 million paid in dividends, mostly finance by recent debt

As of September 30, 2011, AVG's total shareholders' deficit $130.9 million as adjusted to give effect to conversion of preferred shares upon the closing of this offering, with the shareholders' deficit being principally a result of the aggregate of $557.5 million in dividends and distributions in excess of capital paid since January 1, 2008.

AVG currently expects to retain future earnings, if any, to finance the growth and development of the business and to provide additional liquidity.

As of September 30, 2011, AVG had $225.2 million of debt, which was primarily incurred to pay a distribution to all shareholders, as AVG has cash and cash equivalents of $73.3 million as of September 30, 2011.

TERM LOAN

On March 15, 2011, AVG entered into a $235 million term loan facility with a syndicate of various banks and other financial institutions as lenders. AVG entered into the term loan facility in order to return capital to shareholders through the payment of a distribution and provide AVG with additional funds and liquidity.

AVG paid a distribution of $183.4 million with a portion of the proceeds of the loan to all of its shareholders, on a pro rata basis. In addition to the initial term loan, AVG may also borrow up to $100 million under one or more additional loans under the same facility with the approval of the lenders and compliance with covenants.

CASH FLOW

AVG generates an increasing proportion of cash through online sales of premium products and online services as well as through the platform-derived revenue generated primarily via AVG's dynamic secure search solution.

AVG also benefits from a strong working capital cycle, such that license fees are paid at the beginning of the subscription period, regardless of whether those subscriptions are for one or two years.

The majority of platform sales are paid within 60 days of the revenue-generating activity. AVG generates cash from sales through its reseller network in substantially the same manner as through online sales.

While sales through AVG's reseller network are paid over slightly longer periods than the online distribution channel, AVG generally collects from its reseller network sales within 60 days. The majority of sales through AVG's reseller network are undertaken by intermediaries and AVG offers these intermediaries a discount. As a result, AVG receives less revenue per customer from sales through its reseller network than it does through the online distribution channel.

COMPETITION

AVG's main competitors fall into the following categories:

Vendors with "freemium" pricing like AVG's own, such as Avast!, Avira, PC Tools, which was acquired by Symantec (NASDAQ:SYMC), Carbonite (NASDAQ:CARB) and Dropbox;

Traditional vendors such as McAfee (which was acquired by Intel Corporation), Symantec and Trend Micro, which primarily provides software solutions, including security software, for large enterprises (TMIC) and Eset, Kaspersky Labs, Panda Software, Sophos, Rising, Kingsoft, Check Point (NASDAQ:CHKP) and F-Secure (which offers more customized and segment-focused products);

Vendors offering tune-up products, such as UniBlue

Large corporations offering a wide variety of products, only a few of which compete with AVG, such as Microsoft (NYSE:MSF), Google , which recently introduced free security software solutions, Apple (NASDAQ:AAPL), which offers cloud-based data protection, Qihoo (NYSE:QIHU), Tencent and Facebook.

This is from our AVAST report in preparation …

COMPETITION

AVST competitors include other security software companies employing the freemium business model, principally AVG Technologies.

In addition, Microsoft Corporation (NASDAQ:MSFT) offers Microsoft Security Essentials, a free anti-malware product for its most recent Windows operating systems and is expected to begin offering a built-in antivirus program for its Windows 8 platform, scheduled for release in late 2012. Industry analysts estimate that approximately one quarter of users switch to a new computer each year, and the majority of computers run Windows operating systems.

With a built-in Windows antivirus program, purchasers of new computers may not look to install security software, such as AVST products, in addition to the Microsoft software that is or will be pre-installed on their computers.

AVST competitors in the security software industry, with whom AVST competes with respect to both free and premium paid products, also include traditional security software providers, such as Symantec, McAfee (recently acquired by Intel), Trend Micro and Kaspersky Lab. Symantec has recently attempted to enter the freemium market through the acquisition of PC Tools, a free but less comprehensive version of its traditional antivirus software.

BUNDLING RISKS

Microsoft and computer manufacturers

Microsoft Corporation offers Microsoft Security Essentials, a free anti-malware product for its most recent Windows operating systems, and is expected to begin offering a built-in antivirus program for its upcoming Windows 8 platform, scheduled for release in late 2012.

Industry analysts estimate that approximately one quarter of users switch to a new computer each year, and the majority of computers run Windows operating systems. With a built-in Windows antivirus program, purchasers of new computers may not look to install security software, such as AVST products, in addition to the Microsoft software that is or will be pre-installed on their computers.

In addition, in order to more actively promote their products, computer manufacturers, such as Dell (NASDAQ:DELL) or Hewlett-Packard (NYSE:HPQ) or semiconductor chip manufacturers, such as Intel, may bundle security software products and solutions competitive with AVST's in their products and solutions or may limit AVST access to standard product interfaces and thereby inhibit AVST's ability to develop products for their platforms.

Mobile Device Manufacturers and Operators

The mobile device security market is relatively new and underpenetrated, as mobile device users often do not perceive the need to secure mobile devices because they are unaware of the threats.

AVST and other mobile device security software providers face significant challenges in marketing products for devices manufactured by Apple, which has a strong presence in the tablet computer and smartphone markets.

Apple (OTC:APPL) customers generally perceive security as unnecessary or less critical. Moreover, the designs of some mobile platforms, most notably Apple iOS and Microsoft Windows Phone, do not currently permit the integration of products that offer meaningful malware protection.

Applications on these platforms run in isolated environments and do not protect other applications and data. While some companies have attempted to introduce malware protection products for these platforms, the functionality of these products has been limited to scanning individual files imported into the application's environment and do not provide any meaningful real-time protection to users.

In the future, AVST may also face competition from other mobile device manufacturers and from operators who could also exclude us and other developers of mobile device security software from segments of the mobile device security market.

These factors could further impede our penetration into the mobile device security market, which could materially and adversely affect AVST's business, financial growth and results of operations.

USE OF PROCEEDS

AVG expects to net $54 million from sale of 4 million shares. Shareholders also intend to sell 4 million shares

AVG intends to use the proceeds of this offering for general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.