Avast: COVID-19 Benefits Should Last (OTCMKTS:AVASF)

Avast (OTC:AVASF), the Czech multinational cybersecurity company listed on the LSE, just reported H1 2020 results. The results were strong but seemingly priced in by the market as shares closed down 3% on the day. Whilst H2 growth will most likely not be as strong as H1 as more people start to return to work and relative demand subsides, Avast will benefit over the long run from this period as more businesses realize that working from home is possible and even in some cases, more efficient. Other factors such as greater digitization as the world becomes more increasingly integrated put Avast in a strong position as a market leader to show strong customer demand over the coming years.

Source: Tomsguide.com

H1 Results

Headline results for H1 saw revenue up 1.5% to $433 million at actual rates (6.6% organic), with billings standing up 2.1% to $469.1 million (9.2% organic). The 6.6% on revenue growth proved how resilient Avast has been throughout the pandemic. It is primarily benefiting from the work from home environment created due to the pandemic. In terms of profitability, Avast remains a highly generative business, producing $241 million of free cash flow in the first half, up 4.7% from the prior year. As Avast is an FTSE 100 constituent, this high cash generation is an important factor in attracting new investors and delivering sizable dividends ahead as the company looks to scale up operations. Adjusted cash profits nudged up just 2% in the first half; while this isn’t unbelievable growth, it once again highlighted that Avast can continue to grow and remain very profitable under a strenuous position.

The company’s consumer-direct business is where the bulk of its revenues come from (around 84% of annual revenues). This side of the business includes the company’s antivirus protection services, VPN, and family shield offerings – along with other solutions as well. The company said there was an ‘upswing’ in demand across consumer direct. Whilst Avast benefited from the tailwinds that were created in their core business area, they were also successful in developing their localization program to aid in obtaining customers worldwide. The company’s use of the word ‘penetration’ here was important, as this localization program will allow them to specifically target different geographies across the globe with defense services that are most suited to them.

Avast continues to place increasing focus on its core pipelines of product offerings and has already shown that through its wind-down of the Jumpshot business, something which they had announced back in January of this year. Jumpshot had a focus on selling the data that Avast was able to collect from the services it provides. The predominant reason for this wind-down was the controversies that were tied to the business, in that many customers felt that Avast was overstepping the line in violating user privacy. Whilst they were not officially charged for doing so, some customers weren’t happy. The Jumpshot business was worth circa $180 million but the wind-down of this business was the correct decision in my opinion as Avast wants to create a healthy brand image, in a business where consumers must trust their services to help protect them online.

The growing need for security

Not only do I like Avast because it is a high cash generative business, but also due to the sector it operates in. Being a dominant and global force in cybersecurity, they have a huge opportunity going forward. The need for online security is growing and H1 growth has also proved that. In April Google (GOOGL) said that they saw 18 million daily malware and phishing emails. Whilst Google themselves do well to screen ‘99.9 percent’ of these articles so they don’t reach users, that still leaves 18,000 emails to slip through and reach unsuspecting people – Avast is there to offer people protection in this eventuality. Whilst Avast first gives a free protection service to users, they then look to move them into the premium services where they will provide useful features such as password manager, wifi scanner, and gaming/movie mode. Avast is not simply trying to offer protection but also improve users’ online experience and therefore appeal to a broader audience, something I believe will allow them to attract a greater number of customers in the coming years.

Looking ahead

Looking forward, I believe that the company will see long-term benefits from the work at home environment that has been created from the coronavirus. Many institutions may now realize that working from home has many benefits and is a feasible option. Working from home can allow the company to cut costs and work efficiently via video communication services such as Zoom (ZM). Whilst the market is wary that more people will return to work, I see the potential for Avast to secure more long-term partners and customers. A few months ago the Barclays CEO had already stated that they may look to bring fewer people into their offices and do more remote working going forward:

There will be a long-term adjustment in how we think about our location strategy…the notion of putting 7,000 people in a building may be a thing of the past

Risks

One of the primary risks concerning Avast is their debt level, currently standing at $817 million; whilst large on the face of it, this is a manageable debt pile. Net debt has been reduced by 26% over the last year as the company looks to deliver the balance sheet. Cash generation remains extremely high and will allow the company to reduce this debt load going forward. Net cash flow from operating activities was up 28% to $226 million in H1, showing this high cash generation and giving the company the necessary liquidity to pay the debt down and return shareholder value through both capital appreciation and dividends.

Conclusion

Avast has a premium price tag with a P/E ratio of over 30, so shares are still pricing in growth. Avast needs to continue to diversify and expand its core offering to constantly attract new customers, whilst also using targeted marketing and services to attract new customers globally. Work at home benefits have boosted H1 numbers, but these benefits will also carry into H2 as more institutions incorporate remote working into their operations as they have now seen the feasibility in doing so.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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