Contact: Brenon Daly
In the half-year leading up to AVAST Software pulling its IPO paperwork on July 25, the market moved steadily against it. A number of high-profile consumer-focused offerings – and, importantly, their subsequent after-market trading – have burned a lot of investors, making them hesitant to buy shares of a security vendor selling entirely to consumers. Additionally, there’s the overhang about the health of Europe, where AVAST has its headquarters and where it still does half its business.
In terms of perception, it also didn’t help AVAST that the IPO of fellow European security software vendor AVG Technologies earlier this year has been a money-loser. AVG priced its shares at the low end of its expected range, and has been underwater since then. The stock is currently changing hands at about $10, one-third lower than where the company initially sold it.
Amid those bearish grumblings on Wall Street, business at AVAST also started to slow. After soaring along with 50% bookings growth in 2011, the pace in the first quarter dipped to 38%. Meanwhile, its margins also ticked lower this year compared with 2011.
Granted, both the revenue growth and the company’s incredibly rich margins are at levels that most companies could only aspire to reach. For instance, AVAST – a company that generates around $100m in bookings with just 207 employees – runs at around a 65% Free Cash Flow (FCF) margin. It currently nets more than $10m each quarter.
But we suspect that business model wouldn’t have gotten much appreciation on Wall Street – at least not initially. If AVAST had gone ahead and priced at the high end of its expected range, it would have debuted at about eight times trailing bookings and 13x trailing FCF. That’s hardly an outrageous valuation, particularly when compared to the rich multiples enterprise-focused vendors have drawn in their recent IPOs. To put a point on that, consider this: at around an $800m debut valuation, AVAST would be worth just one-fifth the amount of the most-recent security IPO, Palo Alto Networks.
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