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Edited Transcript of AVST.L earnings conference call or presentation 26-Feb-20 9:00am GMT

Full Year 2019 Avast PLC Earnings Call

London Feb 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Avast PLC earnings conference call or presentation Wednesday, February 26, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ondrej Vlcek

Avast Plc - CEO

* Peter Russell

Avast Plc - Director of IR

* Philip Marshall

Avast Plc - CFO & Director

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Conference Call Participants

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* Alastair P. Nolan

Morgan Stanley, Research Division - Research Associate

* Anand Dhananjay Date

HSBC, Research Division - UK MidCap Equity Analyst

* Ben Castillo-Bernaus

Exane BNP Paribas, Research Division - Analyst

* Charles Brennan

Crédit Suisse AG, Research Division - Research Analyst

* Victor Cheng

BofA Merrill Lynch, Research Division - Analyst

* Julian Alexander Serafini

Jefferies LLC, Research Division - Equity Analyst

* Michael Briest

UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research

* Stacy Elizabeth Pollard

JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research

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Presentation

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Peter Russell, Avast Plc - Director of IR [1]

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Okay. Good morning, everyone, and thank you for joining us for our full year 2019 results presentation. This morning's presentation will be led by our CEO Ondrej Vlcek; and CFO, Phil Marshall. Ondrej will begin with an overview of the group's performance and then provide a review of the separate business units. He'll then hand over to Phil for details on the financials. Management will take questions after their prepared remarks, and a Q&A facility is available to the conference call participants. During the presentation, questions may also be submitted by e-mail to the IR address, ir@avast.com.

As a reminder, the earnings statement and presentation are available online in the IR section of our website. Be aware that the presentation contains estimates, projections and other forward-looking statements. So we ask that you review the statement in the presentation deck.

At this point, I'll hand over to Ondrej.

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Ondrej Vlcek, Avast Plc - CEO [2]

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Thank you, Peter. Hello, and thanks, everyone, for joining today. Now before we dive into the result, I would like to kick it off by sharing some introductory remarks on our business as well as my top priorities for the upcoming year. I'll start here on Slide 5. In 2019, we continue to build on our strength. We achieved delivery against our guidance and met our target for all key metrics including customer numbers and debt reduction. In 2020, we expect our differentiated business model to continue driving healthy growth for the group despite the known challenges within some of our business. We are focused on another year of strong execution and building for the future. The fundamental strength of our business remains unchanged. Likewise, our strategy. Customers always come first in everything that we do. From the day we first offered free security solutions to users all around the world, we have been committed to providing peace of mind. We'll continue to evolve the customer-centric approach that underpins the success of our platform model and our ability to cross-sell solutions across the security, privacy and performance categories. Avast is a great business with a market-leading position and a singular focus on delivering on its mission. Going forward, I'm confident that we have both the opportunity and the right strategy to deliver on it.

Slide 6 sets out our priorities. In terms of our priorities, in the core business, we will invest more in top of the funnel initiatives, both organic and inorganic. This also includes more localization initiatives like the ones that have brought us success in markets like Brazil, Japan and Russia. And it means continued product investment that introduces brand-new solutions to the market, making the most of our platform model. In 2020, we look forward to a number of new product releases, including a new privacy product in the first half of the year to complement AntiTrack. We'll also continue to build out new multiproduct subscription plans that make the most of our increasing breadth of the offerings. And we are ambitiously building on the solid foundations that our past investments in market-leading products and technology have created, and you will see that in the product rollout program in the year ahead.

Constant innovation is part of who we are, and we'll continue to prioritize investment in our own capabilities and resources to drive further growth. In the second half of 2019, we established a new innovation process to harvest great ideas from within the business and to accelerate them. The trick here is to balance the short-term needs of today's users with planting the seeds of future businesses. This means investing today for returns in 3 years, in 5 years and beyond. Our organic approach to capital allocation will be supplemented by acquisitions as and when they make sense, and we see scope to create value for our shareholders.

Talent and talent development are the foundations of our business. At Avast, we have a smart, creative and highly motivated team. Since I started as CEO last July, I've made several changes in our senior leadership team, promoting great internal talent and bringing in fresh expertise from outside to enhance our technical and strategic expertise. This includes a new Chief Technology Officer, new Chief Information Security Officer, Chief Strategy and Transformation Officer, Chief People and Culture Officer as well as the General Manager of the SMB business unit.

Another area I'm very passionate about is company culture. And since becoming CEO, I've made it a real focus for Avast. Our priority is to be a customer-centric organization that is agile, nimble and adaptable to our fast-paced environment. At the same time, we are committed to being a socially responsible business with strong corporate governance. And this afternoon, our Chairman and our [Senior independent director] will be hosting an event on ESG matters important to the company.

We recognize that we are in a journey. The closure of Jumpshot was a difficult decision, especially in light of the impact on more than 300 hard-working employees, but the correct one in order to better align our business to the company's core purpose of providing protection and privacy and also to further unlock our long-term growth potential in that area. The actions that we have taken are consistent with our values and how we behave as an organization. The priorities I've just outlined here, built on our fundamentals which remain strong, I believe that will help us truly unlock the full potential of Avast by delivering targeted and strategic investment in our people, our products and our technology and systems.

With that, let me return to the business and our performance for the full year 2019. I'll start with an overview on Slide 7. We've sustained the growth momentum of the first half to deliver strong full year results, very much in line with expectations. We delivered 10.2% organic billings growth and 9.1% organic revenue growth. This was due in large part to growth in our core Consumer Desktop, the largest part of our business.

EBITDA margin was 55.3% and unlevered free cash flow was up almost 8%. This, in turn, has supported a steady reduction in leverage as expected. Adjusted net income was up 19%, and adjusted diluted EPS was up 14%. We continue to successfully attract new paying [Desktop] customers with a 3.5% increase compared to the end of 2018. We now have over 12.6 million paying customers. Our other key operating metrics, average products per customer and average revenue per customer also grew strongly, reflecting the health of the business.

During the year, we were very pleased to release our Internet of Things solutions, both direct-to-consumer omni-product as well as our carrier channel solution launched with our partner, Wind Tre in Italy. While sales volumes remain modest, it is an important first step in the journey. And it was great to see our omni-product named a Best of Innovation Honoree in the prestigious CES Innovation Awards last month. The strength of Avast's business model also includes strong cash generation, which enables us to invest in our business. However, dividends are also an important part of our allocation policy, and we are pleased to declare a proposed final dividend of $0.103 per share, which gives a total dividend for the year of $0.147.

Slide 8 is a closer look at our operational KPIs in Consumer Desktop. As you can see here, all 3 of our key operating metrics, end-of-period customers, average revenue per customer and average products per customer performed well in line with our guidance of low single digit, mid-single-digit and mid-single digit, respectively. On the left, you can see that since the start of the year, our customer count is up 3.5%, supported by ongoing improvements in acquisition and retention activities plus an increase in mobile-enabled solutions. This has been achieved against the backdrop of a consistent tranche of user numbers, albeit one where we see lower value returns from our [PPI] investments.

The average revenue per customer is up 3.6%, and the average product per customer is up 4.2%, driven by the success of our cross-selling activity.

As illustrated on Slide 9, our localization program continued to deliver. This has been -- there has been a sustained uplift in customer numbers and penetration rates in target markets with nearly half of the customer number growth just over 200,000 customers derived from this market. Calling out just a few of the countries, we have seen a 14% increase in Argentina, 12% growth in Mexico and 24% growth in Japan. All of this is in addition to continued good growth in customer numbers in traditional markets, such as the U.S., Germany and France. As previously mentioned, this localization approach will remain central to our strategy with incremental investments being made in people, marketing programs and partnerships.

Let me now briefly talk about our product portfolio on Slide 10. Avast grew its global footprint and reputation through our award-winning free and paid antivirus product. Today, we are delivering a whole portfolio of products to loyal and new users to meet their evolving security needs. Privacy is the new frontier for security, and we see strong growth in our 2 central privacy products, VPN and AntiTrack. The more established of the two, VPN, has delivered consistently strong growth with another 30% increase in organic billings in the past year. That's over 688,000 new licenses added in 2019 alone. AntiTrack, which protects users previously by eliminating data trackers and masking users' digital fingerprints, has seen a 132% increase in organic billings with almost 0.5 million new licenses added in 2019.

We see a significant opportunity to build out our privacy portfolio, and we are gearing innovation efforts towards that this year. Plus, the Jumpshot experience gave us some unique insights into evolving customer sentiments in that area and revealed actual product opportunities that we'll be pursuing moving forward.

I would now like to provide some comment on each of the business units. Looking first at Page 11, our core Consumer Desktop. The business delivered strong results with adjusted billings up 11.7% year-on-year and adjusted revenue up 10.7%, delivering on our guidance provided at the half year of low double-digit growth. Growth here was driven by strong cross-selling of products, in particular, the mobile-enabled products. The success of our localization efforts and continued expansion of the customer base was also an important factor here. Overall improved billings and customer volumes have been supported by further enhancements made to the Avast e-commerce engine and pricing optimizations.

It was from the end of 2019 that Avast came under media scrutiny with respect to our Jumpshot subsidiary. We have been alert to the threat of reputational impact on our brand because of the adverse publicity. For transparency, Slide 12 shows some data points that indicate that [AV] user behavior has remained relatively resilient, though. The top chart shows the global number of organic installations of Avast antivirus for Windows, and at the bottom, you can see a chart, number of uninstallations over a 6-month period. These initial statistics show no material change versus the average trend lines, and installations did rise in the week of the critical news articles, the week of January 27, but this quickly returned to average levels, and the immediate impact was contained. That said, we take the situation very seriously, and we'll obviously continue to closely monitor these key metrics and other relevant data points over the coming months. Our focus now is to ensure that the trust our loyal users and partners have in us is reaffirmed by our actions and the quality of our offerings in the security and privacy areas.

Turning to Slide 13. We are pleased to be able to report a retention rate in our core Desktop business of 67%. This compares to the rate of 65% that we talked about at IPO. We have seen a gradual improvement over the last 24 months, but most noticeably in 2019. It is the result of continued development of our monetization platform, product enhancements and ongoing investment in customer engagement and care. In particular, we have seen a 3 percentage point increase in paid AV retention and a strong 20 percentage point increase in CCleaner retention, benefiting from transition onto Avast platform. The sustained increase in average products per customer has also supported customer retention rates. While we are pleased with this increase in customer retention rates, we believe there remains scope to materially improve this critical metric even further.

Let me now turn to Slide 14 and Consumer Mobile. For the full year, organic revenue growth in the mobile business was behind guidance of mid-single-digit decline. As anticipated, the carrier business declined year-on-year. The 2017 Sprint account loss was a factor for this. However, we have also seen a softer performance in existing U.S. carrier accounts, largely because of lower marketing investment from some carriers. This resulted in weaker-than-expected sales in the carrier channel, notably in the second half of the year. We remain committed to unlocking the full potential of the carrier market. However, we expect these short-term challenges to continue as we transition from the legacy family protection products to a broader offering and solutions.

The first half of 2019 saw the launch of Avast IoT router-based solution by the Italian operator, Wind Tre, the first of our carrier partners worldwide to add the security component based on Avast Smart Life platform. Through 2019, we bolstered our dedicated carrier sales team and strengthened our presence and profile in different geos. As a result, we have stronger carrier partnerships than before in more markets. The company is currently involved in several late-stage tenders and discussions around the provision of IoT and other security solutions. As you would expect, these are competitive situations with competitive pricing a factor.

Strong double-digit growth in the direct-to-consumer subscription business has been sustained. This has been underpinned by good renewal rates and further supported by the introduction of new functionality and product bundles to attract more uptake. As already stated, we continue to see multi-device subscriptions growing through our desktop platform. We expect this dynamic to continue, which will likely limit reported growth in our mobile channel.

Moving on to Slide 15 and Consumer Indirect. Our indirect business performed in line with guidance of double-digit growth with revenue up 25.2%, and billings increased by 26.9%. The business unit, excluding Jumpshot, delivered 8.6% organic revenue growth. Avast Secure Browser has performed strongly in the year, benefiting from strong demand, including from beyond the Avast and AVG user base. At year-end, Secure Browser had 35 million active monthly users and monetization has continued to strengthen. We expect the Secure Browser to be the key driver in the Consumer Indirect in the medium term.

Chrome distribution continued to soften, in line with expectations. The current Avast contract to distribute Chrome to Avast AVG and CCleaner branded products extends to March 2020, and renewal is currently under negotiation. Our data analytics business, Jumpshot, delivered double-digit growth rates in 2019 following the decision to wind Jumpshot down. Moving forward, it will be classified as discontinued business, though.

Lastly, let's look at the SMB business on Slide 16. The SMB business has performed in line with expectations provided at half year. Further to our launch of the Secure Web Gateway solution in the first half of the year, in October, we introduced a the Secure Internet Gateway product. SIG, as we call it, is an advanced cloud security solution set to replace hardware-based gateway solutions with better scalability, manageability and total cost of ownership. It is especially suited for larger SMBs and managed service providers, or MSPs. Early progress in Secure Web and Internet Gateway sales pipeline has been encouraging. As part of Avast's layered security protection, our new patch management solution went live in June 2019. This was followed by its fourth quarter release on the CloudCare platform, which specifically services the MSPs. In December, we additionally launched a patch management version for the business console platform, adding improved functionality based on customer request. Patch management is expected to become a meaningful revenue contributor within SMB over time.

Following earlier restructuring, 2019 was a year of transition for SMB. The new SMB leadership team is now in place, and we have realigned our business towards better performing geos. That said, given its relative size, SMB will not be a meaningful contributor to overall growth of the group in 2020, but we do believe in the opportunity in the midterm. We are encouraged by recent signs of modest improvement and believe that SMB is on track and positioned for a return to growth in the future.

Now I would like to hand over to our CFO, Phil Marshall, to run through the numbers in more detail. Thank you.

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Philip Marshall, Avast Plc - CFO & Director [3]

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Thanks, Ondrej. Before we go to the financial section of the presentation, just the usual part about the appendix. In the appendix, we have more financial information just to give you more color on the business, and also for those building models, particularly around EBITDA down to net income and cash flow, we have more associated detail around the guidance just to help you with that modeling.

Okay. So with that, let's turn to Page 18 of the presentation, which reviews the billings and revenue performance and gives you the mechanics around how the numbers are constructed. Billings is top of the page, revenue bottom of the page. If you see the top left of billings, a $911 million headline number and to the right, you can see the 5.7% absolute growth for that billings. If you walk down the page, you can see acquisitions, [1 million] discontinued business, which again as a reminder, is principally the toolbar part of the AVG acquisition, that's in [runoff mode]. And you get down to the billings, excluding acquisitions, disposals and discontinued business of $901 million. And if you walk to the far right to the top, you see the 10.2% is organic growth, which obviously excludes FX and to give you that underlying like-for-like performance of the business. So again, the headline numbers, $901 million, excluding acquisitions, 10.2% organic growth.

And the bottom of the page, you can see revenue, the same construct, acquisitions and discontinued business the same. And as you walk across the page, you can see the headline number, 9.1% organic growth.

Let's turn to Page 19 of the presentation. This takes that $65 million of billings growth in 2019, again, excluding the acquisitions and discontinued business, and it shows you the makeup of that versus for the business segments.

Top of the page is the growth for each of the segments. So again, 11.7%, as an example for Consumer Direct Desktop. The bottom of the page, the percentages you see are the percent of the total business each segment represents. So again, as an example, Consumer Direct Desktop represents 74% of 2019 billings at the entire group.

You can see the growth in 2019 was driven principally by our desktop channel. It's our platform obviously that we push the products through and also the indirect segment, which, of course, included Jumpshot. But even without Jumpshot, as Ondrej mentioned, the growth was 8.6%.

If you turn to Page 20 of the presentation, really it's the same view, but this time, revenue. So taking that $62 million of revenue growth and breaking it down by segment, it's really the same point driven by Desktop and Indirect. Just a reference point, if you see the bottom of page, the percentages and you see the Direct Desktop being 73% of group revenue in total. If we adjust for Jumpshot, which clearly won't exist in 2020, that 73% becomes 77%.

Turning to Page 21 of the presentation, which highlights the size of our deferred revenue balance. Just as a reminder, the majority of our business is subscription-based where we basically invoice upfront and we get paid upfront. So we have the cash in advance, and then it basically sits on the balance sheet because we recognize the revenue over a period of subscription. So if you have a 12-month subscription, then we recognize that equally over to 12 monthly periods.

At the end of 2019, the balance was $468 million. That excludes the $8 million for Jumpshot. That was up 7.7% versus 2018. Just as important, if you look at that less than 1 year, so to be recognized in 2020, $414 million of that will be recognized as revenue in 2020. And of that $414 million, $283 million of it will be recognized in the first half of 2020. So again, that's a subscription that's been built, cash we've had, and we're just recognizing that over the period of the subscription. So $414 million of that is revenue for 2020, $283 million of that is revenue for the first half of 2020.

Turning to Page 22 of the presentation, just to illustrate the consistent revenue performance of the business. Left-hand side of the page is billings, first half and second half; right-hand side of the page is revenue, first half and second half; and the percentages in the bubbles above the chart are the respective organic growth rates for the first and second half, respectively.

You can see on the right, revenue, very consistent, 9% and 9.2%. It's what we guided to at the half year results. On the left-hand side of the page, billings slightly heavier in the first half and second half aligned to revenue, again, as we guided to at our half year results. Overall, very pleasing performance, as we said, on top line growth.

Moving to Page 23 and our industry-leading margins. They will maintain themselves in 2019. You can see the page, top of the page, you can see the breakdown of the consumer SMB, discontinued and overhead and a piecing [grade] there is our absolute margin, EBITDA of $483 million, 55.3% for the business. So again, very good margin performance.

You can see the right-hand side of the page, (technical difficulty) up 119 basis points. As you recall, IFRS 16 was implemented last year, and that gave us basically a 98 basis point onetime benefit. So apples-to-apples, it's really 21 basis points improvement year-on-year. We guided broadly flat, so again delivered in line with guidance.

In terms of business segments, Consumer is still very healthy. We're seeing a little bit of margin erosion for our mobile business with the volume pressure. And obviously, we continue to reinvest in the business.

On SMB, as Ondrej mentioned, it's really a turnaround situation. We feel comfortable where we are. We've really focused on profitability in that business. And again, last year, you can see a very significant increase in margin rates, albeit on slightly lower volumes.

If we now turn to Page 24, which gives you a bit more detail around the construct of the margin.

Top of the page of Page 24 was the 2018 EBITDA, the $448 million or 54.1%, and then we walk down to the 2019 performance. You can see just before the bottom there, the IFRS 16 impacts or above that, you can sort of see the apples-to-apples walk. Key point here is basically growth strong, obviously, falls through a very good operating leverage, so obviously, high 80s, early 90s gross margins, discontinued business, FX, slightly unfavorable on dollars, slightly favorable on rate. The key point here is the investment line. We're continuing to reinvest in the business. So we're maintaining really strong healthy margins while continuing to reinvest in the long-term part of the business. And just to reiterate, majority of our expenditure goes as OpEx through the P&L. We only capitalize our R&D work around the infrastructure, around the hardware piece, the server capacity. Everything else gets expensed. So again, very good performance on margin in terms of 2019.

I think I wanted to show you here a page on the discontinued, just to clarify for everyone what discontinued sort of is and what it will look like in 2020. On the left-hand side, we have revenue; on the right-hand side, EBITDA. For discontinued, in order to give you an underlying future view of the business, on the top line, we exclude discontinued in terms of our organic growth metrics. So remember, we took the billings and revenue, we took out basically acquisitions, we took out discontinued, and we took out FX and show you the underlying growth of the business. So in terms of 2020, you can see the toolbar piece now is very negligible and Jumpshot was $36 million in 2019, will be 0 in 2020. So that $42 million of, let's call it, billings, erosion or revenue erosion, I should say, that will be excluded from the headline numbers. So when we say in 2019, 10.2%, that excludes the discontinued business as it excludes any acquisitions or disposals.

On the right-hand side for EBITDA, we only exclude it from a headline growth rate to give you that sense of underlying growth. We do not exclude it from EBITDA, we do not exclude it from the income, we do not exclude it from any other metric. So from an EBITDA standpoint, you can see there the toolbar and the Jumpshot business delivered $16 million of EBITDA in 2019. In 2020, they'll deliver, we think, minus $2 million. So that's an $18 million headwind in EBITDA as we walk into 2020. And that Jumpshot number is basically the cost of basically employees in January because, clearly, we had employee costs in January and the wind down in February, and then the legacy costs as we cleaned up -- sorry, finalized the sort of closure of the business in the coming months. We have a few employees that are helping us close the business. So that's just to be clarified on discontinued. We only adjusted in the headline growth metric.

So now let's turn to Page 26 of the presentation and our strong cash flow generation. I think the headline point here is we had very good cash flow growth in 2018, and we continued that in 2019, and that's really reflective of our strong underlying subscription business model. If you look at the points there in gray, you can see the unlevered free cash flow, $425 million. That's a growth rate of 8% and 82% cash conversion.

If you go below that, you see levered free cash flow of $370 million, and that's really benefiting from the active capital management we've done, lowering the debt, obviously, lowering the leverage and the associated interest expenses and that's falling through to levered free cash flow, which then in turn, obviously falls through to our dividend policy, which is 40% of levered free cash flow.

Ondrej mentioned the dividend, the final dividend. If you think about that $370 million, our dividend policy is 40% -- well, approximately 40% of the levered free cash flow. So $370 million times by 40% is $148 million. We paid $43 million as our interim dividend in October 2019, so our final dividend is $105 million to make up that EUR 148 million, which is our final dividend that will be paid in June this year.

So very pleasing cash performance again in 2019 and indicative of the strong model that we have.

If you now go to Page 27, to illustrate the active management, as I said, of our capital structure and the reduced debt and leverage that we now see. On the left-hand side of the page, you see our net debt, 27% down in 2019 to $0.9 billion, it's a 27% reduction in our net debt. On the leverage, you see on the right side, 0.7x -- 0.7 turns down to 1.8. Now adjusting that back for the repayment we've done to Ascential as part of the Jumpshot closure, that 1.8 becomes pro forma-ed back to 2x, but still a very nice reduction year-on-year, and obviously, a very nice reduction pre-IPO.

The other thing I'd say here in terms of the net debt. Not only have we paid down more debt, we've also renegotiated the terms of the debt, so lower the interest expense one more time in 2019, which again will benefit our interest expense in 2020. And that detail is in the appendix in terms of more detail around the guidance.

So talking about guidance, let's move to Page 28 and an update on our 2020 full year guidance. Headline numbers at the top of the page, adjusted revenue growth, mid single-digit growth. So still very healthy growth in 2020 despite the closure of Jumpshot.

In terms of the segments, Mobile, mid single-digit decline. So those challenges that we experienced on the carrier side, and the fact, as we've mentioned on the direct-to-consumer side, where we basically sell via Google, Apple Play Store (sic) [App Store] et cetera, we're seeing there pressures simply because we're selling more multi-platform trend subscriptions through the desktop channel. So that channel where we sell so much of our product are now becoming more multi-platform subscriptions. So even though people are using it on mobile and benefit in the mobile experience, that subscription appears on desktops. So we're seeing that continuation, and we expect more of that in the future.

Indirect, as we mentioned, it was very strong growth in 2019, high single digit, excluding Jumpshot. We see a continuation for the strength of our browser experience.

And SMB is largely driven by the billings of 2019. So we see on revenue, a low single-digit decline, but we're seeing more positive signs there and expect to return to growth in the future.

Our margins, it's obvious again, industry-leading margins, 55.3%. We see broadly flat again. A couple of points, I think, on margin. Just to reiterate what we've said since IPO because of the nature of the margin is so good relative to our peers and because we see lots of growth opportunities, we will reaffirm again, do not expect the margin rate to go up. It will be broadly flat. The second point, I would say, around the margin, Jumpshot was clearly a lower-margin business than our total business. It was about 18 points of EBITDA versus 55. So obviously, without Jumpshot, your margin on a mix basis shouldn't actually go up. There's 2 reasons it won't go up because of Jumpshot. One, as we showed on the previous page, the Jumpshot margin is not 0 in 2020, it's minus 5 because we do have costs associated with Jumpshot and no revenue. The second point, that piece that is not in Jumpshot, that will be released. We're going to basically add into our existing investments around top-of-funnel marketing, localization, product innovation. So again, reinvesting back in the business. We have lots of opportunities -- medium-term opportunity that we want to invest in.

At the bottom of the page here on the guidance, you see the dividend distribution again, reiterated 40% of levered free cash flow, approximately 40% of levered free cash flow. And on these exceptional items, it's really Jumpshot-related. So we mentioned before, this $15 million to $25 million of closure restructuring costs, that's still what we see today, see no change in that. And we're working towards that now. In terms of those restructuring costs, they will obviously be treated as exceptional from a P&L standpoint, not so much from a cash flow standpoint.

And then the $73 million from Ascential. Remember, we have the arrangement with Ascential where they bought in 35% of the business. We've now repaid that back. So basically, they have investments, they did the first tranche, they did the second tranche, and obviously, there are associated costs. We've repaid that back to Ascential. So basically, when we show our Q1, let's call it, debt leverage numbers, that repayment to Ascential will already be in those Q1 numbers when we report them.

I would actually like to take a few seconds just to -- I mean, with regards to Ascential. Obviously, this is our results, but I will say Duncan and the team were very professional from the very short tenure we had with them. They were very professional. And also with the exit, they were very supportive.

Okay. So the final page, really just to iterate Ondrej's key messages that we started with. I think in terms of 2019, we really did deliver a very strong performance. You've seen the numbers. Every metric, very good growth, in line with expectations and with the way we guided. So we're very pleased with our 2019 performance. Healthy growth expected in 2020, reflecting the strength of our business model, principally, that channel, that platform that we have in the desktop. Long-term opportunity for Avast continues to grow with cybersecurity a growing market. We still see again lots of avenues for opportunity. Our fundamental strategy hasn't changed. We're still focused on security, privacy and performance, and the core DNA of the company remains. And the business is strongly positioned. Ondrej has mentioned many of the positives and where we're looking to invest. It's really continuing around the things that are working. The localization initiative is working. The cross-sell is working. The browser is working. So we're going to continue doing the things that are working and hopefully continue to do them better for our users and our customers.

With that, thank you very much for listening to both of us. And I think we're going to take questions from the floor, and then we'll open it up to questions on the line.

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Questions and Answers

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Peter Russell, Avast Plc - Director of IR [1]

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Yes. I think for the benefit of those in the webcast, if you ask a question, please just reach for the microphone in front of you and press on the switch. Thanks.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [2]

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Stacy Pollard with JPMorgan. A few questions from me, please. First of all, you didn't mention Zscaler, so maybe you could make a comment on that.

Secondly, IoT relationships. Just to dig in a little bit on Wind Tre, it sounded like there was some rework there, so just curious how that's progressing. I'm not sure if you can quantify revenue stream, but maybe talk about that opportunity over time. And especially with carriers, again, I know that you're engaged in discussions. Curious, anything -- any further detail that you can provide there.

And third question -- sorry for so many at once. Third question is why was CapEx up so much.

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Ondrej Vlcek, Avast Plc - CEO [3]

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Okay. Well, so I'll take, I guess, the first part. So Zscaler -- I spoke about the Secure Web Gateway and Secure Internet Gateway product. These are the Zscaler-powered products. So even though we use a different commercial name, these are products that are powered by the Zscaler technology. So that partnership is very much ongoing, and we are investing in it.

The second question, I think, was related to IoT and Wind Tre and any more color that we can share. So the product launch in June last year has been sort of growing. I'm probably not in a position to sort of give you any specific numbers, but it's starting to get some traction, of course. I mean the way we look at IoT as a whole category, I think consistent with our messaging last year, we don't really expect IoT to be a material revenue contributor before 2022. That is -- it is a long-term investment that we are making. The awareness of the problem is relatively low, so the market still needs to be educated. The adoption of smart homes and smart devices is definitely increasing, but again, the awareness of the security problems are not as high yet. So for us, this is really seeding the market for the future.

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Philip Marshall, Avast Plc - CFO & Director [4]

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In your 2 questions. In terms of the tenders, obviously, we don't control these time lines, and they do move because, obviously, you can appreciate the telcos are working with multiple players, testing multiple products, sometimes changing their processes around that. We believe, right now, we've got a couple that were in late stage, that we're involved in, that should get decided at some point in Q2. But don't hold me to that, of course, because I don't control it. The thing there is, even if we were successful, it doesn't necessarily mean we can announce it. As you can appreciate, we can only announce once the telcos tells we can announce. But there are a couple that are in, let's say, later stage.

In terms of CapEx, the main piece, again, our CapEx is basically hardware. It's basically server capacity. So it's really building out our server capacity around the world. I would say that also includes Jumpshot, which was probably disproportionately heavy versus the size of its business because, you can appreciate, it was very much data-driven. So you will see in the details of the appendix, when we give more color around the guidance, we see CapEx being much closer to 2% of revenue in 2020.

Charlie?

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [5]

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It's Charlie Brennan here from Crédit Suisse. Just a couple of questions actually. Firstly, just on the mid-single-digit guidance for the desktop products, I guess that's 2 or 3 percentage points below the high single digit that you would be aspiring for. I guess in dollar numbers, that's $15 million or $20 million of shortfall. Can you just break that shortfall down for us? Where is it coming from? And how quickly does that snap back? And when do we get back to high single digit?

And I guess the second question is we don't really talk about AVG very much. We used to talk about a performance gap between Avast and AVG. Does that still exist, or is that closed?

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Philip Marshall, Avast Plc - CFO & Director [6]

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Yes. Okay. So I'll do the second one because it's the much quicker one. AVG and Avast are very similar now. So Avast is maybe a point higher in growth, but they're very similar. We see CCleaner actually outperforming, somewhat driven by, again, that continued improvement around retention rates, but AVG and Avast are very similar, Charlie, not -- maybe within a point.

In terms of the desktop growth, I would simplify and just say around historically going into the year, particularly around -- well, actually, on revenue and billings, we've had more visibility than we've got this year, principally around the timing of products. So in 2018, we had the AVG and the CCleaner acquisitions before. And we talked about at the time of the IPO that we felt it would be, let's call it, a onetime benefit from all those monetization, commercialization initiatives, and that would see a pop in, in number of customers. That's what we saw in '18. In '18, we launched a couple of new products, principally AntiTrack, which proved to be very successful. It's proven to be very successful. And so we had good momentum going into '19. So we have a good -- we had a good sense of what that run rate was and the impact on billings, principally in desktop. We don't have that coming into '20. So we made a conscious effort in terms of that attempted attack in terms of our network last year. We made a conscious effort as a management team to sort of pause and strengthen our build environment, which is our product environment, product release environment, and that basically pushed everything out 6 months. So now we're expecting that the product releases to be, let's call it, somewhat in Q2, latter part of Q2, Q3. And so that's just pushed to the right, Charlie. So we still fundamentally believe in that platform. Clearly, it's a core part of our business. We see the strength. We still see the opportunity to cross-sell, et cetera. I'd say it's principally that.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [7]

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Okay. Can you say anything about the new products that are coming?

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Philip Marshall, Avast Plc - CFO & Director [8]

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No. I mean what I'd say is we've got a couple now that we think are, again, let's call it, Q2. And one is privacy related, which is obviously a primary focus of us. But at this stage, we can't say more.

We'll go -- I'll go around the room. There was one here, and then we'll just go left.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [9]

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Julian Serafini from Jefferies. So I guess one just quick question. You talked about lower return on PPI investments. I guess can you clarify, a, what are PPI investments specifically; and what is the return dynamic, I guess, that you're observing?

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Philip Marshall, Avast Plc - CFO & Director [10]

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Yes, we should have actually put pay per installs. So basically, if you think about installs of our products, our antivirus product, it comes from organic installs. You search it yourself. If you go to our website, you download it, and it goes with pay per installs, where, that's for a better word, we piggyback on someone else. So are you installing others' software and you get the opportunity to download or you can actually want to download Avast. What we've seen in the last sort of 6, 9 months is certain partners or certain geographies haven't really returned, let's call it, a return on investment that we've historically seen. So we're becoming more selective in those investments. So that's what it means.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [11]

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Okay. And then just a follow-up question for Ondrej. You talked about potentially doing more acquisitions as well, I think, at the very beginning in your remarks. I mean should we expect any change from your more traditional, over the past couple of years at least, smaller, more technology-focused acquisitions? Should we expect any change in that or more of the same sort of [acquisitions]?

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Ondrej Vlcek, Avast Plc - CEO [12]

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Well, historically, we've done different types of acquisitions. So last year specifically, we did just a few technology and product tuck-ins. But then, of course, in 2016, for example, we did the AVG acquisition, which was truly transformational for the company. It was actually a larger business than ourselves back then. And so we have experience with doing different types of acquisition. Now as we are getting closer to the sort of leverage floor that we messaged, 1.5x, during the IPO, then I mean clearly, our sort of desire to do more acquisitions is increasing. And so we have a full pipeline, but there is nothing right now imminently to be sort of -- to be announced, but it is going to be an important part of our growth strategy.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [13]

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Michael Briest, UBS. Just one from me to you, Ondrej. I mean at the IPO, the mobile business was definitely seen as one of the stronger growth drivers, even putting to one side the IoT. There were 30 carriers, I think, specifically being targeted or countries. And I appreciate Sprint has been a drag, but do you feel differently about that business now? Or is it that some of the revenues appearing in the desktop side? Could you just sort of assess where mobile is? And would you be able to say how much of the impact last year was Sprint?

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Ondrej Vlcek, Avast Plc - CEO [14]

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Yes. So my sense here is that things are generally taking longer than we expected. That is, I think, we slightly underestimated the time it needs to sort of negotiate these deals. And especially when it comes to IoT, the adoption of IoT in general, and I'm not necessarily talking IoT security, I'm talking IoT and the carrier strategies around IoT itself, has been somewhat delayed compared to the anticipated sort of ramp that we had 2 years ago. But that said, we still believe IoT as a market and IoT security as a problem that is real and that is going to be very, very pertinent to the whole ecosystem is definitely going to materialize. So for us, again, it's more a question of when rather than if.

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Philip Marshall, Avast Plc - CFO & Director [15]

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In terms of the numbers, I'd say, if you think about the shortfall in the carrier business, slightly less than half would be Sprint, and slightly more than half would be non-Sprint.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [16]

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Okay. And then just a second one on the attrition rate or the retention rate. I mean it's nice to see the progress there. Can you talk maybe about those customers who have 2 products, whether it's notably higher? And is this something where you can actually almost sort of, I wouldn't say lastly, but sells something quite cheaply, which is sticky, which improves retention in sort of antivirus or some of the other products?

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Philip Marshall, Avast Plc - CFO & Director [17]

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Yes. So I'd say it is noticeably higher. So there is clearly a marked difference between someone who has 2 products versus 1 or the customers actually who have 3 products versus 1. So there is a difference. I think in terms of strategies, I mean, clearly, we try different things in different situations. We don't have a principal approach of, let's call it, loss leading, as you allude to, but there's different approaches we try. But certainly, there's a difference in stickiness with more products.

Alastair?

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Alastair P. Nolan, Morgan Stanley, Research Division - Research Associate [18]

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Alastair Nolan with Morgan Stanley. Just a couple from me as well. Maybe if we could just go back to the mid-single-digit guide, obviously, Jumpshot, you did 9% last year. Jumpshot was 2%. Is it fair to say then that the kind of 1% to 2% is basically the lack of visibility on the kind of traction around new products at this moment? And perhaps with the second half launch, that could -- there's an element of conservatism there as a result? Maybe you could just comment on that.

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Philip Marshall, Avast Plc - CFO & Director [19]

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Yes. So I'd say the simple answer is yes. I mean you got some again -- you got some baseline again. So when you think about browser, all these growth platforms, the growth on a bigger baseline, if you're doing 50% growth, if you do 50% growth on a bigger baseline, the growth is still great. But maybe it's 32%, whatever. So you've got some just baseline noise, but simplistically, yes, Alastair, that's the answer.

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Alastair P. Nolan, Morgan Stanley, Research Division - Research Associate [20]

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And I guess then when you've mentioned the fact that Jumpshot, you're going to essentially reallocate the operating costs elsewhere and further reinvestment, is it kind of fair to assume then that we should see a reacceleration at some point when those products come on and kind of, I guess, how you're thinking about the kind of time line on that?

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Philip Marshall, Avast Plc - CFO & Director [21]

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Yes. Because If you think about Jumpshot, you think about that sort of $36 million of revenue. And if you took the, let's call it, average group number of 55% and you took the margin that it did of 7%, you'd say simplistically, there probably is $10 million-ish of cost, let's called it, to be released. As we showed on the page, half that will be used to -- in 2020 to essentially shut down the business largely because you've got employee costs in January and early February, which you obviously got to pay people. And then the other half will be redeployed to the business. So clearly, the intent, Alastair, is -- I mean we see lots of growth opportunities, so we're a little bit more cautious to the outlook because we don't have quite the same visibility as we typically do. But our intent here is to get the business to what it's been historically. And again, we see lots of growth opportunities.

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Alastair P. Nolan, Morgan Stanley, Research Division - Research Associate [22]

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And then just one final one on leverage. We're 2x levered pro forma for Jumpshot. Do you still anticipate kind of approaching or meeting the 1.5x target or floor this year? Or is that likely to be next year?

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Philip Marshall, Avast Plc - CFO & Director [23]

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Yes. I think if we be do the math, I mean I think most people who did the math would say it's at some point early -- previously early second half. I guess now at some point, end of the year, early next year, yes, but we're still in that direction. I mean our model hasn't changed. I mean our cash-generative model hasn't changed. The subscription nature of our business hasn't changed. Jumpshot was a small part of our business, and that was like -- it was sort of like 4% of our business. So that cash-generative nature hasn't changed.

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Ben Castillo-Bernaus, Exane BNP Paribas, Research Division - Analyst [24]

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Ben Castillo from Exane BNP. Two from me, if I may. Just on the churn and retention metrics, 2-point improvement since IPO. That sort of trajectory since then to now, is that something we can look to moving forward? Is there a headroom around that given you have more products available now?

And then the second one was around penetration. So it looks like you had some good customer growth numbers in Mexico, Japan, Argentina. How is that progressing relative to, say, Brazil, which was a good story for you so far?

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Ondrej Vlcek, Avast Plc - CEO [25]

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Yes. So in terms of the first question, we do think there is still headroom for further growth. So 67% is still a number that can be improved. We are investing in that area quite a lot. We have a new team in the company focused on customer success. Sort of better management of the sort of customer experience on the whole journey, and that is bringing fruit. And of course, the dynamic that we spoke about, that is the correlation between retention and APPC. That is the more -- a couple of more products people have, the more likely they are to retain being customers. Then that is also in play as the metric grows. So yes.

The second question was around...

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Philip Marshall, Avast Plc - CFO & Director [26]

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Penetration rates.

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Ondrej Vlcek, Avast Plc - CEO [27]

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Oh, penetration rate.

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Philip Marshall, Avast Plc - CFO & Director [28]

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I think we still see again opportunities. It's really a mix. If you take Mexico, for example, we're seeing good growth but still materially below Brazil's penetration rate. We've got other countries who are getting close to Brazil's penetration rate, but the majority of those, let's call it, target countries are still below Brazil's penetration rate. We've got a couple who are getting to similar, but most is still below the Brazil penetration rate, so we still think there's opportunity.

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Ben Castillo-Bernaus, Exane BNP Paribas, Research Division - Analyst [29]

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These newer areas, are they kind of tracking as Brazil was when you first [got there]?

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Philip Marshall, Avast Plc - CFO & Director [30]

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I'd say possibly a little bit quicker because, obviously, we -- Brazil was more of a first-time learning experience. So I'd say we've probably accelerated that learning. So frankly, if I look at the growth over the last 2 years on, let's say, Japan or Ukraine or Argentina, it's clearly more accelerated than Brazil because, obviously, we've taken the learnings and applied them. But yes.

So is that -- back of the room here.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [31]

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It's Anand Date from HSBC. I've got a couple, please. Could you talk a little bit about the KPIs in Consumer Direct? You don't really talk about initial discounts in year 1. Can you talk about any trends there and how you weigh that against the price increases you've just put through on some of the key products? And then maybe I ask the others after.

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Ondrej Vlcek, Avast Plc - CEO [32]

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Yes. Well, so -- I mean the strategy hasn't really changed. So for the most part, our first purchases, that is the actual conversion from free to paid, is done at a discount, a pretty significant discount, typically 50% or 60%. That's to break that barrier kind of the first payment. But then the first cycle of renewals is where we are getting the sort of most churn, and that is understandable. It has a very strong correlation between the retention or churn number and the price point delta difference between first purchase and renewal. And we know that, but of course, the business is optimized for overall sort of customer lifetime value. So the model that we have today has been tested and proven to work best for that metric.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [33]

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Well, actually, on that, could you give us a sense of what the churn rate is by cohort because, presumably, year 1 then is a big number, and then year 2 is a big step-down and so on?

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Philip Marshall, Avast Plc - CFO & Director [34]

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Yes. So it's not something we're disclosing. But again, coming back to the previous question, the churn rates follow the trends that you would expect them to. So again, someone has got more products is better and the way you say about the time line. So we're not at that level of detail, but they follow the trends you'll expect them to.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [35]

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Okay. And then we were just looking at some of the sort of country websites. You haven't really -- it doesn't look like you've rolled out payment by installments yet in many countries. And we were wondering why not. So what's the sort of delay there? And is it right to assume that once that's rolled out has quite a material impact on penetration?

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Philip Marshall, Avast Plc - CFO & Director [36]

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I'd say it's different by -- I mean it really is different by country, and so I don't want to get into individual countries. But what we have and we do have is we have a team that's focused on each of these countries, and there's various programs in place at any point in time. So I know of a couple of countries where we've got some discussions going on, so I'll leave it like that. But we still think -- I guess my simple answer to you is we still see lots of opportunity around the localization initiative. And that's why Ondrej mentioned at the start and that's why I reiterated in terms of those incremental dollars that we see released from Jumpshot, the localization is still a priority for us because we still see lots of opportunities.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [37]

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And sort of a second one on that as well, why does the term product still makes sense?

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Philip Marshall, Avast Plc - CFO & Director [38]

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Why does a...

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [39]

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Why does it -- a 12-month or a 24-month term product still makes sense? Why is it not the initial offer is $5 a month sort of into perpetuity?

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Ondrej Vlcek, Avast Plc - CEO [40]

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Well, so if you are talking about the developed markets like the U.S., U.K., so previously, we did some testing on monthly plans compared to yearly plans. And by the way, we have monthly plans actually on some products such as the VPN product, which is more sort of industry standard to have monthly plans in that product category. But to be frank with you, right now, based on all our testing, we can say that the annual plans actually resonate better with customers, that is they ultimately bring better returns. But I mean we're committed to testing these things all the time. We have a whole team sort of focused on this. I mean, optimization and the monetization engine, that is -- this is part of it. So I mean maybe in the future, the sort of -- the preferred way of paying for this kind of service is going to be monthly, but today, that's not what we are seeing.

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Philip Marshall, Avast Plc - CFO & Director [41]

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I think linked to your question is I remember at the time of the IPO, I think it was 15-point-something months average subscription length. Now it's closer to 14. And again, to Ondrej's point, that was -- because when we looked at the data and the cohort, the lifetime value was stronger on 1-year subscriptions than 2 years because if the delta in terms of the first purchase versus the renewal price was even bigger on a 2 year versus the 3 year, so we focus more on 1 year. And that might be counterintuitive because you might say it yourself, well, aren't you better with a multiyear versus -- but not the way that the lifetime value works. So I think to Ondrej's point, we're constantly reassessing this with different, let's say, models in different geographies, and we'll shift accordingly. But right now, 1 year seems to be the one that resonates the best.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [42]

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Then just on M&A., do you have specific teams in Tel Aviv and San Francisco, wherever it is, the hotbeds of new development? So do you have special teams that are out there actually looking for products? And you're competing against other listed companies. You're competing against a lot of private equity. What's your USP to those companies? Is it access? We can plug you in immediately to all our users worldwide? Or what do you guys say other than price?

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Philip Marshall, Avast Plc - CFO & Director [43]

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Well, I think there's 2. I think the first part of your question is we have a dedicated M&A team and obviously taps into different geographies around the world. I think the second part of your question is what do we offer it. It sort of depends on, of course, what you're buying or partnering with. But principally, if you are, let's call it, a smaller business, which a lot of our opportunities, these are like AntiTrack, and then clearly, we offer them a distribution platform, which they don't have. So obviously, we offer them an engineering team that can develop the product further and a distribution platform that they don't have, which resonates well and obviously works on both sides. If it's a larger acquisition, then obviously, we offer a brand and a partnership to further scale that business and drive commercial synergies. It really does come back largely to our distribution platform and our know-how, yes.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [44]

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Yes. And then just the last one. You've given us some new data today, right, around churn rates, about penetration rates. Why not show us time series data?

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Philip Marshall, Avast Plc - CFO & Director [45]

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In what respect?

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [46]

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Well, so you said churn rates have sort of gone down by 2 points or the inverse maybe since IPO. Why not just show that every time?

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Philip Marshall, Avast Plc - CFO & Director [47]

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Again, we felt this was -- I mean the difficulty we have here, I think, again, we've said this before, is when we look at data over a 3-, 4-, 5-, 6-month period, we're very, very reluctant because data moves, I mean churn improved, it slightly decreased. As users go up, users go down. So for us, we want to get comfortable that we've got a significant period of time that's passed before we saw data metric. To Ondrej's point, the retention or reverse churn actually improved in 2018 but not materially. It started to accelerate more in '19. And now that we've had that sort of extended period, we want to update it. I think with all data at some point, you have to draw a line and say this is what we're sharing and this is what we're not sharing. So we're trying to be as informative as we can, but within the visible limits.

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Victor Cheng, BofA Merrill Lynch, Research Division - Analyst [48]

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It's Victor from Bank of America. Two questions, if I may. So first one, on the desktop business, obviously, you're guiding to mid-single-digit growth partly because of the lower visibility maybe. And then I guess if you can unpack that bit, how much of that growth from non-antivirus solution? It seems like it's slowing down a bit for H2. So going into 2020, how -- the dynamics of that in terms of VPN and other newer products like AntiTrack, are you expecting slower growth in there as well? And then also, obviously, if that part is growing very fast and is the antivirus business flat or even declining?

And then I guess the second question is on the customer acquisition. So nowadays, how many of -- how much of the customers are actually coming from antivirus products upselling and cross-selling to other solutions? Or how many other customers are coming from maybe Secure Browser or straight to products like VPN?

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Philip Marshall, Avast Plc - CFO & Director [49]

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Okay. For the first question, I'd say -- again, coming back, simplistically, we're comfortable with that growth number clearly that we've guided to, and it's principally because of the timing of this whole product releases.

In terms of the sort of composition of that, you say is the growth outside of antivirus slower, yes, by default because it's compromising to mid-single. But I think the key point here is -- and I think is very important, when you've got high-growth products, your baseline by default changes. So doing 50% growth on $10 million is not the same as doing 50% on $100 million. You're still doing very, very good, healthy growth, it's just your baseline is getting bigger, so it's just mathematically harder to do the same growth levels. So again, AntiTrack has a bigger baseline, it's just harder to keep doing. So even though growth is by default a little bit softer, it's still very healthy growth.

Antivirus we've seen is broadly flat. We still see it's broadly flat. Clearly, that is not a growth -- we don't see that. We've said that since IPO, antivirus to us is not the growth market. We benefited from good retention rates on antivirus. So it's a little bit softer market. We've benefited from good retention rates. We still see that being broadly flat. That's what we see in 2020. So the growth is coming from, what I'd call, non-antivirus products.

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Victor Cheng, BofA Merrill Lynch, Research Division - Analyst [50]

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(inaudible)

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Philip Marshall, Avast Plc - CFO & Director [51]

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Yes. So in terms of customer acquisition, could you just repeat your question, please?

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Victor Cheng, BofA Merrill Lynch, Research Division - Analyst [52]

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So how much of that acquisition nowadays comes from antivirus products, so from upsell, cross-sell or from Secure Browser and others?

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Philip Marshall, Avast Plc - CFO & Director [53]

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Yes. So in the half year result, we had a page around the sort of composition of where this sort of cross-sell comes from. I think it's 81%, so I think -- I'll say 81%. I think it was 81% of our, let's call it, cross-sell products derived from someone who has the free antivirus. So that free antivirus, let's call it, base, that platform, basically is still the key platform for generating, let's call it, upsell, cross-sell.

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Ondrej Vlcek, Avast Plc - CEO [54]

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The free or paid.

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Philip Marshall, Avast Plc - CFO & Director [55]

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Free or paid, sorry, yes. Sorry, free or paid, yes.

Any other questions before we go to the line?

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Peter Russell, Avast Plc - Director of IR [56]

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There are currently no more questions in the room. I have one by e-mail, gents. It's from Pavel Ryska at J&T Banka in Prague. And his question is on the competitive threat. In particular, there has been some chatter recently around potentially higher competition from the built-in antivirus from Microsoft. How does Avast feel about that? And what do you feel differentiates its products?

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Ondrej Vlcek, Avast Plc - CEO [57]

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I'll take that one. So first and foremost, Microsoft has been in consumer security for about 15 years now, Windows Defender, of course, as an integral part of Windows 10 since 2015. Before that, Microsoft Security Essentials, also free. And even before that, Microsoft OneCare. We have seen the product in the market again competing with everyone else. We do believe that this product can very well coexist with third-party free and commercial products, as it has for more than a decade. So even though we take Microsoft seriously, of course, it's a powerhouse in the sort of IT space. We are not overly concerned because there's nothing that's materially changed in the last period.

Now in terms of the product completeness, of course, our product portfolio goes way beyond antivirus. And pretty much -- as we just said, pretty much all the growth is actually in the non-antivirus products such as VPN, AntiTrack, the performance tools, et cetera, while the Defender product, the Microsoft product is a sort of plain antivirus only. That's really designed to protect Windows endpoints.

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Peter Russell, Avast Plc - Director of IR [58]

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Two more questions from James Goodman at Barclays. One on SMB. The first on SMB, can you provide some more background to the SMB management change? Is the absence thus far of a turnaround so far primarily an execution issue, or is it the recent strategic changes that are more important? And then the second question is on Chrome renewal. Is this a competitive renewal? How is that going?

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Philip Marshall, Avast Plc - CFO & Director [59]

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Yes. So in terms of SMB, I mean the management changes, principally, we have a new GM in internal promotion, who knows the business very well, knows with the industry well. And obviously, he's refreshed by his management team, so let's say, second line of management.

In terms of the business and the turnaround, it's not an execution thing. Actually, execution has been good. I mean we inherited -- the AVG acquisition has been very good for us but the one part of the acquisition which was, let's say, troubled or not integrated with SMB. It's been quite a complex thing. We had multiple 5 different businesses we have to integrate essentially because it would have been integrated. We have multiple different billing systems, different IT systems. We had, let's call it, commercial practices which weren't sustainable, basically doing 2-, 3-year deals instead of 1 year at significant discounts. So basically, renewal ports weren't there when they became Jew and they were attracted to be repriced at levels that we weren't willing to reprice them. We had countries in which we didn't feel well sustainable in terms of profitability. So actually, the team have been executing, we think, along the lines we said. We felt it was time for a refresh because now when we look forward, we think there's a different sort of skill set needed more moving towards, let's call it, growth opportunities, new product development. But as Ondrej said, '20 will be challenged by '19 billings, will impact '20 revenue, but we still see this as a nice opportunity. And it's just -- as we've said before, it's an extension of our technology. So as you've seen by the margins, we've improved them, but they're actually a pretty good margin for that type of business. It's an extension of our technology, so it's not a huge back end and additional cost of running that business. So a lot of it goes online as well.

Second question, Peter?

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Peter Russell, Avast Plc - Director of IR [60]

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Chrome distribution.

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Ondrej Vlcek, Avast Plc - CEO [61]

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Well, so as I said, the deal contract that we have with Google, it's an annual deal, as it has been, that is set to expire next month in March. But we are in active negotiations to renew it, and we are very comfortable about the renewal.

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Peter Russell, Avast Plc - Director of IR [62]

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Okay. I think with that, there are no more questions. So Ondrej, I'd just ask you to say a few words in closing. Thank you.

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Ondrej Vlcek, Avast Plc - CEO [63]

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Thank you, everyone, for your time and for your questions. We appreciate your interest in the company and your support. We'll be on the road over the next week, and we look forward to meeting many of you in person. In the meantime, if you have any follow-up questions on the presentation or any other questions on our business, Peter and the IR team will be happy to help. Thank you.

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Philip Marshall, Avast Plc - CFO & Director [64]

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Thank you, everyone.

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Peter Russell, Avast Plc - Director of IR [65]

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Thank you.