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Edited Transcript of AVST.L earnings conference call or presentation 14-Aug-19 8:00am GMT

Half Year 2019 Avast PLC Earnings Call

Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Avast PLC earnings conference call or presentation Wednesday, August 14, 2019 at 8:00:00am 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

* Hannes Leitner

UBS Investment Bank, Research Division - Equity Research Analyst of Software

* John Peter King

BofA Merrill Lynch, Research Division - Research Analyst

* Julian Alexander Serafini

Jefferies LLC, Research Division - Equity Analyst

* Pavel Ryska

J&T Banka, a.s., Research Division - Analyst

* Toby Ogg

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and welcome to today's Avast Plc half year results for 2019. (Operator Instructions) So speakers, please begin.

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Peter Russell, Avast Plc - Director of IR [2]

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Good morning, everyone, thank you for joining our half-year 2019 results presentation. Today'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 at the end of the presentation, and a Q&A facility is available to conference call participants.

As a reminder, the earnings results statements 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 cautionary statement in the presentation deck. Also, unless stated otherwise, billings and revenue growth rates exclude the impact of FX, discontinued business and disposals.

At this point, I will hand over to Ondrej.

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Ondrej Vlcek, Avast Plc - CEO [3]

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Good morning, everyone, and thank you, Peter. And thanks for joining us on the call today. I'm proud to report our financial results for the first half of 2019. These are my overall as the company's CEO and to that I'm actually going to take a few minutes longer than usual, and also cover what I see as my key priorities for the new role.

This morning, we announced a strong set of results. We are reporting good revenue growth, slight margin increase, and strong cash generation.

To begin, I thought it would be useful to highlight the main themes behind our performance and our outlook. Slide 5. First, our platform model continues to serve us extremely well. We have a massive user base made of users of our high-quality products and this gives us multiple ways to generate revenue. In particular, we are capturing strong growth as we cross-sell additional privacy and performance-related products. And this is driving an increase in customer numbers worldwide.

Second, Avast is now offering more multidevice subscriptions. In particular, we see more use of desktop-purchased products on mobile. Let's be clear about this. Desktop is increasingly becoming a channel for selling multidevice mobile-enabled products for us. Today, this is most visible in our revenues from our privacy-related products such as VPN and password manager, but as we further increase the device compatibility of other existing and new products, we expect this convergence to continue, effectively reducing our dependency on the PC platform.

Third, our activities in the first half show a commitment of -- to investment in technology and innovation. In both Consumer and SMB, we have sustained high levels of investment in people and products, which is driving profitability and growth. In just a few weeks' time, we look forward to welcoming Michal Pechoucek to Avast, our new CTO. Michal is a renowned AI expert, and will lead our core technology and R&D teams and provide fresh drive to our machine learning, big data and innovation projects.

Fourth, we've delivered on a key strategic goal presented at the time of the IPO, bringing our important Internet of Things project to live. Both the carrier-based solution as well as the direct-to-consumer product are now live in the market.

And finally, toward the end of the half year, we secured agreement on a strategic partnership for our data analytics business Jumpshot. And this partnership will unlock significant value from the business, and is consistent with our strategy to effectively use M&A to create value.

Let's now turn to Slide 6. As Avast's new CEO, before we delve into the details, I would now like to take an opportunity and present to you what I see as the main priorities for the company. These priorities were designed to sustain the competitive performance of our business and to drive long-term growth. First, it's of critical importance that we continue to evolve the Avast customer experience. I strongly believe that sustained focus on the customer will ensure our long-term success. Over the years, we have fostered high levels of brand loyalty and user engagement, but we need to go beyond that. We now need to put the customer front and center and we will do this by providing products that customers love. Second but equally important on my agenda is the company's soul, its purpose, mission, values. I'm talking about the company culture here. I take these things very seriously as I believe they represent an incredible growth potential for us. We have a strong technical expertise in all the sectors we operate in, and when combined with our passion and our entrepreneurial culture, great things will happen. I take my responsibility to motivate and inspire our people seriously, and this will become a key component of our growth agenda. We will also continue to focus on smart capital allocation decisions, and, of course, execute on those as well. This must be consistent with the company's strategic priorities. They must drive strong and sustainable financial performance. They must be value-creating. And finally, turn all this into strong financial performance.

In summary, Avast's competitive advantage is achieved by combination of a few factors: an innovative business model; a high-quality portfolio of assets; an incredibly talented and driven workforce; and advanced technologies adds to all of these high-quality earnings and the financial strength to make investment. I can't stress enough how excited I am to be in this new role, and how optimistic I am about the future prospects of our business.

Slide 7. Now let's take a look at the actual financial and operating data for the period. It's been a good first half performance by the group, in line with company guidance. The core consumer desktop business continued to power the group's performance. But this was supported by notable strength in the Indirect segment. I draw your attention to our key financial metrics, billings, revenue and EBITDA as well as our operational KPIs. First, our group billings performance has been strong with 12.5% growth in the period on a like-for-like basis. This has been accompanied by revenue growth of 9.2%, which is in line with our high single-digit growth guidance for the full year. An increase in EBITDA of 6.5 points has supported a very healthy EBITDA margin of 55.4%. And we are tracking in line with guidance on all 3 of our desktop operational KPIs, which includes the number of customers, where for the 6-month period, it showed 1.8% growth. On the product side, we reached an important milestone around the end of the period with the launch of our IoT value solutions. The carrier-based solution went live with our partner Wind Tre in Italy in June and then in July, the direct-to-consumer product Omni was released to Avast users in the U.S. market.

Profits and strong cash generation -- cash flow underpin the interim dividend, which is $0.044 per share, which is consistent with our stated dividend policy that targets 40% of levered free cash flow, 1/3 payable at the interim.

So overall, we are looking at a pleasing group performance in the first half, which supports a strong full year outlook. We now expect like-for-like full year 2019 revenue growth to be at the upper end of the previously stated high single-digit percentage range.

Turning to Slide 8 and our key financials. Let me start here at the middle of the page with adjusted revenue, which is our headline metric for reporting and for marking the guidance. It came in at $421.7 million, which is a growth of 9.2%. Adjusted billings, a leading indicator of the group's performance, were $454.6 million, a growth of 12.5%. As you can see, first half year-on-year billings growth was particularly strong and in large part that was due to new product launches in the first half of 2018 in both Desktop and Indirect, which also means that the year-on-year impact of these products will be lower in the second half of the year.

Our business enjoys sustainably high margins. We see this again in the first half of the year with adjusted EBITDA up 6.5%, which translates to a margin of 55.4%. The CapEx-light nature of the business feeds through to unlevered free cash flow. In the period, unlevered free cash flow increased 20% to $230.4 million. Adjusted net income was up 13.8% to $148.2 million and diluted EPS at $0.15, up over 7%.

Slide 7 (sic) [Slide 9] is a closer look at our operational KPIs, and it shows how all 3 of our operating metrics, which is end of period customers, average revenue per customer and average products per customer, are tracking nicely in line with full year guidance. We continue to successfully attract new paying desktop customers, adding more than an additional 220,000 customers since the beginning of the year, which brings us to a total of 12.41 million desktop customers. Since the start of the year, average revenue per customer is up 2.3%, and average products per customer is also up 2.3%. This progress has been achieved by a number of means. We continue to expand our localization program highlighted last year and learn from it. We are seeing a pleasing uplift in customer numbers and penetration rates in new target countries from Japan in Asia to Germany and Poland in Europe. Importantly, we also continue to see good growth in customer numbers in traditional markets, such as the U.S. and U.K. The appeal of our value-added products, in particular Utilities and VPN, has helped drive growth in average products per customer, which has also been aided by more recent product launches, in particular Avast Driver Updater and AntiTrack. Our advanced machine learning monetization platform remains a key driver of our success, which -- it effectively promotes, upsells and cross-sells across our existing user base across various device types and various operating systems.

Slide 10. Let me now spend some time on each of the separate business units and I'll begin with Consumer Direct Desktop. The core consumer desktop business continued to power the group's overall performance. Driven by cross-sell promotions within the installed user base, we experienced strong demand for Avast value-added solutions. These are our products that enhanced user privacy such as VPN and AntiTrack and our performance products such as Cleanup and Driver Updater. The strong billings growth in the first half of this year was partly due to the release of the new products AntiTrack and Driver Updater in the first half of 2018. And all of this was all supported by a resilient performance from our traditional antivirus products, which remain best-in-class. The strength in performance of Consumer Desktop gives us confidence for the remainder of 2019. We, therefore, revised our full-year guidance upward from high single-digit revenue growth to low double-digit revenue growth.

Slide 11. Now we wanted to give you a bit more insight into the drivers of our Consumer Desktop performance. Here at Avast, we talk a lot about the competitive advantage of our platform model. This is supported by a vast installed base, mostly made up of our top-ranked, free antivirus product. On this slide, you can see that an average of 81% of customers that pay for an Avast product today, be it paid AV or any other paid product originate from that free user base, and this evidences the great value for our free product for both the user and for Avast. Avast Free AV is widely recognized for its reliability and ease of use and this attracts loyal users and serves as a highly effective platform for the business to cross-sell other innovative products.

Slide 12. On this slide, we want to underscore the success of cross-sell and its importance to the business. Despite our roots in consumer antivirus software, today more than half namely 52% of total dekstop billings is from nonantivirus products, and these other segments of Avast end market continue to grow strongly, from 26% annual growth in utilities, which, in dollar terms, is the second largest product in the portfolio after antivirus, through to nearly 400% annual growth from one of our 2018 launches AntiTrack. Avast VPN and Utilities products have been in the market for several years, yet they continue to deliver this very strong double-digit growth held by strong renewal rates, and we are very encouraged by the high growth rates of these newer products whose success can also help us to steer future product development.

Slide 13. Another important thing is the stickiness of Avast product. That points to higher levels of customer satisfaction and perceived value. This slide shows that paying customers of our desktop AV are now staying with us longer. Today more than 50% of our AV customers have been with us for 4 or more years, and that cohort has enjoyed growth compared to the same period last year. Importantly, and showing the sustained popularity of paid desktop AV, the same percentage of total AV customers remain first year customers. So the conclusion here is that our products are finding a place in consumers' everyday lives, and we are able to achieve that by being increasingly relevant and engage with our customers.

I would now like to turn to Slide 14 and Consumer Mobile. In the first half, the mobile business saw a decline in underlying revenue of 7.5% year-on-year. First, the positive. The direct-to-consumer subscription business delivered strong double-digit growth. This was supported by continued product optimization and high renewal rates and has also benefited from a positive trend in uptake of Avast mobile security for iOS, which has become a contributor to sales after its recent 2018 market release. In thinking about Avast vision for product development, it's helpful to understand the increasing convergence of Consumer Desktop and Mobile. Consumers today are seeking to use the same product between multiple types of devices, a good example here is VPN, one of our most important products. There has been demand for VPN licenses that can be used on both desktop and mobile. However, since these licenses today are mostly sold and accounted for within the Consumer Desktop segment, their extensive use via the mobile channel is not reflected in the Mobile segment's performance. And this trend is likely to continue as multidevice licensing becomes a larger part of Avast sales activity.

Now as anticipated, in the mobile carrier channel, performance in the first half was adversely affected by the impact from the 2017 Sprint loss, which has been partly offset by recent family safety product launches. So while it is taking longer than expected, we remain patient and focused on the development of our carrier relationships, and we still believe in the potential of this market and our capability. At the center of our future vision is the Internet of Things, and Avast's Smart Home product. We were very pleased to announce the release of our first carrier-based IoT solution with Wind Tre in Italy. While this is only the start of our journey, we are optimistic about the opportunities in IoT and remain confident that our carrier-based solutions will become a key driver of the anticipated growth in Consumer Mobile from the midterm onward. For the current financial year, we are lowering our full-year 2019 expectations for the Consumer Direct Mobile business, partly because of the weakness in the carrier channel and also the shift toward multidevice subscriptions on the direct-to-consumer channel. We now expect revenue to experience a mid-single-digit percentage decline versus previously -- previous guidance of flattish growth.

Moving onto slide 15 and Consumer Indirect. In the first half of the year, we were very pleased with the performance of our indirect business. Billings are up 29% and revenue up 28%. Our data analytics business Jumpshot continued its expansion delivering growth in line with historic strong double-digit rates. And in July 2019, we announced a strategic partnership between Jumpshot and the U.K. information company, Ascential plc for a 35% minority stake in the business. And what I really like about this partnership is that it will allow Jumpshot to do certain things that it couldn't do before. There are really 3 reasons why we selected Ascential as a partner of Jumpshot. First, it has a large complementary customer base, which gives Jumpshot access to the right decision makers at the organizations most likely to buy its products. Second, it has a global footprint that can accelerate our move into Europe, the APAC region and potential Latin America. And third, it has rich data assets that will increase the quality of Jumpshot's products and make them even more competitive. So overall, this partnership is really set to accelerate Jumpshot's growth with additional customer relationship and product development opportunities.

Now the other high growth component of Consumer Indirect is the Avast Secure Browser. The browser platform has continued to see strong active user momentum, which has been achieved mainly through new installs from the Avast user base. So again, we are benefiting here from the power of our platform. The strong growth in both the Secure Browser and Jumpshot has helped more than offset expected decline in Chrome distribution. And so for full year 2019, we expect Consumer Indirect to continue its solid performance supported by the strong billings momentum in the first half driven by the browser and Jumpshot, we are raising guidance to double-digit revenue growth excluding the impact of discontinued business and FX.

Lastly, let's look at our SMB business on Page 16. The SMB business has performed in line with expectations on revenue, down 5% for the half year. Our focus here has been on commercial pricing discipline, which has resulted in expansion of margins with EBITDA margin up by a considerable 469 basis points in the period.

On the operations, based on Avast's partnership agreement with Zscaler, the Secure Web Gateway product was fully launched in mid-February to all channels and territories. And this has enabled the pipeline to be built around endpoint and network gateway product integration. Sales activity is well underway, but it will realistically take some time for early-stage customer engagement to become revenue-generating. Then in April, we made important progress in effectively redirecting our channel partners to the new Avast order management system, and overall feedback on this change has been very positive. So as a result -- I'm sorry, lastly, the divestiture of Managed Workplace to Barracuda announced in January has now completed. So as expected, our current financial year revenues are impacted by the decline of billings during 2018. However, billings growth in the first half has improved to be close to flat year-on-year and our other initiatives are tracking according to plan. And so as a result, our revenue expectations remain a mid-single-digit percentage decline.

Slide 17. In H1, we've also continued our strong track record of innovation. We released a number of new solutions to the market alongside product enhancements. I've already spoken about the release of our IoT solutions on both the operator channel and the direct-to-consumer channel. In the first half, we were able to bring to market solutions in mobile security and parental controls with 3 of the carriers as part of our Veon relationship. And then AntiTrack, which is our high-performing privacy product, launched last spring, has now been rolled out under the AVG brand as well, which means that AVG customers are now able to benefit from this privacy protection that eliminates online trackers. And within the performance range of products, we have refreshed and enhanced both Avast Cleanup and AVG TuneUp.

Avast product leadership is valued by our customers widely, widely recognized by independent third parties. And this helps build our reputation in the market as well as satisfaction within our customer base. So as a result, I'm really pleased with our continued ability to innovate here because these new products and services give me a lot of confidence as I look into the future.

And with that, let me now hand it over to our CFO, Phil Marshall

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

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Thanks, Ondrej. Let's move into the financial section by referring to Page 19 of the presentation. This outlines the billings and revenue performance of the business for the first half of 2019. Billings are shown at the top of the page, revenue at the bottom of the page. You can see in the first column, top of the first column, $460 million of billings, which was the number for the first half year. See below that $5 million of this comes from discontinued business, which to remind everyone is principally the toolbar business that came from the ABG acquisition that is now in one-off mode. And then the highlighted number $455 million of billings excluding discontinued business is the headline metric. This is the ongoing organic growth number we refer to as it represents our continuing business and grew $38 million in the first half, or 12.5% adjusted for FX. $427 million of revenue at the bottom of the page, again $5 million of which comes from the discontinued business. So the headline metric being before $422 million of revenue excluding discontinued business, which grew $32 million in the first half, or 9.2% adjusted for FX. This is the headline number. And as Ondrej mentioned, we are now guiding to the upper end of our high single-digit revenue guidance.

Now turning to Page 20 of the presentation. This shows the makeup of the $38 million growth in billings I mentioned on the previous page, again excluding the impact of discontinued business. The percentage shown at the top of the page represents the first half growth excluding FX in each of those segments. And the percentages at the bottom of the page represent the percent of total business each segment represents.

You can see as Ondrej mentioned that the growth was not just driven just by the strong performance of our core Desktop business of 14.3%, but also the Indirect business, which grew 29% in billings in the first half year.

On Desktop and Indirect growth, this was helped by the very strong growth of the new products such as Driver Updater and AntiTrack in Desktop and Avast Browser in Indirect. These products were all launched in the first half of '18 so benefit from a very low baseline. While we do expect good growth to continue in the second half of '19, it will be to a lesser degree because the baseline is higher, obviously, as we introduced the products in the first half. As such, one would expect that billings growth in the second half will be much more aligned to revenue growth in the second half of the year.

Now turning to page 20 of -- 21, sorry, of the presentation. This page basically shows the same view as the prior page but for revenue representing the $32 million half year growth and again the percentages at the top of the page represent the growth in the individual segments and the percentages at the bottom represent the percent of the total business that each segment represents.

The message is the same, the growth driven again by our core Desktop platform and the Indirect business.

If we now turn to Page 22 of the presentation. The majority of our subscriptions are paid in full upfront and then recognized to revenue ratably over the life of the subscription contract. As such, we always carry a balance on our balance sheet of deferred revenue that supports future revenue and obviously underpins the guidance that we give for the next period. If you look at the overall balance of the first half, it was $471 million, an increase of 10.2% versus first half 2018. Of this number, $417 million is to be recognized as revenue within the next 12 months. And a key point with respect to the second half of the year and then obviously, the full year guidance that we have given, of this $417 million, approximately 2/3 of that will be recognized in the second half 2019, which again, obviously, helps underpin our confidence in the guidance that we've given.

Now turning to Page 23 of the presentation. This shows the Q1 and Q2 revenue splits and the respective growth rates for each quarter in 2019. Looking at the revenue on the left-hand side of the page. This shows the Q1 performance of 9.1% growth, delivering $209 million of revenue, and then looking at the right-hand side of the page, you see the growth of 9.3% delivering $213 million of revenue. So the key point here is the continued consistency of delivery both in terms of number and growth rates, and when we look forward to the second half of the year, we would expect something similar, which again underpins the guidance and the movement to the upper end of the revenue single digit guidance range.

Now turning to Page 24 of the presentation. This shows our group EBITDA margin at $237 million for the first half versus $222 million last year, or a 55.4% margin rate, an increase of 36 basis points versus the first half of last year. We have sustained our high levels of profitability, and within this, we continued to make good progress on improving the commercial discipline, and therefore, the profitability of our SMB business, which gained a further 469 points in margin improvement in the first half of 2019.

If we now turn to Page 25 of the presentation, this gives you a more detailed view of the components of the increase in the margin from first half versus last year. The page at the top takes the 2018 margin of $222 million or 55.1%. That's what we reported in the first half of last year. And it walks it down to this set of numbers the $237 million or 55.4% that is reflected at the bottom of the page. The key message here is that we continue to reinvest in the business and a significant promotion of the benefits coming from revenue growth is put back into the business principally around product development and innovation. The walk separates the favorable impact from our IFRS 16 adoption as we've articulated previously, which gives us a benefit of about 100 basis points. If you exclude this benefit, you can see operationally it's down 65 basis points year-on-year. This half 1 profile is as previously guided, so it's nothing that is unexpected. And as we see for the full year, the guidance remains the same of broadly flat margin for the year.

If we now turn to Page 26 of the presentation. Our consumer-driven subscription model continues to support attractive cash-generating characteristics, with $230 million of unlevered free cash flow versus $192 million last year, an increase of 20%. At the bottom of the page, you will see this delivered $200 million of levered free cash flow versus $154 million last year, an increase of 30%, also benefiting from the reduction in interest payments as a result of the further reductions in our debt balance. We did benefit from some favorable timing on both CapEx and cash tax. So while the growth and subsequent 86% cash conversion number were very pleasing, we do expect a slightly lower growth profile in the second half year and a cash conversion number for the year closer to the 80% mark.

With all that said, we are very pleased with the progress made again on cash delivery in the first half of the year and the performance again in terms of the translation from P&L to cash.

With respect to our dividend policy, we again reaffirm the policy of approximately 40% of levered free cash flow to be used for dividend with the 2009 interim payment being based off the $325 million levered free cash flow that we delivered in 2018.

So essentially, it's 40% of the $325 million as we articulated and then 1/3 of that as the interim payment, which equates to $0.044 per share. As a reminder, with respect to the dividend payment for 2019 in total that will be due to be paid in final installment next year, you might recall as a result of the IP transfer we did from the Netherlands to the Czech Republic last year, we incurred a $49 million tax obligation payment with the Dutch tax authorities. This was paid in March this year. But as previously guided, it was treated as an exceptional item and therefore excluded from our levered free cash flow number and thus also excluded from the baseline when we calculate dividend.

If you now turn to Page 27 of the presentation. The nature of our subscription business model continues to support the deleveraging of the business. Our net debt has reduced by 9% since year-end 2018 to a net debt balance of half year of $1.1 billion, which now represents, in last 12 months, EBITDA calculation of 2.4x leverage. The rate at which we deleverd was slower than in prior years principally due to the fact that we now, obviously, have a dividend payment, the first one of which we made in the first half of the year and also the $49 million one-off payment I mentioned to the Dutch tax authorities relating to the IP transfer done last year.

Now turning to Page 28, and a update on the full year guidance. On the right-hand side of the page, this is the reference of the numbers and the guidance we provided when we did our full year results in March of this year and to the left of that column, you see the current view and we have highlighted in bold the P&L metrics that have updated. The headline point here now is that we now see review growth at the upper end of the high single-digit growth range supported by our core Desktop business at low double-digit growth, and also our Indirect platform, also at low double-digit growth -- sorry, at double-digit growth. On a related point, for all of those who are doing modeling or modeling the company numbers, we have also included, as always, several appendix pages supporting the modeling with supplementary guidance and also supporting material that will help you such as exceptional items and other supporting details.

Now turning to the final page of the presentation, Page 29. I think in summary, I think the headline is both Ondrej and I are very pleased with the results that we've delivered in the first half of 2019, and more importantly the progress made on our 2019 priorities. On the business side, we have seen further evidence of expansion arising from the strength of our platform model and the utilization of the desktop as our distribution platform in both the numbers of customers but also in the cross-sell to those customers. And while we expect further product development through the second half of the year, we will continue to further invest in the business for the future. On the financial side, our highly cash generative business model is supported both by further reduction in our debt obligations and deleveraging, while supporting the dividend policy outlined in IPO.

And finally to reiterate the guidance for 2019 one more time. We now see revenue growth at the upper end of the high single-digit growth underpinned by that record deferred revenue balance previously mentioned.

With that, I thank you for listening and hand back to Ondrej.

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Ondrej Vlcek, Avast Plc - CEO [5]

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I would like to open it for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from the line of Tony Ogg (sic) [Toby Ogg] at JPMorgan.

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Toby Ogg, JP Morgan Chase & Co, Research Division - Analyst [2]

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Just 2 questions if I may? Firstly, on the adjusted EBITDA margin trading nicely up in the first half 60 basis points above consensus I appreciate. That was helped a little bit by enough spend delay you mentioned in the first quarter. No change to the full year guide though despite the uplift of the revenue. Perhaps you could explain why you haven't upped that guide just given the operational leverage in the business? And then secondly, just clearly with respect to the guidance on the revenues, it's clearly a few moving parts there specifically those for the Consumer Direct Desktop segment, the guide is now low single digit for FY -- low double-digit, sorry, for FY '19. Perhaps you could update us on the medium-term guide there?

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

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So in terms of the first -- thank you for the question. In terms of the first part of the questions in margin. As you recall, we did 54.1% last year and that obviously, was before the IFRS 16 adjustments. So if you adjust for that on a like-for-like basis, the full year last year was 55.1%. And we're 55.4% in the first half of this year. Right now, as we mentioned -- and it's reflected also on the cash side, we do see a little bit of shift into the second half year, some of which is just principally timing from start of May, June to July, August, but we do see a little bit of shift in terms of investment. And so right now, we feel it most prudent just to keep the guidance as it was on margin. And I think in the longer term as we've articulated at the time of the IPO in recent results announcements, because we see significant growth opportunities in the business, we feel that, that profile of maintaining margin versus increasing and reinvesting back in the business is the right approach to take. In terms of the, sort of medium-term guidance, really no update. Obviously, at the time of the IPO, we guided high single digit for the current year. We guided again that way this year and, obviously, we guided that way for the medium term. At this stage, we're not looking to change anything because we're focused just on this year.

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Operator [4]

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We are now over to Julian Serafini at Jefferies.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [5]

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So, Ondrej, one of the things you mentioned was the 34% growth in the non-AV billings and their share of desktop billings. So just quick back of the envelope math suggests that AV billings are actually flat down. Can you confirm that, that is correct? And is that like an ongoing trend or more of a one- time?

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Ondrej Vlcek, Avast Plc - CEO [6]

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Yes, so the AV billings I can confirm are flat flattish. And this is consistent with our messaging. That's what we always said. The growth really is coming from the non-AV segment.

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Philip Marshall, Avast Plc - CFO & Director [7]

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I think that links in -- sorry, I think that links into the point that Ondrej was articulating at the start here that more and more that desktop piece and that freemium, obviously, not the paid AV but the freemium piece, it really is the platform of the distribution channel to sell those incremental products. So it is as Ondrej said, it's what guided at IPO and it's what we have consistently said. Our future growth aspirations is not based on any expectation of AV growing.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [8]

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Yes. That makes total sense. And one follow-up too on the SMB business. I think you talked a little bit about the Zscaler partnership earlier this year. Is there a point where we should expect that to start materializing in the results? Should we expect anything in 2H or is that more of a 2020 type of item?

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Ondrej Vlcek, Avast Plc - CEO [9]

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We see that 2020 item, yes.

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Operator [10]

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Okay. We're now on to Alastair Nolan at Morgan Stanley.

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Alastair P. Nolan, Morgan Stanley, Research Division - Research Associate [11]

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Just a couple if you don't mind. Firstly, just on the Smart Home, the Omni product. I know it's early days, but could you give us a bit of an update as to kind of initial traction? And I guess when you believe it's going to become a little bit more meaningful in terms of revenues and billings? And also just where exactly that will show up in terms of divisions? And then just secondly on the capital allocation, you're obviously playing debt down at a pretty healthy rate and leverage is coming down pretty quickly. Is there an update as to what you might want to do potential ideas around a buyback, anything like that? And anything you could add around that, that would be really helpful?

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Ondrej Vlcek, Avast Plc - CEO [12]

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I will answer the first question on Smart Home. So the Omni product was really only launched a couple of weeks ago. So it's really early for us to say anything. I mean clearly this is a long-term project that we've been preparing for years. So in terms of the second part of that first question, which is when we see the actual meaningful revenue impact from IoT and how we'll be reporting those 2. So I mean this is a 2021, 2022 thing for any -- I mean in our view as a meaningful revenue contribution. And the segmentation here is going to be direct-to-consumer product. Omni is going to be in Consumer Desktop while the carrier-borne product is going to be in Mobile. Now to Phil to answer the second question.

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Philip Marshall, Avast Plc - CFO & Director [13]

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Yes. The second one, Alastair, I'd say 2 things. One, obviously, we've historically deleverd a very good clip and whilst we'll continue to do so, obviously, going forward, we'll delever slightly slower because, obviously, now we're paying a dividend that we historically have not paid. What I'd say is really to reiterate, really what we said at the IPO I mean we've sort of guided to this sort of 1.5 sort of floor number. We're at now 2.4 now. At some point when we get closer to that 1.5, then clearly we'll update in terms of what we might be thinking in terms of capital. Right now our focus is really supporting the core part of the business, which is the CapEx piece. It's not overly demanding. We see sort of 3% of revenue. So again, that's easily managed. Acquisitions, we have nothing in our line. So right now in absence of that, we will just continue paying down debt, to be perfectly honest with you, to reduce our interest burden and obviously, further facilitate the performance and reinvestment in the business.

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Alastair P. Nolan, Morgan Stanley, Research Division - Research Associate [14]

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Understood. And just one quick follow-up, if you don't mind. Just on the KPIs. It appeared as though the headline line numbers slowed somewhat but clearly the underlying performance of the business in terms of revenues and billings was really strong. Could you just talk to us about the kind of dynamics there? Is that selling -- upselling to higher-priced products? Or what exactly is going on there?

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

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A little bit of -- I'd say, a little bit of everything really. Slight improvement in the pricing dynamic. A slight improvement in the sort of mix and, obviously, we've seen a further increase in the average products per customer. So, obviously, that helps.

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Operator [16]

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Okay. We are now over to John King of Bank of America Merrill Lynch.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [17]

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Could you comment a little bit on how the AVG base is doing? I know just U.S. growth within the mix was lower than everywhere else and obviously, good performance overall but U.S. was a bit slower. So comment on AVG in the U.S. in general. And then I've got a couple of follow-ups.

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Philip Marshall, Avast Plc - CFO & Director [18]

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So in terms of what I would say is the first half-year, on this reporting period, AVG within the Desktop business is very similar to the Avast growth. So those 2 numbers was aligned they've just sort of ever been actually because Avast has always been materially stronger when we first acquired AVG. We now (inaudible) out last year but in the first half year very similar growth rates. In terms of the geos, it's -- the U.S. actually slightly expanded. Obviously, it's our biggest geo. So it slightly expanded. I think the mix, it hurts on the mix because others are growing just faster. Principally a lot of those target regions, the non-U. S. dollar regions are growing faster, but the U.S. did grow, but obviously, at much slower clip.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [19]

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Yes. Okay and then on -- Ondrej maybe some comments around M&A would be useful. We continue to just see consolidation in the sector. Could you just talk about the Avast's vision as to whether you expect the sector to continue to consolidate and your role within that, for example, could we see you acquiring potentially paid AV products? Or, obviously, historically you've really focused on freemium? So any thoughts around that will be helpful.

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Ondrej Vlcek, Avast Plc - CEO [20]

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So we have a track record of acquiring companies as you know. But right now, I really don't have much to say. There is nothing that we are announcing. We are kind of looking constantly for opportunities, but I would leave it there.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [21]

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Yes. And sorry, can I just squeeze a last one in? Just on the IoT product following up there. How much would you expect that to be sold? Do you think direct could be a meaningful channel for that product or substantively is that going to be something you expect to be sold through the mobile telco cooperators?

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Ondrej Vlcek, Avast Plc - CEO [22]

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Well, I think it can become meaningful on both that is we are actually investing in both direct-to-consumer and carrier because it's quite unclear whether in the mid- to long term, the winning strategy will be either of the 2 or which of the 2 it will be. So we don't know yet. But we think we have always the power of the platform and our ability to cross-promote other products plus the increasing threats and the adoption of IoT devices. I think the direct-to-consumer channel can be very interesting.

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Operator [23]

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Okay. We're now over to Sebastian (inaudible).

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Unidentified Analyst, [24]

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When thinking about your whole consumer business both Direct and Indirect but specifically Direct really, the installed base of AV and possibly your CCleaner product is very important to driving your revenues. Can you give us any indications how that installed base is growing really? I've got a $300 million number before, just any sense of where that is now?

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Ondrej Vlcek, Avast Plc - CEO [25]

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So the installed base is broadly flat. This is what we messaged during the IPO as our expectation. And it's what it has been. So no change there.

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Operator [26]

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Okay. Before going onto the next question, which is Pavel Ryska at (inaudible) (Operator Instructions) And Pavel, we go over to you.

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Pavel Ryska, J&T Banka, a.s., Research Division - Analyst [27]

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First of all congratulations on the very good results for the first half of the year. I just have one question catching up on the Mobile segment. So you wrote in the statement that there is longer impact, a negative impact of the loss of Sprint back from 2017. So it's taking a little longer maybe than we were expecting before, so do you think this negative impact is going to extend into next year or do you think that this segment as a whole could be flattish in terms of growth next year?

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

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I mean Pavel it's a little bit of a yes and no answer in the sense that obviously, we lost the account in '17. We had some revenue in '18, a lower revenue in '19 and therefore by default, it will impact '20 because we have some revenue in '19. So when you lose one of these things, they seem to have a year-on-year impact for 2 or 3 years. So there will be, obviously, an impact next year because we do have revenue this year. But clearly, we expect it to essentially get itself down to an exit situation as we move through the year, but obviously, there'll be a carryover impact. I think when you look at the rest of the business, as Ondrej alluded to, there's a lot of things that we're working. Obviously, we've announced the Wind Tre thing. It's just (inaudible). As always, we keep saying it, but it really just seems to take longer each time, each time we work one of these things. So right now, I'd say, it's a little bit early to tell to give sort of further guidance beyond today. Obviously, we'll do that next year when we announce the full-year results. I think the other thing to say here which -- just to repeat what Ondrej said on the noncarrier piece which is direct-to-consumer the subscriptions when we sell typically Google, Apple et cetera, a key important piece that we're seeing the business is as Ondrej mentioned, that Desktop platform is a distribution platform and a significant part of the growth on Desktop has come from sort of multidevice enabled subscriptions. So people are buying something off the Desktop, but using it on the Mobile, but that is reflected in the Desktop numbers. So even though we've seen growth, good growth, on the mobile direct-to-consumer, it's somewhat actually understated because a chunk of that is sitting in the Desktop because that's just the way it occurs. So I think it's an important dynamic to note that more and more we're seeing more multi-enabled licenses and that sits on the Desktop side. So these 2 things are becoming closer and closer together.

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Operator [29]

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Okay, we have a final question and that's of the line of Hannes Leitner at UBS.

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Hannes Leitner, UBS Investment Bank, Research Division - Equity Research Analyst of Software [30]

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Couple of questions on my side. Could you update us on your campaigns by geographies and regions? That's the first question. And the second one is on the IoT in the U.S., the product around Omni. Why did you launch that in the U.S. in a very large market? If there is anything related to the GDPR in Europe regulation? And the third question is I saw the Digital River revenues full Digital Rivers resale increased 53% and made up now 57% of revenues through that channel. Is there any concern regarding margins on that side? And how should we think about the development going forward?

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Philip Marshall, Avast Plc - CFO & Director [31]

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So we'll split the questions. Let me take the Digital River one and then I'll leave the sort of IoT and the country expansion part to Ondrej.

On Digital River, as you know that's our primary partner with regards to shopping cart and payments. We've had a long-standing relationship with them, a very good relationship with them. They work with us. And all I'd say I mean obviously, we are not here to disclose details of that relationship. But I'd as we grow with them, it's beneficial, obviously, from the growth we're doing in the company. They're a very good partner, but it's also financially, it's helpful to us in terms of as we grow with them.

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Ondrej Vlcek, Avast Plc - CEO [32]

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And so to the other questions. So the third one was about the localization project. So no real change there. So we spoke about certain geos last year such as Japan, Russia, Poland and certain countries in Latin America. So we continue driving those countries. They are contributing to the customer growth that you have seen we also messaged we added a few more countries such as Italy and Spain. And again this project is very much ongoing. So no real update here. But they are contributing. And then the second question about the IoT Omni launch and why we chose U.S. This was a focused launch. This is what we -- how we designed it from the beginning. This is -- remember this product involves a hardware component. And so for logistical reasons, we decided to do a focused launch and U.S. markets as the largest market was the logical choice for us. Of course, we will not stay there that is later we will be expanding that launch to other countries as well.

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Operator [33]

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Okay. As that was the final question on today's session, can I please pass it back to you for any closing comments?

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Peter Russell, Avast Plc - Director of IR [34]

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Thank you, everyone, for your time and for the questions. Now I look forward to speaking directly with many of you around the call in the days to come. And in the meantime, if you have any additional questions, IR will be pleased to help. So thank you again and goodbye.