Avast Holding BV Assigned 'BB' Rating; Outlook Stable

  • Avast benefits from relatively low leverage, at well below 3x, solid cash flow generation, and good revenue growth, but is limited by low switching costs and customer stickiness.
  • Although we note that recent data privacy concerns could lead to reputational issues in the short term, we think this will be temporary and largely offset by new product releases.
  • We are assigning our 'BB' long-term issuer credit rating to Avast Holding BV and our 'BB' issue rating to its term loans
  • The stable outlook indicates that Avast will likely grow its revenue by 3% organically (about a 3% decline on a reported basis) with solid S&P Global Ratings-adjusted EBITDA margins of 50%-53%, leading to S&P Global Ratings-adjusted debt to EBITDA of 2.4x and free operating cash flow (FOCF) to debt of about 30% over the next 12 months
LONDON (S&P Global Ratings) March 24, 2020—S&P Global Ratings today assigned the ratings listed above.
The rating mainly reflects Avast's solid cash flow generation and moderate leverage, as well as its relatively stable growth prospects.  We forecast its adjusted debt to EBITDA to remain relatively low at 2.4x in 2020, supported by a 3%-5% increase before the negative effect of its Jumpshot division winding down. Its EBITDA should also be supported by solid cash flow generation, with expected free cash flow of $310 million-$320 million in 2020 (about 30% of debt) and only about $140 million of dividends, leaving significant headroom to potentially reduce debt. Avast's track record of debt repayment in 2019 is a support. Its balance sheet position and cash flow generation are key credit-quality drivers, in our view.
We continue to see positive prospects for Avast in 2020, supported by continued cross-selling of unified solutions to existing customers and gaining a larger share of paying customers in several of its markets, which should lead to 3%-5% revenue growth excluding the negative impact of Jumpshot.
Potential short-term reputational issues should be balanced by significant headroom under the current rating.  On Jan. 30, 2020, Avast decided to wind down its user data monetization business Jumpshot (about 4% of FY2019 revenue) amid users' data-privacy concerns. Despite user data monetization being within legal bounds, Avast decided to wind down the business to preserve user trust consistent with its key mission of keeping its users safe online and giving users control of their privacy.
We believe that possible reputational issues could have some effect over the next 12 months due to potentially higher churn in certain geographies. At the same time, we still assume low single digit organic revenue growth in 2020 coming from the sale of newly launched products related to VPN and privacy, as well upselling additional devices to existing users. We also note that Avast has sufficient headroom under the current rating for a potential operational setback.
The coronavirus outbreak is unlikely to have a meaningful negative effect on performance.  In our view, and while it is still early days, we believe the COVID-19 pandemic is unlikely to have a meaningfully negative effect on Avast. This is because staying at home means household users will have more time to spend on their devices, which could raise their awareness about cyber security threats. In addition, we note that the cost to install Avast's paid solution is relatively low, and consumers could be willing to spend more on securing their devices as they cut back their spending on leisure activities.
Avast's concentration in the highly competitive consumer desktop segment, with low switching costs and limited long-term growth prospects, constrains the rating.   The rating is constrained by revenue concentration in the consumer desktop segment, which generated more than two-thirds of 2019 revenues. Compared with the enterprise market, we consider switching costs in this segment to be significantly lower, and price sensitivity to be much higher. Subscription periods are also relatively short at one-to-three years.
Avast faces competition from some larger and better capitalized competitors such as Microsoft, MacAfee, and Symantec. It also faces the challenge of generating income from mobile users, given that PC sales have stagnated as online activity continues to shift toward mobile devices. This could be somewhat offset in the future as the market for connected devices grows and Avast can upsell additional security products for households.
Above-average profitability and high cash conversions support the rating.  Avast's S&P Global Ratings-adjusted EBITDA margins are relatively strong, at 54.6% in 2019, compared with its peer group. Its EBITDA margins are supported by a cost-effective online direct sales and distribution model, community-based support, and highly automated threat detection processes. Its freemium business model enables efficient cross-selling to Avast's user base.
Avast also benefits from high cash conversion of about 65% of S&P Global Ratings-adjusted EBITDA given its low capital requirements (2%-3% of sales), low interest burden (US$45 million-US$50 million) and positive working capital cycle given an average contract duration of 14 months, with a high share of contracts paid up front.
The stable outlook indicates that we expect Avast to grow its revenue by 3% organically (about 3% decline on a reported basis due to disposals) while maintaining solid S&P Global Ratings-adjusted EBITDA margins of 50%-53% leading to S&P Global Ratings-adjusted debt to EBITDA of about 2.4x and about 30% FOCF to debt over the next 12 months.
We see rating downside over the next 12 months as unlikely due to significant headroom within the credit ratios and solid cash flow generation that could cushion any operating underperformance. We could lower the rating if adjusted debt to EBITDA increased above 3.0x, or if FOCF to debt deteriorated below 25% of S&P Global Ratings-adjusted debt on a sustainable basis.
This could occur if the company pursued a large debt-funded acquisition or a more-aggressive shareholder remuneration policy, or if reputational issues amid data privacy concerns led to a significant increase in customer churn and weakened cross-selling and upselling activity to its existing freemium customer base on a prolonged basis.
We could raise the rating if Avast actively reduced leverage to below 2x while maintaining FOCF to debt above 25% on a sustainable basis.
We consider an upgrade unlikely over the next 12 months because we expect Avast to prioritize acquisitions over debt repayment and we foresee limited trading upside amid data privacy concerns.
We work across the world

From London to San Francisco, to our home base in (Saint Helier) Jersey, we’re looking for extraordinary and creative scientists to help us drive the field forward.

AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. If AC Invest’s business model were to change and it begins routing non-directed orders in NMS securities, it will comply with the disclosure requirement of Rule 606.

77 Massachusetts Avenue Cambridge, MA 02139 617-253-1000 pr@ademcetinkaya.com