The tech IPO everyone's (not) talking about

Security vendor AVG Technologies may go public on Thursday

The tech and financial worlds are eagerly awaiting Facebook's expected filing this week for an initial public offering of shares, which reportedly could come by Wednesday.

But another well-known tech company is expected to go public one day later. And is anyone talking about that? No!

For good reason, to be honest. That's because AVG Technologies NV isn't exactly Facebook, in terms of its size or cultural significance (for good or bad). While Facebook's IPO is expected to raise up to $10 billion, AVG's is aiming for up to only $136 million. Which makes Facebook's IPO 73.5 times larger.

Still, nearly anyone who has spent time on the Internet is familiar with AVG through its line of security software for both personal and enterprise use. Many of you may have some AVG software guarding your computer right now. So here's some information about the company to which you are entrusting your computer security, and perhaps your personal and professional lives.

Founded in 1991 and based in the Netherlands (though most of its 800+ employees work in the Czech Republic), AVG makes a range of security and PC repair software, using the common "freemium" business model of offering free products or services and then trying to entice freemium customers to upgrade to a paid product or subscription service.

Which is a constant challenge, though AVG, which has 106 million active users, has had some success. Revenue per active user increased to $1.94 for the nine months ended last September 30, up from $1.63 in the nine months ended September 30, 2010.

Overall revenue grew to $217.2 million in 2010 from $113.8 million in 2008, with sales through the first nine months of 2011 coming in at $198.1 million. Net income also is moving in the right direction, to $67.2 million in 2010 from $33.1 million in 2008. Through the first nine months of 2011, AVG's profit was $104.8 million.

Which all sounds good, but AVG is in a highly competitive sector, battling:

* Other vendors with “freemium” pricing such as Avast!, Avira, PC Tools (acquired by Symantec), Carbonite and Dropbox

* Traditional vendors such as McAfee (acquired by Intel), Symantec and Trend Micro, as well as Eset, Kaspersky Labs, Panda Software, Sophos, Rising, Kingsoft, CheckPoint and F-Secure

* Large corporations such as Microsoft and Google that offer security products.

* Emerging cloud-based and SaaS data protection offered by companies such as Apple

AVG has handled the competition well, though it's too soon to tell how much cloud and SaaS services will hurt its business.

However, AVG faces a couple of big problems: First, its internal metrics are sketchy. From the SEC filing:

We also face difficulties in quantifying user retention, both in terms of user churn and subscription renewal rates. This difficulty is in part due to our limited ability to track non-subscription users based on personally identifiable information. ... Furthermore, we offer a variety of products and online services and do not have integrated methods of quantifying retention of our users across these products and services. This inability to quantify certain aspects of aggregate user behavior may adversely affect our business if we are unable to accurately monitor the results of our strategic decisions on pricing and product introduction and marketing.

Ya think? Nothing like flying blind.

The other big problem involves AVG's "most successful program" to monetize its active user base: its "secure search" program, keyed by its browser toolbar. What's the problem? Oh, just this (my italics):

Search engine companies pay us for the search queries we steer to them via our dynamic secure search solution. If software companies that provide Internet browsers prevent the addition of our toolbar, either directly by limiting space for toolbars in the browser interface or indirectly by restricting access to software code, our ability to monetize all of our active user base will be adversely affected. The rise of mobile computing makes this risk more acute as most mobile devices have smaller screens than desktop and laptop computers and software developed for these devices may not as readily accommodate additional toolbars as software developed for desktop and laptop computers.

Well, mobile computing ain't going away, and while AVG does have a stake in mobile security products and services -- it purchased cloud-based mobile security vendor DroidSecurity last year -- it's not good to have an irreversible trend working against your "most successful program."

The security vendor will offer 8 million shares between $16 and $18 and should have a market value in the range of $900 million to $1 billion. The IPO is being led by Morgan Stanley.

AVG will trade on the New York Stock Exchange under the ticker symbol AVG.

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