Source - RNS
RNS Number : 1208E
Avast PLC
26 February 2020
 

Avast PLC

 

FULL YEAR RESULTS FOR THE YEAR ENDED 31 DECEMBER 2019

 

 

Avast plc, together with its subsidiaries ('Avast', 'the Group' or 'the Company'), a leading global cybersecurity provider, announces its results for the year ended 31 December 2019.

 

Ondrej Vlcek, Chief Executive of Avast, said:

 

" I'm pleased to report another year of good performance for Avast in 2019, with results in line with the Board's expectations.   Group Adjusted Revenue was $873.1m, with organic growth of 9.1%1, driven by double-digit growth in our Consumer Direct Desktop business. We also sustained a high level of profitability with Adjusted EBITDA margin2 at 55.3%.

 

"The core of the Avast business and our fundamental strengths remain unchanged. Our focus on cross-sell and upsell, our localisation strategy, and new product releases continue to drive good growth. There is an exciting pipeline of product launches for the year ahead. We continue to expect healthy growth in 2020 and remain confident in the long-term prospects for the business.

 

"For the full year 2020 we expect Group mid-single digit organic revenue growth, and a stable EBITDA margin percentage."

 

FINANCIAL HIGHLIGHTS

 

·

Strong overall performance in line with expectations

·

Adjusted Billings at $911.0m up 5.7% at actual rates, with organic growth of 10.2%

·

Adjusted Revenue at $873.1m up 5.6% at actual rates, with organic growth of 9.1%

·

Consumer Direct Desktop Adjusted Revenue at $632.9m, up 9.1% at actual rates, with organic growth of 10.7%

·

Adjusted EBITDA up 7.9% to $483.0m; Adjusted EBITDA margin at 55.3%, up 119bps

·

Adjusted fully diluted earnings per share ('EPS') up 14.1% to $0.32 (versus $0.28 at YE 2018)

·

Proposed final dividend payable in June 2020 of 10.3 cents per share; total dividend for the year of 14.7 cents per share, up 8.1%3

·

Continued strong cash generation with Unlevered Free Cash Flow up 7.9% to $424.6m and Levered Free Cash Flow up 14.0% to $370.4m

·

Net debt / LTM ('last twelve months') Adjusted EBITDA at 1.8x at year end

·

On a statutory basis, Revenue up from $808.3m to $871.1m, Operating profit up from $248.3m to $344.6m, fully diluted EPS at $0.24.

 

OPERATIONAL AND STRATEGIC HIGHLIGHTS

 

·

Customer retention rates on Consumer Direct Desktop have increased to 67%, driven by lower churn in paid anti-virus and CCleaner products, and APPC growth. Desktop operating KPIs tracked positively, with customers4 up 3.5% to 12.62m, APPC5 up 4.2% to 1.45 and ARPC6 up 3.6% to $51.02

·

Strong growth in the Desktop business was driven from the cross-selling of Privacy products such as VPN and AntiTrack, and Performance products such as Cleanup and Driver Updater

·

There has been continued expansion of multi-device subscriptions, with Consumer Desktop an important channel for transactions of mobile-enabled products

·

Customer numbers and penetration has risen in both established markets such as the US, and new target countries, including an increase in customer numbers by 19% in South East Asia and 13% in Central and Eastern Europe

·

Avast announced the termination of the provision of data to Jumpshot from January 2020, aligning our customer offering to the company's core values of privacy and protection.

 

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX) 7

Adjusted Billings

911.0

862.1

5.7

8.1

Acquisitions

1.4

0.0

n/a

n/a

Disposal Managed Workplace (SMB) 8

0.0

10.5

n/a

n/a

Discontinued Business 9

8.9

15.5

(42.6)

(41.7)

Adjusted Billings excl. Acquisitions, Disposals and Discontinued business

900.7

836.2

7.7

10.2

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Revenue

873.1

827.0

5.6

7.0

Acquisitions

1.4

0.0

n/a

n/a

Disposal Managed Workplace (SMB)

0.0

10.5

n/a

n/a

Discontinued Business

8.9

15.5

(42.6)

(41.7)

Adjusted Revenue excl. Acquisitions, Disposals and Discontinued business

862.8

801.0

7.7

9.1

 

 

($'m )

FY 2019

FY 2018

Change %

Adjusted EBITDA

483.0

447.7

7.9

Adjusted EBITDA Margin %

55.3

54.1

1.2 ppts

Adjusted Net Income

322.3

270.8

19.0

Net Debt 10

884.5

1,138.2

(22.3)

 

Statutory Results:

($'m )

FY 2019

FY 2018

Change %11

Revenue

871.1

808.3

7.8

Operating profit

344.6

248.3

38.8

Net Income

248.9

241.2

3.2

Net Cash Flows from operating activities

399.1

376.0

6.1

 

 

PRESENTATION OF RESULTS

 

A presentation for analysts and investors will be held at 9:00 AM GMT today (26 February) at UBS, 5 Broadgate, London, EC2M 2QS. To register your attendance please contact [email protected] The presentation will also be accessible via a conference call and live webcast. Please register for the call or webcast on the Company website at https://investors.avast.com . A Q&A facility will be available for conference call participants.

 

PUBLICATION OF ANNUAL REPORT

 

The Company today published its Annual Report and Accounts 2019. The document will be available to view on the Company website at https://investors.avast.com and is also being submitted to the National Storage Mechanism for inspection at www.morningstar.co.uk/uk/nsm .

 

ESG BRIEFING

 

Avast's Chairman and Senior Independent Director will today hold a briefing and Q&A session on Environmental, Social and Governance issues relevant to the Company. The event, intended for investors and ESG rating agencies, will be held at 1:00 PM GMT in London. For further information please contact [email protected]  

 

 

 

ENQUIRIES

 

Investors and analysts:

Peter Russell, Director of IR 

[email protected]

 

Media:

Stephanie Kane, VP PR and Corporate Communications 

[email protected]

 

Tavistock

Lulu Bridges / Jos Simson / Heather Armstrong

+44 20 7920 3150

 

Cautionary statement regarding forward-looking statements

 

This announcement contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the Company's business. Whilst the Company believes the expectations reflected herein to be reasonable in the light of the information available to them at this time, the actual outcome may be materially different owing to factors beyond the Company's control or within the Company's control where, for example, the Company decides on a change of plan or strategy. Accordingly, no reliance may be placed on the figures contained in such forward-looking statements.

 

Notes:

 

Throughout the Full Year Report a number of alternative performance measures are used to provide users with a clearer picture of the performance of the business. This is in line with how management monitor and manage the business day-to-day. Definitions and details are provided below. Further definitions (see 'PRESENTATION OF RESULTS AND DEFINITIONS') and reconciliations (see 'FINANCIAL REVIEW') of non-GAAP measures are included in the notes to the financial statements.

 

All dollar figures throughout the report are at actual currency rates unless otherwise indicated.

 

1 Organic growth rate excludes the impact of FX, acquisitions, business disposals and discontinued business. It excludes current period billings and revenue of acquisitions until the first anniversary of their consolidation .

2 Adjusted EBITDA margin percentage is defined as Adjusted EBITDA divided by Adjusted Revenue.

3 Growth rate calculated on an annualized basis. In June 2019 the Group paid dividend of 8.6 cents per share in respect of the period 15 May 2018 to 31 December 2018 (13.6 cents per share on an annualized basis).

4 Users who have at least one valid paid Consumer Direct Desktop subscription (or licence) at the end of the period.

5 APPC defined as the Consumer Direct Desktop simple average valid licences or subscriptions for the financial period presented divided by the simple average number of Customers during the same period.

6 ARPC defined as the Consumer Direct Desktop revenue for the financial period divided by the simple average number of Customers during the same period.

7 Growth rate excluding currency impact calculated by restating 2019 actual to 2018 FX rates (see "Principal exchange rates applied "). Deferred revenue is translated to USD at date of invoice and is therefore excluded when calculating the impact of FX on revenue.

8 On 1 February 2019 Avast plc sold the non-core asset of Managed Workplace, its remote monitoring and management product, to Barracuda Networks, Inc. ('Barracuda'). Managed Workplace was Avast's solution in the Remote Monitoring and Management ('RMM') space, which is sold to Managed Service Providers ('MSPs'). This business was not core to our SMB strategy, which focuses on securing the workplace. Barracuda, which has a large existing MSP base but did not offer an RMM solution, provides a better long-term solution for this business. In addition, Barracuda has signed a reseller agreement with Avast under which it now resells Avast's business security solutions to MSPs. In the year ended 31 December 2018 the asset generated low teen revenue (USD million) with a materially lower margin profile than the Group.

9 As the company is exiting its toolbar-related search distribution business, which had previously been an important contributor to AVG's revenues (referred to above and throughout the report, with the Group's browser clean-up business, as 'Discontinued Business'), the growth figures exclude Discontinued Business, which the Group expects to be negligible by the end of 2020. The Discontinued Business does not represent a discontinued operation as defined by IFRS 5 since it has not been disposed of but rather it is being continuously scaled down and is considered to be neither a separate major line of business, nor geographical area of operations.

10 The Group applied the IFRS 16 standard as of 1 January 2019 using the modified retrospective approach and did not restate comparative amounts for the year prior to first adoption. Net Debt as of 31 December 2019 includes the balance of IFRS 16 lease liabilities. No lease liabilities are included in the Net Debt as of 31 December 2018. Net Debt as of 31 December 2018 adjusted for opening balance of IFRS 16 lease liabilities would be $1,209.9m.

 

CHIEF EXECUTIVE OFFICER'S REVIEW

The Group has delivered another strong year of top line growth and high levels of profitability. The Group's Adjusted Billings of $911.0m were up 5.7% at actual rates, with organic growth of 10.2%. The Group's Adjusted Revenue of $873.1m were up 5.6% at actual rates, with organic growth of 9.1%. The Consumer and SMB segments contributed $823.9m and $49.2m respectively.

 

Avast's advanced machine learning monetisation platform remains a key driver of the company's success. It effectively promotes up-sells and cross-sells across the existing user base, across different device types and various operating systems. In FY 2019 Avast continued its strong investment in technology capability and innovation, and further enhanced the customer experience. The company offered more multi-device subscriptions, with Consumer Desktop an important channel for transactions of mobile-enabled products, in particular for Privacy solutions such as VPN and Password Manager.

 

Consumer

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Billings

865.0

801.7

7.9

10.3

Acquisitions

1.4

0.0

n/a

n/a

Discontinued Business

8.9

15.5

(42.6)

(41.7)

Adjusted Billings excl. Acquisitions and Discontinued business

854.8

786.2

8.7

11.2

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Revenue

823.9

763.7

7.9

9.3

Acquisitions

1.4

0.0

n/a

n/a

Discontinued Business

8.9

15.5

(42.6)

(41.7)

Adjusted Revenue excl. Acquisitions and Discontinued business

813.6

748.3

8.7

10.2

 

SMB

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Billings

45.9

60.5

(24.0)

(22.3)

Disposal Managed Workplace

0.0

10.5

n/a

n/a

Adjusted Billings excl. Disposal

45.9

50.0

(8.1)

(6.0)

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Revenue

49.2

63.3

(22.2)

(21.4)

Disposal Managed Workplace

0.0

10.5

n/a

n/a

Adjusted Revenue excl. Disposal

49.2

52.7

(6.7)

(5.8)

 

 

 

Business Unit Performance

 

Consumer Direct Desktop

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Billings

668.3

613.9

8.9

11.8

Acquisitions

0.3

0.0

n/a

n/a

Adjusted Billings excl. Acquisitions

668.0

613.9

8.8

11.7

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Revenue

632.9

580.0

9.1

10.7

Acquisitions

0.3

0.0

n/a

n/a

Adjusted Revenue excl. Acquisitions

632.6

580.0

9.1

10.7

 

Operational KPIs

 

 

31 December

2019

31 December

2018

Change %

Number of customers

12.62m

12.19m

3.5

Average Products Per Customer

1.45

1.40

4.2

Average Revenue Per Customer

$51.02

$49.24

3.6

 

·

The largest component of the Avast business, Consumer Direct Desktop, performed strongly in the year. Adjusted Billings of $668.3m were up 8.9% at actual rates, with organic growth of 11.7%. Adjusted Revenue of $632.9m grew 9.1% at actual rates, with organic growth of 10.7%, in line with guidance of low double-digit growth.

·

Customer retention rates have increased to 67%, driven by lower churn in paid anti-virus and CCleaner products, and growth in Average Products per Customer. All three key operating metrics-End of Period Customers, Average Products per Customer, and Average Revenue Per Customer- tracked in line with growth guidance of low single digit, mid single digit and mid single digit respectively. While the number of users has remained within a consistent range, we have started to see lower value returns from our PPI investments, and expect that trend to continue.

·

The consumer monetisation platform remains a key driver of growth, effectively promoting up-sells and cross-sells of products, in particular Privacy type products led by VPN and AntiTrack.

·

The performance of the AV business has proved resilient, benefiting from enhanced product features and a reworked value proposition, built around a more streamlined product line.

·

The number of multi-device subscriptions purchased on Consumer Direct Desktop has continued to increase. Mobile-enabled VPN and Password Manager products have led the trend, and the introduction of multi-device compatibility for other products is set to accelerate the convergence. 

·

In July, Avast released its IoT direct-to-consumer product 'Omni' to users in the US market. The product was named a Best of Innovation Honoree in the prestigious CES Innovation Awards. While volumes remain modest, initial customer feedback has been positive and assimilated to advance product positioning.

·

Additional investments have been made in engagement strategies to both strengthen customer care and build customer lifetime value. Deeper analysis of processes and data has helped optimise content, frequency and context of communications, driving an improvement in Support Net Promoter Score and retention rates.

·

There has been continued strong execution on the localisation program, with a sustained uplift in customer numbers and penetration rates in new target countries from Malaysia in South East Asia to Poland in Europe. This is in addition to continued good growth in customer numbers in traditional markets such as the US.

·

In FY 2020 we expect Consumer Direct Desktop to deliver mid-single digit organic revenue growth.

 

 

 

Consumer Direct Mobile

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Billings

77.3

84.6

(8.6)

(7.6)

Acquisitions

1.1

0.0

n/a

n/a

Adjusted Billings excl. Acquisitions

76.2

84.6

(9.9)

(8.9)

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Revenue

75.4

82.5

(8.6)

(7.9)

Acquisitions

1.1

0.0

n/a

n/a

Adjusted Revenue excl. Acquisitions

74.3

82.5

(9.9)

(9.2)

 

·

Adjusted Billings of $77.3m were down 8.6% at actual rates, representing an organic decline of 8.9%. Adjusted Revenue of $75.4m was down 8.6% at actual rates, an organic decline of 9.2%, behind the guidance of mid-single digit decline.

·

Sustained double-digit growth in the direct-to-consumer subscription business has been driven by product promotion and high renewal rates. The channel has also benefited from a positive trend in the uptake of Avast Mobile Security for iOS. The product has become a contributor to sales after its release last year and more recently benefited from enhanced privacy features.

·

Multi-platform subscriptions sold through desktop continue to negatively impact mobile. This is a trend we expect to continue, further dampening growth in the mobile segment.

·

While adversely affected by the carry-over impact from the 2017 Sprint loss, performance in the carrier channel has also been affected by lower marketing investments by US carriers and subsequent weaker product performance. This resulted in weaker than expected sales in the carrier channel, notably in the second half of 2019.

·

After strengthening its salesforce and presence in different geographies at the start of the year Avast has since made progress in deepening new carrier relationships. The company is involved in several late-stage tenders and discussions around the provision of IoT and other customer security solutions.

·

The first half of 2019 saw the launch of Avast's IoT router-based solution via the Italian operator Wind Tre, the first of our carrier partners worldwide to add the security, based on Avast's Smart Life platform. Avast has further developed and commenced customisation of its IoT solutions in response to carriers' stated needs.

·

We remain cautious  of the headwinds in the carrier channel, and therefore expect mid-single digit organic revenue decline in the mobile business overall in 2020.

 

Consumer Indirect

 

This business unit includes Avast Secure Browser ('ASB'), distribution of third party software, Jumpshot analytics, and advertising within mobile applications.

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Billings

119.5

103.2

15.8

16.7

Discontinued Business

8.9

15.5

(42.6)

(41.7)

Adjusted Billings excl. Discontinued business

110.6

87.8

26.1

26.9

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Revenue

115.5

101.2

14.1

15.0

Discontinued Business

8.9

15.5

(42.6)

(41.7)

Adjusted Revenue excl. Discontinued business

106.7

85.8

24.3

25.2

 

·

Within Consumer Indirect, Adjusted Revenue was $115.5m, up 14.1% at actual rates, with organic growth of 25.2%, in line with double-digit growth guidance.The business unit excluding Jumpshot delivered 8.6% organic revenue growth.

·

Avast Secure Browser, focused on internet security and privacy, has performed strongly in the year, benefiting from organic demand including from beyond the Avast and AVG user base. At year end the Secure Browser had 35m active monthly users. Monetisation has continued to increase at a growing rate. Avast expects 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 product sets extends to March 2020, and renewal is currently under consideration.

·

Avast's data analytics business, Jumpshot, delivered double-digit growth rates. In January 2020, Avast decided to terminate the provision of anonymized data to its data analytics business, Jumpshot, having concluded that the business was not consistent long term with the Group's privacy priorities as a global cybersecurity company.

·

In FY 2020 we expect the organic revenue growth in Consumer Indirect (excluding Jumpshot) to be high-single digit.

 

SMB

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Billings

45.9

60.5

(24.0)

(22.3)

Disposal Managed Workplace

0.0

10.5

n/a

n/a

Adjusted Billings excl. Disposal

45.9

50.0

(8.1)

(6.0)

 

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Revenue

49.2

63.3

(22.2)

(21.4)

Disposal Managed Workplace

0.0

10.5

n/a

n/a

Adjusted Revenue excl. Disposal

49.2

52.7

(6.7)

(5.8)

 

·

The SMB business has performed in line with expectations of mid-single digit organic revenue decline provided at half year.

·

Further to the launch of Secure Web Gateway in the first half of the year, in October we introduced Secure Internet Gateway (SIG), SIG is an advanced cloud security solution, set to replace hardware based gateway solutions with better scalability. It is especially suited to larger SMBs and Managed Service Providers (MSPs). Early progress in Secure Web and Internet Gateway sales pipeline development has been encouraging.

·

As part of Avast's layered security protection, our new Patch Management Solution (PMS) went live in June 2019. This was followed by its fourth-quarter release on the CloudCare platform, which specifically services MSPs. In December we additionally launched a PMS version for the Business Console platform, adding improved functionality based on customer requests. PMS is expected to become a meaningful revenue contributor within SMB over time.

·

As part of the transition plan, the new SMB leadership team is now in place. The business has also exited several low-performing countries.

·

The aforementioned product initiatives are at an early stage. As the SMB business continues its transition to integrated endpoint and network security, in FY 2020 we expect low-single digit organic revenue decline.

 

Group Outlook

 

The Group expects to deliver healthy growth during FY 2020 with organic mid-single digit revenue growth. Organic billings growth for the FY 2020 will be broadly in line with organic revenue growth, albeit slightly weighted towards the second half of the financial year because of the Group's deferral of product upgrades and  releases in the first half of the year. This is due to the rebuild of the product environment that was undertaken to proactively harden and further secure this infrastructure after the attempted attack late last year.

 

Adjusted Group EBITDA margin is expected to be broadly flat versus FY 2019. Jumpshot is expected to incur approximately $5m of operating costs, with negligible associated revenue, as the business is wound down. Incremental expense released from Jumpshot will be re-invested into the business to support long term growth initiatives.

 

In relation to termination of the provision of data to Jumpshot, the Group expects to incur a one-time exceptional cash cost in the range of $15m-$25m in FY 2020 to cover closure costs, asset write-down and employee restructuring. Avast will return the investments made by Ascential plc into the business, along with associated exit costs, amounting to $73m.

 

 

FINANCIAL REVIEW

 

Billings, Revenue and EBITDA

 

In line with our expectations, the Group has achieved good growth and maintained high levels of profitability.

 

The Group's Adjusted Billings increased by $48.8m to $911.0m in the year ended 31 December 2019, mostly driven by the core Consumer Direct Desktop business. This represented a 5.7% increase at actual rates and organic growth of 10.2%. Subscription billings represented 83.4% of the Group's total Adjusted Billings in FY 2019 (85.0% in FY 2018).

 

The Group's Adjusted Revenue increased by $46.1m to $873.1m in the year ended 31 December 2019, which represents a 5.6% increase at actual rates and organic growth of 9.1%. Adjusted Revenue included $387.6m from the release of prior-period deferred revenue. The Adjusted Deferred Revenue11 balance at the end of the period exlcuding Jumpshot was $467.8m, comprising $413.6m that will be recognised within 12 months of the balance sheet date. Including Jumpshot it was $476.3m and $422.1m respectively. This compares to $439.0m, comprising of $387.6m respectively, at the same time last year. The average subscription length in the year ended 31 December 2019 was 14 months, flat versus FY 2018.

 

The Group's reported Billings increased by $48.8m to $911.0m in the year ended 31 December 2019, which represents a 5.7% increase. The Group's reported Revenue increased by $62.8m to $871.1m, which represents a 7.8% increase. It should be noted that the difference between the Group's statutory Revenue of $871.1m and Group's Adjusted Revenue of $873.1 in 2019 is diminishing as the magnitude of non-cash historical adjustments arising from the AVG acquisition decreases (for the reconciliations, please refer to 'PRESENTATION OF RESULTS AND DEFINITIONS'). These adjustments are expected to be zero after 2019. 

 

Profitability was driven by the Group's scale and operating leverage. Adjusted EBITDA increased 7.9% to $483.0m, 8.6% excluding FX, resulting in Adjusted EBITDA margin of 55.3% (including c.1pt upside from IFRS 16 adoption in 2019). This is in line with full year guidance of broadly flat adjusting for the IFRS 16 impact (54.1% EBITDA margin in FY 2018).

 

The reported Operating Profit increased by $96.3m to $344.6m. The increase was driven by a more modest impact from the deferred revenue haircut from the AVG acquisition of $13.7m, increase in Adjusted EBITDA of $35.3m, lower exceptional items of $23.8m, lower depreciation and amortisation of acquisition and non-acquisition intangibles of $33.4m and the lower impact of other adjustments of $1.2m, partially offset by higher share-based payments costs including related employer's costs of $(11.1)m.

 

The table below presents the Group's Adjusted Billings and Adjusted Revenue for the periods indicated:

($'m )

FY 2019

FY 2018

Change %

Change % (excluding FX)

Adjusted Billings

911.0

862.1

5.7

8.1

Consumer

865.0

801.7

7.9

10.3

Acquisitions

1.4

0.0

n/a

n/a

Direct (excl. Acquisitions)

744.1

698.4

6.5

9.2

Discontinued Business

8.9

15.5

(42.6)

(41.7)

Indirect (excl. Discontinued Business)

110.6

87.8

26.1

26.9

SMB

45.9

60.5

(24.0)

(22.3)

Disposal Managed Workplace

0.0

10.5

n/a

n/a

SMB excl. Disposal

45.9

50.0

(8.1)

(6.0)

Adjusted Billings excl. Acquisitions, Disposals and Discontinued business

900.7

836.2

7.7

10.2

Adjusted Revenue

873.1

827.0

5.6

7.0

Consumer

823.9

763.7

7.9

9.3

Acquisitions

1.4

0.0

n/a

n/a

Direct (excl. Acquisitions)

706.9

662.5

6.7

8.2

Discontinued Business

8.9

15.5

(42.6)

(41.7)

Indirect (excl. Discontinued Business)

106.7

85.8

24.3

25.2

SMB

49.2

63.3

(22.2)

(21.4)

Disposal Managed Workplace

0.0

10.5

n/a

n/a

SMB excl. Disposal

49.2

52.7

(6.7)

(5.8)

Adjusted Revenue excl. Acquisitions, Disposals and Discontinued business

862.8

801.0

7.7

9.1

 

Costs

 

($'m )

FY 2019

FY 2018

Change

Change %

Cost of revenues

(210.7)

(241.4)

30.7

12.7

Share-based payments (incl. employer's costs)

0.5

0.2

0.3

Fav 12

Amortisation of acquisition intangible assets

88.3

127.5

(39.2)

(30.7)

Depreciation and amortisation (excl. amortisation of acquisition intangible assets)

8.9

9.4

(0.5)

(5.0)

Gross-up and other adjustments

(0.3)

(2.6)

2.3

90.3

Exceptional items

0.1

0.6

(0.5)

(78.8)

Adjusted Cost of revenues (excluding D&A)

(113.2)

(106.3)

(6.9)

(6.5)

 

The increase in the Group's Adjusted Cost of Revenues reflects higher sales commissions and licence fees of $(4.1)m related to the increase in Adjusted Revenue, increase in costs for distribution of digital content of $(1.1)m and investment into personnel costs of $(1.9)m, offset by a positive FX impact and other costs of $0.2m. Adjusted Cost of Revenues represent the Group's cost of revenues adjusted for depreciation and amortisation charges, share-based payments charges, exceptional items and other adjustments.

 

The Group's reported Cost of revenues decreased by $30.7m to $(210.7)m primarily due to the lower amortisation of acquisition intangibles. The amortisation of acquisition intangibles represents intangible assets acquired through business combinations.

 

($'m )

FY 2019

FY 2018

Change

Change %

Operating costs

(315.8)

(318.6)

2.8

0.9

Share-based payments (incl. employer's costs)

24.4

13.7

10.7

77.9

Depreciation and amortisation (excl. amortisation of acquisition intangible assets)

12.7

6.8

5.9

87.8

Exceptional items

1.7

25.0

(23.3)

(93.2)

Adjusted Operating costs (excluding D&A)

(276.9)

(273.0)

(3.9)

(1.4)

 

The increase in the Group's Adjusted Operating costs excluding the positive impact of IFRS 16 implementation of $8.5m was $(12.5)m. The increase was caused by investment into R&D of $(11.0)m, sales and marketing of $(6.9)m, offset by lower bad debt costs and other costs of $5.4m. Adjusted Operating costs represent the Group's operating costs adjusted for depreciation and amortisation charges, share-based payments charges and exceptional items.

 

The decrease in the Group's reported Operating costs of $2.8m, from $(318.6)m to $(315.8)m, reflects the lower exceptional items, partially offset by higher share-based payments and higher depreciation and amortisation of non-acquisition intangibles driven primarily by amortisation of right-of-use assets. The net impact of IFRS 16 implementation on reported Operating costs including impact on amortisation is a decrease in costs of $0.8m.

 

Exceptional items

Exceptional items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the Group. The Group believes that these non-recurring items should be separately disclosed to show the underlying business performance of the Group more accurately. Once an item is disclosed as exceptional, it will remain exceptional through completion of the event or programme. Exceptional items in 2019 consist primarily of legal fees and restructuring costs related to the disposal of a subsidiary and related business operation (Managed Workplace business of SMB segment) and to the acquisition of TrackOFF and Tenta (see Note 6 Exceptional items). The portion of the exceptional items directly related to the disposal of a business operation was included in the investing cash flow and costs related to the acquisition were included in operating cash flow. The net gain on disposal of a business operation of $17.5m (see Note 16 Disposal of business operation) was treated as exceptional and is not included in Adjusted Net income. Exceptional items in 2018 related mainly to IPO costs.

 

Finance income and expense

 

Adjusted finance expense on a net basis was $(61.4)m in 2019, $30.9m lower compared to $(92.3)m in 2018. Excluding the negative impact of the implementation of IFRS 16 of $(2.3)m, the adjusted finance costs decreased by $33.2m. The decrease was driven by lower total loan interest costs of $29.3m resulting from the repayment of $300m debt post IPO in 2018 and the additional repayment of $297.4m in 2019 (see Note 27 Term Loan), positive FX impact of $3.8m and decrease in other finance costs of $0.1m.

 

The Group's statutory net finance costs decreased by $18.4m to $(47.5)m in 2019 resulting from the decrease in adjusted finance costs described above, offset by the lower unrealised foreign exchange gains in 2019 from the Euro denominated debt.

 

($'m )

FY 2019

FY 2018

Change

Change %

Finance income and expenses, net

(47.5)

(65.9)

18.4

27.9

Unrealized FX (gain)/loss on EUR tranche of bank loan

(13.9)

(26.4)

12.5

47.4

Adjusted Finance income and expenses, net

(61.4)

(92.3)

30.9

33.5

 

Income tax

 

In the year ended 31 December 2019, the Group reported an Income tax expense of $(65.7)m, compared to the income tax benefit of $58.7m in the year ended 31 December 2018. The income tax benefit in 2018 was primarily driven by the transfer of AVG E-comm web shop to Avast Software B.V. ("Avast BV") on 1 May 2018 ("IP transfer").  Subsequently, the former Dutch AVG business from Avast BV (including the web shop) was sold to Avast Software s.r.o. The total net impact of this transaction was $94.4m, which was treated as an exceptional item in 2018. The transferred IP is amortised for tax purposes over 15 years.

 

Income tax was further impacted by the tax benefit of the foreign exchange movements on intercompany loans arising in the statutory accounts of the subsidiary concerned of $0.4m (tax benefit of $9.8m in 2018) and the recognition of previously unrecognised tax losses related to the previous periods of $4.7m.

 

The tax impact of other adjusted items represents the tax impact of amortisation of acquisition intangibles, deferred revenue haircut reversal arising from prior acquisitions, exceptional items and other adjusted items, which has been calculated applying the tax rate that the Group determined to be applicable to the relevant item.

 

Adjusted Income tax is $(77.8)m for FY 2019, resulting in an adjusted effective tax rate of 19.4% (FY 2018: 20.2%). The Adjusted effective tax rate is the Adjusted Income tax percentage of Adjusted Profit before tax of $400.1m (defined as Adjusted Net Income of $322.3m before the deduction of Adjusted Income tax of $(77.8)m.)

 

($'m )

FY 2019

FY 2018

Change

Change %

Income tax

(65.7)

58.7

(124.3)

Unf

Tax impact of FX difference on intercompany loans

(0.4)

(9.8)

9.4

96.3

Tax impact of IP transfer

6.3

(99.2)

105.5

Fav

Tax impact of COGS deferral adjustment

-

0.3

(0.3)

Unf

Tax impact of disposal of a business operations

2.3

-

2.3

n/a

Tax impact on adjusted items

(20.3)

(18.5)

(1.9)

(10.4)

Adjusted Income tax

(77.8)

(68.4)

(9.3)

(13.7)

 

Cash Flow

 

Unlevered free cash flow represents the amount of cash generated by operations after allowing for capital expenditure, taxation and working capital movements. Unlevered free cash flow provides an understanding of the Group's cash generation and is a supplemental measure of liquidity in respect of the Group's operations.

Levered free cash flow represents amounts of incremental cash flows the Group has after it has met its financial obligations (after interest and lease repayments) and is defined as Unlevered Free Cash Flow less cash interest and lease repayments.

 

($'m )

FY 2019

FY 2018

Change

Change %

Adjusted Cash EBITDA

519.4

476.8

42.6

8.9

Net change in working capital (excl. change in deferred revenue and deferred COGS)

(10.0)

13.8

(23.8)

Unf

Capex

(29.9)

(16.8)

(13.1)

(77.7)

Cash Tax (excl. Dutch exit tax)

(54.8)

(79.8)

25.0

31.3

Unlevered Free Cash Flow

424.6

394.0

30.7

7.9

Cash Interest

(45.1)

(67.6)

22.5

33.2

Lease Repayments

(9.2)

(1.5)

(7.6)

Unf

Levered Free Cash Flow

370.4

324.9

45.5

14.0

Cash conversion 13

82%

83%

 

 

The working capital movement in 2018 comprised a positive movement in receivables driven by the renegotiation of payment terms with payment providers. Adjusted for the impact of renegotiation of payment terms with payment providers, the cash conversion in FY 2018 would be 78%.

 

In line with guidance, capex represents 3% of Adjusted revenue in 2019, which is a slight increase versus 2018 (2%), due to investment into network infrastructure.

 

The cash tax included in the calculation of Unlevered Free Cash Flow excludes a $49.4m Dutch exit tax paid in March 2019 as this was treated as an exceptional item. The decrease in the adjusted cash tax is driven by the Czech Republic true-up system, where a company is obliged to make quarterly income tax advances based on its last known tax liability. Upon filing a tax return, tax advances paid during the year for which the tax return is filed offset the final tax liability. As the taxable income for 2017 was significantly higher than the taxable income for 2018 due to unrealized FX gain on intercompany loans, the reported cash tax in 2018 was higher by the amount of the true up. No such true up payment occurred in 2019.

 

($'m )

FY 2019

FY 2018

Change

Change %

Net cash flows from operating activities

399.1

376.0

23.1

6.1

Net cash used in investing activities

(16.7)

(28.8)

12.1

42.0

Net cash flows from financing activities

(440.9)

(254.0)

(186.9)

(73.6)

 

The following table presents a reconciliation between the Group's Adjusted Cash EBITDA and Net cash flows from operating activities as per the consolidated statement of cash flows.

 

($'m )

FY 2019

FY 2018

Change

Change %

Adjusted Cash EBITDA

519.4

476.8

42.6

8.9

Net change in working capital (excl. change in deferred revenue and deferred COGS)

(10.0)

13.8

(23.8)

Unf

Cash Tax (excl. Dutch exit tax)

(54.8)

(79.8)

25.0

31.3

Dutch exit cash tax

(49.4)

-

(49.4)

n/a

Movement of provisions and allowances

5.9

3.5

2.4

68.6

Exceptional items (excl.transaction costs)

(1.5)

(25.6)

24.1

94.1

Employer's costs on share-based payments

(4.2)

-

(4.2)

n/a

FX gains/losses and other non-cash items

(6.3)

(12.7)

6.4

50.4

Net Cash Flows from operating activities

399.1

376.0

23.1

6.1

 

The Group's net cash flow from operating activities increased by $23.1m primarily due to higher Adjusted Cash EBITDA of $42.6m, lower cash tax of $25.0m, lower exceptional items (excl. transaction costs) of $24.1m, positive impact of the movement in provisions and allowances of $2.4m and positive change in FX gains/losses and other financial expenses and non-cash gains of $6.4m, offset by Dutch exit tax paid of $(49.4)m, negative impact of working capital movement (excl. change in deferred revenue and deferred COGS) of $(23.8)m and employer's costs on share-based payments of $(4.2)m (see Note 35 Share-based payments). The portion of the exceptional items directly related to the disposal of business operation of $(0.3)m was included in cash flows from investing activities.

 

The Group's net cash outflow from investing activities of $(16.7)m was comprised of capex of $(29.9)m, consideration paid for TrackOFF and Tenta acquisitions net of cash acquired of $(14.8)m (see Note 15 Business combinations), settlement of contingent consideration of $(0.2)m, proceeds from the sale of a business operation net of cash disposed and transaction costs of $26.7m (see Note 16 Disposal of a business operation) and interest received of $1.5m. The Group's net cash outflow from investing activities in 2018 of $(28.8)m was comprised of capex of $(16.8)m, consideration paid for InLoop acquisition net of cash acquired of $(4.2)m (see Note 15 Business combinations), payment of the remaining portion of the consideration for the acquisition of AVG Technologies B.V. of $(8.0)m and interest received of $0.3m.

 

The Group's net cash outflow from financing activities includes $(83.7)m final dividend paid in respect of 2018, $(43.2)m interim dividend paid in respect of 2019, $(297.4)m net voluntary repayment of borrowings, $(63.0)m mandatory repayment of borrowings, interest paid of $(45.1)m, transaction costs related to borrowings of $(0.9)m, lease repayments of $(9.2)m, proceeds from the exercise of options of $47.2m and net proceeds from transactions with non-controlling interest $54.3m (see Note 34 Non-controlling interest). The full amount of lease repayments in FY 2019 of $(9.2)m relates to IFRS 16 implementation and the comparable amount of cash outflow in FY 2018 was included under cash flows from operating activities. The Group's net cash outflow from financing activities in 2018 included net proceeds from the issue of shares of $195.8m, proceeds from exercise of options in 2H 2018 of $0.9m, offset by the voluntary repayment of borrowings of $(300.0)m, the mandatory repayment of borrowings of $(78.5)m, interest paid of $(67.6)m, transaction costs related to borrowings of $(3.1)m and lease repayments of $(1.5)m.

 

Financing

 

The Group reduced its term loan by the repayment of $400m from USD tranche in March 2019, while executing an incremental €177.5m ($202.6m) add-on to EUR tranche, and voluntarily repaid another $100m from USD tranche in October 2019 (see Note 27 Term Loan). As of 31 December 2019, the total Gross debt14 of the Group was $1,101.1m and the total Net debt14 was $884.5m. The decrease in gross debt since 31 December 2018 is attributable to $297.4m voluntary repayment of borrowings, $63.0m of mandatory repayment of borrowings, $6.9m decrease in lease liabilities and a positive unrealised FX gain of $13.9m on the EUR tranche of the loan. The Group adopted IFRS 16 as of 1 January 2019 using the modified retrospective approach and did not restate for the year prior to first adoption. The balance of lease liabilities as of 31 December 2018, shown in the table below, have been presented as if adjusted for opening balance of IFRS 16 impact.

 

In April 2019 the Group applied for the margin reduction by 0.25% p.a. on both tranches due to a favorable leverage ratio and, in October 2019, the Group further reduced the margin on the EUR tranche by 0.25% p.a (see Note 27 Term Loan).

 

($'m )

31 December 2019

 

31 December 2018

 

31 December 2018

incl. IFRS 16 impact

Margin

 

USD tranche principal

336.5

864.7

864.7

USD LIBOR plus 2.25%

EUR tranche principal

699.8

545.8

545.8

EURIBOR plus 2.25%

Revolver/Overdraft

-

-

-

USD LIBOR plus 2.25%

Lease liabilities

64.8

-

71.7

 

Gross debt

1,101.1

1,410.5

1,482.2

 

Cash and cash equivalents

(216.6)

(272.3)

(272.3)

 

Net debt

884.5

1,138.2

1,209.9

 

Net debt / LTM Adjusted EBITDA

1.8x

2.5x

2.7x

 

           

 

Principal exchange rates applied

 

The table below summarises the principal exchange rates used for the translation of foreign currencies into US Dollar. The assets and liabilities are translated using period-end exchange rates. Income and expense items are translated at the average exchange rates for the period.

 

($:1.00 )

 

 

FY 2019

average

FY 2018

average

AUD

 

 

  0.6966

  0.7479

BRL

 

 

  0.2545

  0.2757

CAD

 

 

  0.7524

  0.7720

CHF

 

 

  1.0061

  1.0228

CZK

 

 

  0.0437

  0.0461

EUR

 

 

  1.1212

  1.1814

GBP

 

 

  1.2757

  1.3357

ILS

 

 

  0.2797

  0.2784

NOK

 

 

  0.1139

  0.1230

 

Earnings per share

 

Basic Adjusted earnings per share amounts are calculated by dividing the Adjusted net income for the period by the weighted average number of shares of common stock outstanding during the year. The diluted Adjusted earnings per share amounts consider the weighted average number of shares of common stock outstanding during the year adjusted for the effect of dilutive options. On a statutory basis, fully diluted EPS was $0.24 (see Note 14 for the statutory earnings per share).

 

($'m )

FY 2019

FY 2018

Adjusted Net Income attributable to equity holders

322.1

270.8

Basic weighted average number of shares

973,788,157

914,567,949

Effects of dilution from share options and restricted share units

44,313,005

62,120,397

Dilutive weighted average number of shares

1,018,101,162

976,688,346

Basic Adjusted earnings per share ($/share)

0.33

0.30

Diluted Adjusted earnings per share ($/share)

0.32

0.28

 

Dividend

 

The Directors propose to pay a final dividend of 10.3 cents per share in respect of the year ending 31 December 2019 (payment of $104.6m). Combined with the interim dividend of 4.4 cents per share paid in October 2019 (payment of $43.2m), gives a total dividend for the financial year of 14.7 cents (total payment of $147.8m), which represents 40% of the Group's levered free cash flow for the period in accordance with the Company's dividend policy. Subject to shareholder approval, the final dividend will be paid in US dollars on 24 June 2020 to shareholders on the register on 22 May 2020. There will be an option for shareholders to elect to receive the dividend in pounds sterling and such an election should be made no later than 8 June 2020. The foreign exchange rate at which dividends declared in US dollars will be converted into pounds sterling will be calculated based on the average exchange rate over the five business days prior to 11 June 2020 and announced shortly thereafter.

Proposed Dividend Timetable

Ex-dividend Date: 21 May 2020

Record Date: 22 May 2020

Last Date for Currency Election: 8 June 2020

Payment: 24 June 2020

 

Notes:

11 Adjusted deferred revenue represents the balance of deferred revenue excluding the effects of the fair value revaluation of the acquiree's pre-acquisition deferred revenues and including the impact of gross-up adjustment.

12 'Fav' in change % represents favorable growth rate figure over 100 per cent, 'Unf' represents unfavorable decline greater than negative 100 per cent.

13 Cash conversion is defined as Unlevered Free Cash Flow divided by Adjusted Cash EBITDA.

14 Gross debt represents the sum of the total book value of the Group's loan obligations (i.e. sum of loan principals) and lease liabilities. Net debt indicates gross debt netted by the company's cash and cash equivalents. Both gross debt and net debt exclude the amount of capitalized arrangement fees on the balance sheet as of 31 December 2019 of $8.7m and accrued interest of $(0.1)m (31 December 2018: $19.1m and $(0.1)m).

 

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

The occurrence of any of the key risks below would have a material adverse effect on the Group's business, results of operations, financial condition and/or prospects:

 

Risk

Impact

Strategy

 

Offering: The risk is that our product and service offerings stop appealing to users.

If we do not offer products and services that appeal to users, our free user base may materially decline and/or we will fail to monetise our products and services.

 

Our strategy to address this risk and achieve long term strategic objectives is to invest in product innovation, product management, quality assurance, and customer care.

People: The risk is talented people leave or do not join our workforce.

If we cannot attract or retain a talented workforce, we will not remain competitive in our industry.

We believe we need to create an exciting brand; provide attractive and competitive compensation; provide our people with global mobility; recruit from a broad pool of candidates; promote based on diversity of backgrounds, skills, cultures, gender, and ethnicity; and provide effective training for personal and professional growth in order to achieve long term strategic objectives.

Data and our security systems: The risk is that the data we store, such as customer data, and the systems that store, manage and process this data become compromised.

Failing to protect the data we store and the systems that store this data could have a material adverse impact on our reputation, and our ability to provision services and updates, potentially resulting in a material decline in our user base, negative financial consequences and investigations, fines and censure by governmental and regulatory bodies.

We strive for strong, effective, and comprehensive data and systems security and governance. As a result, we have implemented a host of new security processes and measures to protect the data we store, systems that store such data, and the updates we provide to provision our products and services. We develop products and services designed for security and privacy, and believe this helps us maintain an ethical culture in which people are concerned about and committed to securing and protecting data.

Regulatory: We operate a digital business globally, and the scale and complexity of new laws, including regarding data protection, auto-renewal billing and tax, are increasing as the digital economy becomes the backbone of global economic growth.

New laws may impose restrictions and obligations on the Group that negatively impact the Group's profitability and ability to grow.

We monitor global legal developments and participate in industry-wide lobbying.

 

Concentration: Our products rely on our users being able to easily find and install them.

We face exposure and risks from large vendors, such as Microsoft, Google, Apple, Facebook, Digital River, and telecommunication carriers, who may take actions that restrict our users from being able to access and use our products.

We develop deep partner relationships with these vendors; however, we continually seek out additional strategic partnerships and growth through organic initiatives.

 

 

PRESENTATION OF RESULTS AND DEFINITIONS

 

This Full Year Report contains certain non-IFRS financial measures to provide further understanding and a clearer picture of the financial performance of the Group. These alternative performance measures (APMs) are used for the assessment of the Group's performance and this is in line with how management monitor and manage the business day-to-day. It is not intended that APMs are a substitute for, or superior to statutory measures. The APMs are not defined or recognised under IFRS including Adjusted Billings, Adjusted Revenue, Organic Growth, Adjusted EBITDA, Adjusted Cash EBITDA, Adjusted Net Income and Unlevered Free Cash Flow as defined and reconciled below.

 

These non-IFRS financial measures and other metrics are not measures recognised under IFRS. The non-IFRS financial measures and other metrics, each as defined herein, may not be comparable to similarly titled measures presented by other companies as there are no generally accepted principles governing the calculation of these measures and the criteria upon which these measures are based can vary from company to company. Even though the non-IFRS financial measures and other metrics are used by management to assess the Group's financial results and these types of measures are commonly used by investors, they have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of the Group's position or results as reported under IFRS. The Group considers the following metrics to be the KPIs it uses to help evaluate growth trends, establish budgets and assess operational performance and efficiencies.

 

"Adjusted" and "Underlying" numbers were presented in the Full Year Report for the year ended 2018. Many of the adjusting items were common to both and the values were similar. As presenting a large number of similar APMs can increase complexity to users, the Group limited the metrics to "Adjusted" measures, which is consistent with those used in the business. Organic Growth APMs were introduced in this Full Year Report to present the change in revenue and billings resulting from continuing Group operations. Besides these changes, the definitions of non-GAAP measures in the year ended 31 December 2019 are consistent with those presented in the IPO prospectus and there have been no changes to the bases of calculation.

 

 

CONSOLIDATED STATEMENT OF ADJUSTED PROFIT AND LOSS  

FOR THE YEAR ENDED 31 DECEMBER 2019

($'m)

 

 

 

Year ended

Year ended

 

 

31 December 2019

 

31 December 2018

 

REVENUES

 

873.1

827.0

Cost of revenues

 

(113.2)

(106.3)

GROSS PROFIT

 

759.9

720.7

Gross profit margin

 

87.0%

87.1%

 

 

 

 

Sales and marketing

 

(123.1)

(116.3)

Research and development

 

(76.7)

(65.7)

General and administrative

 

(77.0)

(91.0)

Total operating costs

 

(276.9)

(273.0)

 

 

 

 

EBITDA

 

483.0

447.7

EBITDA margin

 

55.3%

54.1%

 

 

 

 

Depreciation & Amortisation 15

 

(21.6)

(16.2)

EBIT

 

461.5

431.6

 

 

 

 

Finance income and expenses

 

(61.4)

(92.3)

PROFIT BEFORE TAX

 

400.1

339.3

 

 

 

 

Income tax

 

(77.8)

(68.4)

NET INCOME

 

322.3

270.8

Net Income margin

 

36.9%

32.7%

 

 

 

 

Net income attributable to:

 

 

 

- equity holders of the parent

 

322.1

270.8

- non-controlling interest

 

0.2

-

 

 

 

 

Earnings per share (in $ per share):

 

 

 

Basic EPS

 

0.33

0.30

Diluted EPS

 

0.32

0.28

         

 

Adjusted Billings

 

Adjusted Billings represent the full value of products and services being delivered under subscription and other agreements and include sales to new end customers plus renewals and additional sales to existing end customers. Under the subscription model, end customers pay the Group for the entire amount of the subscription in cash upfront upon initial delivery of the applicable products. Although the cash is paid upfront, under IFRS, subscription revenue is deferred and recognised rateably over the life of the subscription agreement, whereas non-subscription revenue is typically recognised immediately. Adjusted Billings represents the Group's reported billings.

 

Adjusted Revenue

 

Adjusted Revenue represents the Group's reported revenue adjusted for the Deferred Revenue Haircut Reversal16 and  Gross-Up Adjustment17. These historical adjustments are expected to be zero from 2019. The following is a reconciliation of the Group's reported Revenue to the Group's Adjusted Billings and Group's reported Revenue to the Group's Adjusted Revenue:

 

($'m )

FY 2019

FY 2018

Change

Change %

Revenue

871.1

808.3

62.8

7.8

Net deferral of revenue

39.9

53.9

(14.0)

(26.0)

Adjusted Billings

911.0

862.1

48.8

5.7

 

 

 

 

 

Revenue

871.1

808.3

62.8

7.8

Deferred Revenue Haircut reversal / Other

1.8

17.2

(15.4)

(89.3)

Gross-Up Adjustment

0.1

1.5

(1.3)

(91.2)

Adjusted Revenue

873.1

827.0

46.1

5.6

 

 

 

 

 

Adjusted EBITDA

 

Adjusted earnings before interest, taxation, depreciation and amortisation ('Adjusted EBITDA') is defined as the Group's operating profit/loss before depreciation, amortisation of non-acquisition intangible assets, share-based payments including related employer's costs, exceptional items, amortisation of acquisition intangible assets, the Deferred Revenue Haircut Reversal and the COGS Deferral Adjustments18.

 

Adjusted Cash EBITDA

 

Cash earnings before interest, taxation, depreciation and amortisation ('Adjusted Cash EBITDA') is defined as Adjusted EBITDA plus the net deferral of revenue, the net change in deferred cost of goods sold and the reversal of the COGS Deferral Adjustments.The following is a reconciliation of the Group's reported Operating profit to Adjusted EBITDA and Adjusted Cash EBITDA:

 

 

($'m )

FY 2019

FY 2018

Change

Change %

Operating profit

344.6

248.3

96.3

38.8

Share-based payments (incl. employer's costs)

24.9

13.9

11.1

79.5

Exceptional items

1.8

25.6

(23.8)

(92.8)

Amortisation of acquisition intangible assets

88.4

127.5

(39.0)

(30.6)

Deferred Revenue Haircut reversal / Other

1.8

17.2

(15.4)

(89.3)

COGS Deferral Adjustments

(0.1)

(1.1)

1.0

89.1

Depreciation

18.8

13.4

5.5

41.0

Amortisation of non-acquisition intangible assets

2.8

2.8

(0.1)

(2.1)

Adjusted EBITDA

483.0

447.7

35.3

7.9

Net change in deferred revenues including FX re-translation / Other

38.0

36.6

1.4

3.9

Net change in deferred cost of goods sold

(1.8)

(8.7)

6.9

78.7

Reversal of COGS deferral adjustment

0.1

1.1

(1.0)

(90.1)

Adjusted Cash EBITDA

519.4

476.8

42.6

8.9

 

Adjusted Net Income

 

Adjusted Net Income represents statutory net income plus the Deferred Revenue Haircut Reversal, share-based payments, exceptional items, amortisation of acquisition intangible assets, unrealised foreign exchange gain/loss on the EUR tranche of the bank loan, the COGS Deferral Adjustments, the tax impact from the unrealised exchange differences on intercompany loans and the tax impact of the foregoing adjusting items and IP transfers, less gain on disposal of business operation. The following is a reconciliation of the Group's reported Net income to Adjusted Net Income:

 

($'m )

FY 2019

FY 2018

Change

Change %

Net Income

249.0

241.2

7.8

3.2

Deferred Revenue Haircut reversal / Other

1.8

17.2

(15.4)

(89.3)

Share-based payments

24.9

13.9

11.1

79.5

Exceptional items

1.8

25.6

(23.8)

(92.8)

Amortisation of acquisition intangible assets

88.4

127.5

(39.1)

(30.6)

Unrealised FX gain/(loss) on EUR tranche of bank loan

(13.9)

(26.4)

12.5

47.4

Tax impact from FX difference on intercompany loans

(0.4)

(9.8)

9.4

96.3

COGS Deferral Adjustments

(0.1)

(1.1)

1.0

89.1

Tax impact of COGS deferral adjustment

-

0.3

(0.3)

Unf

Tax impact on adjusted items

(20.3)

(18.5)

(1.8)

(9.8)

Tax impact of IP transfer

6.3

(99.2)

105.5

Fav

Gain on disposal of business operation

(17.5)

-

(17.5)

n/a

Tax impact from disposal of business operation

2.3

-

2.3

n/a

Adjusted Net Income

322.3

270.8

51.5

19.0

 

Unlevered Free Cash Flow

 

Represents Adjusted Cash EBITDA less capex, plus cash flows in relation to changes in working capital (excluding change in deferred revenue and change in deferred cost of goods sold as these are already included in Adjusted Cash EBITDA) and taxation. Changes in working capital are as per the cash flow statement on an unadjusted historical basis and unadjusted for exceptional items. Cash tax excludes a $49.4m Dutch exit tax paid in March 2019 as this was treated as an exceptional item.

 

Levered Free Cash Flow

 

Represents amounts of incremental cash flows of the Group after it has met its financial obligations (after interest and lease repayments) and is defined as Unlevered Free Cash Flow less cash interest and lease repayments.

 

 

Rounding

 

Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided, however growth rates are calculated based on precise actual numbers.

 

Notes:

15 Depreciation and amortisation included in Adjusted Net Income excludes amortisation of acquisition intangibles.  

16 Under IFRS 3, Business Combinations, an acquirer must recognise assets acquired and liabilities assumed at fair value as of the acquisition date. The process of determining the fair value of deferred revenues acquired often results in a significant downward adjustment to the target's book value of deferred revenues. The reversal of the downward adjustment to the book value of deferred revenues of companies the Group has acquired during the periods under review is referred to as the 'Deferred Revenue Haircut Reversal'.

17 The  'Gross-Up Adjustment' refers to the estimated impact of the additional amount of 2015 and 2016 revenue and expenses and their deferral that would have been recognised by Avast had the contractual arrangements with certain customers qualified to have been recognised on a gross rather than a net basis prior to 2017 (AVG had historically recognised Billings and revenues on a gross basis, whereas Avast recognised them on a net basis). Both businesses recognise revenue on a gross basis since 2017.

18 There was no deferred cost of goods sold ( 'COGS') balance consolidated by the Group in the acquisition balance sheet of AVG in 2016 and thus no subsequent expense was recorded as the revenue in respect of pre-acquisition date billings was recognised. The 'COGS Deferral Adjustments' refers to an adjustment to reflect the recognition of deferred cost of goods sold expenses that would have been recorded in 2016 and 2017 in respect of pre-acquisition date AVG billings, had the AVG and the Group's businesses always been combined and had AVG always been deferring cost of goods sold.

 

 

 

CONSOLIDATED STATEMENT OF PROFIT AND LOSS  

For the year-ended 31 December 2019

 

 

 

 

Year-ended

31 December 2019

$M

Year-ended

31 December 2018

$M

 

Note

REVENUE

5

871.1

808.3

Cost of revenues

8

(210.7)

(241.4)

GROSS PROFIT

 

660.4

566.9

 

 

 

 

Sales and marketing

 

(132.0)

(124.5)

Research and development

 

(82.5)

(68.9)

General and administrative

 

(101.3)

(125.2)

Total operating costs

9

(315.8)

(318.6)

 

 

 

 

OPERATING PROFIT

 

344.6

248.3

 

 

 

 

Net gain on disposal of a business operation

16

17.5

-

 

 

 

 

Interest income

11

1.5

0.3

Interest expense

11

(58.7)

(85.8)

Other finance income and expense (net)

11

9.7

19.7

PROFIT BEFORE TAX

 

314.6

182.5

 

 

 

 

Income tax

13

(65.7)

58.7

PROFIT FOR THE FINANCIAL YEAR

 

248.9

241.2

Attributable to:

 

 

 

  Equity holders of the parent

 

248.7

241.2

  Non-controlling interest ("NCI")

34

0.2

-

 

 

Earnings per share (in $ per share):

 

 

 

Basic EPS

14

0.26

0.26

Diluted EPS

14

0.24

0.25

         

 

The accompanying notes form an integral part of these financial statements.

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year-ended 31 December 2019

 

Year-ended

31 December 2019

$M

Year-ended

31 December 2018

$M

 

Profit for the financial year

248.9

241.2

Other comprehensive gains/(losses):

 

 

 

 

 

Items that may be reclassified subsequently to profit or loss:

 

 

-  Translation differences

0.3

(1.6)

Total other comprehensive gains/(losses)

0.3

(1.6)

Comprehensive income for the year

249.2

239.6

  Attributable to:

 

 

 

  Equity holders of the parent

 

249.0

239.6

  Non-controlling interest

 

0.2

-

         

 

The accompanying notes form an integral part of these financial statements.

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2019

Company registered number: 07118170

Note

31 December 2019

$M

31 December 2018

$M

ASSETS

 

 

 

Current assets

 

 

 

Cash and cash equivalents

17

216.6

272.3

Trade and other receivables

18

78.9

82.9

Capitalised contract costs

19

33.3

31.2

Prepaid expenses

 

13.6

8.5

Inventory

 

0.4

0.5

Tax receivables

13

22.0

7.3

Other financial assets

 

1.2

0.4

 

 

366.0

403.1

Non-current assets

 

 

 

Property, plant and equipment

20

42.9

29.3

Right-of-use assets

21

62.6

-

Intangible assets

22

193.3

267.3

Deferred tax assets

13

203.8

204.1

Other financial assets

 

0.8

0.7

Capitalised contract costs

19

4.4

4.6

Prepaid expenses

 

0.8

2.0

Goodwill

23

1,991.3

1,993.7

 

 

2,499.9

2,501.7

TOTAL ASSETS

 

2,865.9

2,904.8

SHAREHOLDERS' EQUITY AND LIABILITIES

 

 

 

Current liabilities

 

 

 

Trade payables and other liabilities

24

65.1

64.0

Lease liability

21

7.3

0.4

Provisions

25

11.6

9.1

Income tax liability

13

0.3

40.4

Deferred revenue

26

420.5

384.3

Term loan

27

58.2

73.4

 

 

563.0

571.6

Non-current liabilities

 

 

 

Lease liability

21

57.5

2.6

Provisions

25

0.9

0.9

Deferred revenues

26

54.3

51.2

Term loan

27

969.5

1,318.1

Financial liability

 

2.1

1.0

Other non-current liabilities

 

1.7

4.3

Redemption obligation

29

56.3

-

Deferred tax liabilities

13

36.2

54.7

 

 

1,178.5

1,432.8

Shareholders' equity

 

 

 

Share capital

31

136.0

129.0

Share premium, statutory and other reserves

31, 32

280.7

275.9

Translation differences

 

1.3

(0.3)

Retained earnings

 

698.9

494.8

Equity attributable to equity holders of the parent

 

1,116.9

899.4

Non-controlling interest

33

7.5

1.0

 

 

 

 

1,124.4

900.4

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES

 

2,865.9

2,904.8

         

 

The accompanying notes form an integral part of these financial statements.

 

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY  

For the year-ended 31 December 2019

 

 

Note

Share

 Capital

$M

Share premium, statutory and other reserves

$M

Translation differences

$M

Retained earnings

$M

Equity attributable to equity holders of the parent

$M

Non-controlling interests

$M

Total equity

$M

 

At 31 December 2017

 

 

371.7

3.3

1.3

57.9

434.2

0.9

435.1

Result of the year

 

 

-

-

-

241.2

241.2

-

241.2

Other comprehensive income

 

 

-

-

(1.6)

-

(1.6)

-

(1.6)

Comprehensive income for the year

 

 

-

-

(1.6)

241.2

239.6

-

239.6

Primary proceeds

31

 

8.0

191.8

-

-

199.8

-

199.8

Group re-organisation

31

 

(250.8)

250.8

-

-

-

-

-

Capital reduction

31

 

-

(180.6)

-

180.6

-

-

-

Other movements

 

 

-

-

-

0.3

0.3

-

0.3

Share issue expense

31

 

-

(4.0)

-

-

(4.0)

-

(4.0)

Share-based payments deferred tax

13

 

-

-

-

14.8

14.8

-

14.8

Share-based payments

35

 

-

13.8

-

-

13.8

0.1

13.9

Exercise of options

31

 

0.1

0.8

-

-

0.9

-

0.9

At 31 December 2018

 

 

129.0

275.9

(0.3)

494.8

899.4

1.0

900.4

Result of the year

 

 

-

-

-

248.7

248.7

0.2

248.9

Other comprehensive income

 

 

-

-

0.3

-

0.3

-

0.3

Comprehensive income for the year

 

 

-

-

0.3

248.7

249.0

0.2

249.2

Transactions with NCI - Sale of interest

34

 

-

-

-

48.6

48.6

5.7

54.3

Transactions with NCI - Recognition of put liability

29

 

-

(55.7)

-

-

(55.7)

-

(55.7)

Share-based payments deferred tax

 

 

-

-

-

34.9

34.9

-

34.9

Other movements

 

 

-

0.2

1.3

(1.1)

0.4

-

0.4

Share-based payments

35

 

-

20.1

-

-

20.1

0.6

20.7

Exercise of options

31

 

7.0

40.2

-

-

47.2

-

47.2

Cash dividend

33

 

-

-

-

(127.0)

(127.0)

-

(127.0)

At 31 December 2019

 

 

136.0

280.7

1.3

698.9

1,116.9

7.5

1,124.4

                               

 

The accompanying notes form an integral part of these financial statements.

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year-ended 31 December 2019

 

 

Year-ended

31 December 2019

$M

Year-ended

31 December 2018

$M

 

Note

Cash flows from operating activities

 

 

 

Profit for the financial year

 

248.9

241.2

Non-cash adj. to reconcile profit to net cash flows:

 

 

 

Income tax

13

65.7

(58.7)

Depreciation

12

18.9

13.4

Amortisation

12

91.1

130.3

Gain on disposal of a business operation

16

(17.5)

-

Gain on disposal of property, plant and equipment

 

(0.2)

(0.2)

Movement of provisions and allowances

 

5.9

3.5

Interest income

11

(1.5)

(0.3)

Interest expense, changes of fair values of derivatives and other non-cash financial expense

11

59.6

85.5

Shares granted to employees

34

20.7

13.9

Effect of exchange rate changes on cash and cash equivalents held in foreign currencies

 

(2.8)

(2.8)

Unrealised foreign exchange gains and losses and other non-cash transactions

 

(13.8)

(32.0)

Working capital adjustments:

 

 

 

(Increase)/decrease in trade and other receivables and inventories

 

(10.4)

4.1

Increase/(decrease) in trade and other payables

 

(1.2)

1.0

Increase in deferred revenues

26

39.9

56.9

Income tax paid

 

(104.2)

(79.8)

Net cash flows from operating activities

 

399.1

376.0

Cash flows from investing activities

 

 

 

Acquisition of property and equipment

20

(26.3)

(13.5)

Acquisition of intangible assets

22

(3.6)

(3.4)

Investment in subsidiary, net of cash acquired

15

(14.8)

(4.2)

Settlement of contingent consideration

 

(0.2)

(8.0)

Proceeds from sale of a business operation, net of cash disposed

16

26.7

-

Interest received

 

1.5

0.3

Net cash used in investing activities

 

(16.7)

(28.8)

Cash flows from financing activities

 

 

 

Proceeds from issue shares

31

-

199.8

Transaction costs related to the issue shares

31

-

(4.0)

Transaction with NCI, net of fees

34

54.3

-

Exercise of options

31

47.2

0.9

Dividend paid

33

(127.0)

-

Repayment of borrowings

27

(562.9)

(378.5)

Proceeds from borrowings

27

202.6

-

Transaction costs related to borrowings

27

(0.9)

(3.1)

Interest paid

27

(45.1)

(67.6)

Lease payments interest

21

(2.3)

-

Lease payments principal

21

(6.8)

(1.5)

Net cash used in financing activities

 

(440.9)

(254.0)

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

(58.5)

93.2

Effect of exchange rate changes on cash and cash equivalents held in foreign currencies

 

2.8

2.8

Cash and cash equivalents at beginning of period

17

272.3

176.3

Cash and cash equivalents at end of period

 

216.6

272.3

 

The accompanying notes form an integral part of these financial statements.

1.  general information

Avast plc, together with its subsidiaries (collectively, "Avast", "the Group" or "the Company"), is a leading global cybersecurity provider. Avast plc is a public limited company incorporated and domiciled in the UK, and registered under the laws of England & Wales under company number 07118170 with its registered address at 110 High Holborn, London WC1V 6JS. The ordinary shares of Avast plc are admitted to the premium listing segment of the Official List of the UK Financial Conduct Authority and trade on the London Stock Exchange plc's main market for listed securities.

These results do not comprise statutory accounts within the meaning of section 435 of the Companies Act 2006. The consolidated financial statements for the year ended 31 December 2019 have been audited with an unqualified report that did not contain an emphasis of matter referenced or a statement under section 498(2) or (3) of the Companies Act 2006.

The consolidated financial statements of the Group for the year ended 31 December 2019 were approved by the Board of Directors on 25 February 2020 and have not yet been delivered to the registrar.

2.  Significant accounting policies

The accounting policies used in preparing the historical financial information are set out below. These accounting policies have been consistently applied in all material respects to all periods presented except for the changes described in Note 4.

 

Basis of preparation

The audited consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). The consolidated financial statements have been prepared on a historical cost basis and are presented in US dollars. All values are rounded to the nearest 0.1 million ($'m), except where otherwise indicated.

Under section 408 of the Companies Act 2006, the parent company is exempt from the requirement to present its own profit and loss account.

 

The Group uses the direct method of consolidation, under which the financial statements are translated directly into the presentation currency of the Group, the US Dollar ("USD"). The consolidation of a subsidiary begins when the Group obtains control over the subsidiary, and continues to be consolidated until the date when such control ceases. All intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are eliminated in full on consolidation.

 

The directors have reviewed the projected cash flow and other relevant information and have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern assumption in preparing the consolidated financial statements .

 

Revenue recognition

Revenue is measured based on the fair value of consideration specified in the contract with a customer and excludes taxes and duty. The Group recognizes the revenue when it transfers control over a product and service to a customer. Each contract is evaluated to determine whether the Group is the principal in the revenue arrangements.

Revenues from individual products and services are aggregated into the following categories:

Consumer

Direct

The principal revenue stream of the Group is derived from the sale of its software and related services for desktop and mobile which protect users' security, online privacy and device performance. Licence agreements with customers include a pre-defined subscription period during which the customer is entitled to the usage of the products, including updates of the software. The typical length of a subscription period is 1, 12, 24, or 36 months. Antivirus software requires frequent updates to keep the software current in order for it to be beneficial to the customer and the customer is therefore required to use the updated software during the licence period. This provides evidence that the licence grants the right to access the software over time and therefore revenue is recognised evenly over the term of the licence. The software licence, together with the unspecified updates, form a single distinct performance obligation.

 

The Group mainly sells software licences through direct sales (mainly through e-commerce services providers including Digital River and the Group's e-shop) to customers. However, the Group also sells a small portion through indirect sales via the Group's retailers and resellers.

 

Deferred revenue represents the contract liability arising from contracts with customers. The portion of deferred revenues that will be recognised as revenue in the 12 months following the balance sheet date is classified as current, and the remaining balance is classified as non-current. Deferred revenue also materially represents the transaction price relating to sales of software licences that is allocated to future performance obligations. Some of the Group's products can be used on a one-time basis (VPN and Utilities), in which case sales are recognised immediately as revenue.

 

The Group uses a practical expedient not to adjust the promised amount of consideration for the effects of a significant financing component if the Group expects, at contract inception, that the period between when the Group transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

 

When the Group concludes that it has control over the provided product or service before that product or service is transferred to the customer, the Group acts as principal and revenues for satisfying the performance obligations are recognised on a gross basis (before deduction of resellers' commissions, payment provider fees and the third party costs). Otherwise revenues are recognised on a net basis.

 

The Group accounts for sales of products through E-Commerce partners on a gross basis before the deduction of the E-Commerce partners's commissions and fees. The Group's e-commerce service providers fulfil administrative functions, such as collecting payment and remitting any required sales tax. The Group's e-commerce service providers collect the fees and transfer cash payments to the Group on a monthly basis within 30 days after the end of the month with respect to which payment is being made. The Group sets the retail list prices and has control over the licences before transferring them to the customer.

 

The Group also sells subscription software licences through an e-shop directly to end customers in cooperation with certain payment gateways providers. Revenue from sales through the e-shop are accounted for on a gross basis before the deduction of payment gateways fees. The Group sets the final retail prices and fully controls the revenue arrangement with the end customers.

 

Location Labs, Inc. ("Location Labs") provides mobile security solutions that partner with Mobile Network Operators ( "MNOs") providing locator, phone controls and drive safe products to their customers. Once the product is developed by Avast based on the MNO's requirements, the product is then sold to the end customer via the MNO's subscription plans   . The revenues generated by these arrangements are based on revenue share percentages as stated in the MNO agreements. Revenue is recognised on a net basis, after deduction of partners` commissions, based on the delivery of monthly services to the end customers of the MNOs. Avast has no control of the product and no discretion to set the final prices.

 

The Group also sells a limited amount of physical CDs through its distributors which then sell the Group's products (Internet Security and Antivirus Software) to retail stores. The retail revenue is recognised on a gross basis, before the deduction of distributors commissions, ratably over the subscription period.

 

The Group reduces revenue for estimated sales returns. End users may return the Group's products, subject to varying limitations, through resellers or to the Group directly for refund within a reasonably short period from the date of purchase. The Group estimates and records provisions for sales returns based on historical experience. The amount of such provisions is not material.

Indirect

Consumer indirect revenues arise from several products and distribution arrangements that represent the monetisation of the user base. These arrangements are accounted for on a net basis in an amount corresponding to the fee the Group receives from the monetisation arrangement. The contracted partner in the arrangement is the customer rather than the end customer. The most significant sources of revenues are:

 

·

Google - The Group has two distribution arrangements with Google Ireland Limited ("Google") pursuant to which the Group is paid fees in connection with the Group's offers to users of Google Chrome or Google Toolbar. The Group recognises revenue from Google in full in the month they are earned as the Group has no subsequent performance obligations after the date of sale.

·
Secure Browsing - The Group's Secure browser earns the Group a share of advertising revenue generated by end user search activity. Revenue is recognised immediately as the Group has no performance obligation after the date of sale.
·
Advertising - Other Consumer Indirect derived revenues are comprised of advertising fees and product fees. Advertising fees are earned through advertising arrangements the Group has with third parties whereby the third party is obligated to pay the Group a portion of the revenue they earn from advertisements to the Group's end users. Amounts earned are reflected as revenue in the month the advertisement is delivered to the end user. The Group also receives product fees earned through arrangements with third parties, whereby the Group incorporates the content and functionality of the third party into the Group's product offerings. Fees earned during a period are based on the number of active clients with the installed third-party content or functionality multiplied by the applicable client fee. 
·
Analytics - The Group offered big data and marketing analytics through its entity, Jumpshot Inc. ("Jumpshot"), generating mostly recurring subscription revenue. Subscriptions were recognised ratably over the subscription period covered by the contract. Subsequent to year end, the Group decided to wind down the Jumpshot business as further described in the Note 39.

 

Small and Medium-sized business ("SMB'')

SMB includes subscription revenue targeted at small and medium-sized businesses. Revenue is generated through the sale of security software and other IT managed solutions (including CloudCare). CloudCare is a cloud-based security suite designed for SMBs and third party managed service providers who can use this tool to manage security on behalf of their clients. Licences are provided in conjuction with hosting services as the customers have no control over the software independently. The licence is not distinct and would be combined with the hosting service as a single performance obligation. The performance obligation is typically satisfied over the subscription term, beginning on the date that service is made available to the customer.   Revenues from sales of CloudCare are recognised on a gross basis, before deduction of the payment gateways fees.

Cost of revenues

 

Expenses directly connected with the sale of products and the provision of services, e.g. commissions, payments and other fees and third party licence costs related to the subscription software licences , are recognised as cost of revenues.

Capitalised contract costs

The Group pays commissions, third party licence costs and payment fees to resellers and payment providers for selling the subscription software licences to end customers. Capitalised contract costs are amortised over the licence period and recognised in the cost of revenues. Capitalised contract costs are subject to an impairment assessment at the end of each reporting period. Impairment losses are recognised in profit or loss. 

 

Taxes

 

Current income tax assets and liabilities recognised are the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the country where the Group operates and generates taxable income.

 

Deferred tax is recognised for all temporary differences, except:

 

·
where the deferred tax arises from the initial recognition of goodwill or of an asset or liability
in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
·
in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

 

Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available, whereby the deductible temporary differences and the carry forward of unused tax credits and unused tax losses, can be utilised.

 

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

 

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date for the respective tax jurisdiction.

 

Deferred tax items are recognised with respect to the related underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

 

Foreign currency translation

 

The Group's historical financial information is presented in US dollars ("USD" or "$"). The functional currencies of all Group entities are presented in the table below. Each entity in the Group (including branch offices not representing incorporated entities) determines its own functional currency, and items included in the financial statements of each entity are measured using that functional currency. For the purposes of inclusion in the historical financial information, the statement of financial position of entities with non-USD functional currencies are translated into USD at the exchange rates prevailing at the balance sheet date and the income statements are translated at the average exchange rate for each month of the relevant year. The resulting net translation difference is recorded in other comprehensive income.

 

The functional currencies of the Group's main entities are as follows:

 

Company or branch

Functional currency

Avast plc

USD

Avast Holding B.V.

USD

Avast Operations B.V.

USD

Avast Software B.V.

USD

Avast Software s.r.o.

USD

Avast Software, Inc.

USD

Avast Corporate Services B.V.

USD

Avast Deutschland GmbH

EUR

AVG Technologies UK Limited

GBP

AVG Technologies USA, Inc.

USD

FileHippo s.r.o.

CZK

InloopX s.r.o.

EUR

Location Labs, Inc

USD

Piriform Group Limited

GBP

Piriform Limited

GBP

Piriform Software Limited

GBP

Piriform, Inc.

USD

Privax Limited

USD

TrackOFF, Inc.

USD

Jumpshot s.r.o.

CZK

Jumpshot, Inc.

USD

 

Transactions in foreign currencies are initially recorded by the Group entities at their respective functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are recalculated at the functional currency spot rate of exchange valid at the reporting date. All differences are recorded in the statement of profit and loss as finance income and expenses.
 

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions.

 

Business combinations and Goodwill

 

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred and included in Administrative expenses.

 

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. If the business combination is achieved in stages, any previously held equity interest is re-measured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss. It is then considered in the determination of goodwill.

 

Any contingent consideration to be transferred will be recognised at fair value at the acquisition date. Contingent consideration is measured at fair value with changes in fair value recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity.

 

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. During the measurement period, which may be up to one year from the acquisition date, the Group may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Consolidated Statement of Profit and Loss.

 

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

 

Intangible Assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition.

Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses.

Intangible assets with finite lives are amortised over their useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period for
an intangible asset with a finite useful life is reviewed at least at the end of each reporting period.
The amortisation expense on intangible assets with finite lives is recognised in the Consolidated Statement of Profit and Loss in the expense category consistent with the function of the intangible assets.

 

Indefinite lived intangibles are not amortised but are tested for impairment annually and for impairment indicators on a quarterly basis. The assessment of indefinite life is reviewed annually to determine whether the indefinite life assumption continues to be appropriate.

 

 

 

The useful economic lives of intangible assets are as follows:

 

 

Years

Developed technology

4-5

Avast Trademark

Indefinite

Piriform Trademark

10

AVG Trademark

6

Customer relationships and user base

4

Other licensed intangible assets

3-5

 

Research and development costs

Research costs are expensed when incurred when the criteria for capitalisation are not met. Development expenditures are recognised as an intangible asset when the Group can demonstrate:

 

-  the technical feasibility of completing the intangible asset so that the asset will be available for use or sale;

-  its intention to complete and its ability and intention to use or sell the asset;

-  how the asset will generate future economic benefits;

-  the availability of resources to complete the asset; and

-  the ability to measure reliably the expenditure during development.

 

Development expenditure incurred on minor or major upgrades, or other changes in software functionalities does not satisfy the criteria, as the product is not substantially new in its design or functional characteristics. Such expenditure is therefore recognised as an expense in the Consolidated Statement of Profit or Loss as incurred.

 

Goodwill

Goodwill is assessed as having an indefinite useful life and is tested for impairment annually.

 

Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Cost comprises the aggregate amount paid and the fair value of any other consideration given
to acquire the asset and includes costs directly attributable to making the asset capable of operating as intended.

 

Repairs and maintenance costs are charged to the Consolidated Statement of Profit and Loss during the accounting period during which they are incurred. 

 

Depreciation is recorded on a straight-line basis over the estimated useful life of an asset, as follows:

 

 

Years

Leasehold improvements

over the lease term

Machinery and equipment

2-5

 

Gains or losses arising from the de-recognition of property, plant and equipment are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the Consolidated Statement of Profit and Loss when the asset is de-recognised.

Impairment

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's ("CGU") fair value less costs of disposal or its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.

 

Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used.

 

Impairment losses of continuing operations are recognised in the Consolidated Statement of Profit and Loss in those expense categories consistent with the function of the impaired asset. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. Any reversal of previously recognised impairment is limited so that the carrying amount of the asset does not exceed the lower of its recoverable amount or the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the Consolidated Statement of Profit and Loss.

 

Goodwill and intangible assets with indefinite useful lives are tested for impairment annually as at 31 December at the operating segment level, which is the smallest group of CGUs to which the Goodwill and intangible assets with indefinite useful life can be allocated. Goodwill is allocated to the groups of CGUs, that corresponds with operating segments (Consumer and SMB) according to the allocation from past business combinations - see Note 23. Intangible assets with indefinite useful lives are all allocated to the Group of CGUs that corresponds to the Consumer operating segment.

 

Leases

For any new contracts entered into on or after 1 January 2019, the Group considers whether a contract is, or contains a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Group applied IFRS 16 only to contracts that were previously identified as leases. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into on or after 1 January 2019. 

 

The Group applies a recognition exemption for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option ('short-term leases'), and lease contracts for which the underlying asset is of low value ('low-value assets'). Short-term lease payments are recognised as operating expenses in the Consolidated Statement of Profit and Loss on a straight-line basis over the lease term.

 

Right-of-use assets

The Group recognises right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and are subsequently adjusted (where appropriate) for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.

The right-of-use asset is depreciated on a straight-line basis over the lease term or, if it is shorter, over the useful life of the leased asset. The Group currently applies the lease term for depreciation of all right-of-use assets (see Note 21). Related expense is presented within depreciation, allocated to general and administrative expenses.  The Group also assesses the right-of-use asset for impairment when such indicators exist.

Lease liabilities

At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate and lease payments within extension option periods for which the Group considers it likely that the extension option will be utilised.

 

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable.

 

The amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Lease interest is presented within Interest expenses. In addition, the carrying amount of lease liabilities is re-measured if there is a reassessment of the lease term (using a revised discount rate at the date of the reassessment) or a change in the variable lease payments that depend on an index or rate (using the original discount rate). In such cases, there is a corresponding adjustment to the right-of-use asset.  

Operating leases (accounting policy applied prior to 1 January 2019)

Under IAS 17 (prior to transition to IFRS 16), leases where the lessee did not obtain substantially all the risks and rewards of ownership of the asset were classified as operating leases. Operating lease payments, other than contingent rentals, were recognised as an expense in the Consolidated Statement of Profit and Loss on a straight-line basis over the lease term.

Employee stock option plans

Employees of the Group receive remuneration in the form of share-based payment transactions whereby employees render services as consideration for equity instruments (equity-settled transactions).

Equity-settled transactions

The cost of equity-settled transactions is determined based on the fair value of the share-based payment award at the date when the grant is made, taking into account the market and non-vesting conditions, using an appropriate valuation model. Non-market vesting conditions are not taken into account in determining the fair value of the award. The cost is recognised, together with a corresponding increase in other capital reserves in equity, over the period in which the performance or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The Consolidated Statement of Profit and Loss expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in compensation expense.

No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

When the terms of an equity-settled transaction are modified, where the modification increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification, additional expense is recognised. When an equity-settled award is cancelled other than by forfeiture, it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award. The dilutive effect of outstanding options is reflected in the computation of diluted earnings per share.

 

Payments for settlement of equity-settled awards are taken to equity up to the fair value of the award at the time of settlement (with any excess recognised in profit or loss).

 

Deferred tax assets are recognized in connection with granted stock option in the amount of the expected tax deduction available on exercise, measured using the share price at the end of the period and multiplied by the expired portion of the vesting period. The cumulative related tax benefit is recognised in profit and loss to the extent of the tax rate applied to the cumulative recognised share-based payments expense, with the excess (if any) recognised directly through equity.

Employee benefits

Pension obligations

Contributions are made to the Government health, retirement benefit and unemployment plans at statutory rates applicable during the period and are based on gross salary payments. The arrangements of the Government health, retirement benefit and unemployment plans qualify as defined contribution plans. The Group has no further payment obligations once the contributions have been paid. The expense for the contributions is charged to profit and loss in the same period as the related salary expense. As a benefit for employees, the Group also makes contributions to defined contribution schemes operated by external (third party) pension companies. These contributions are charged to profit and loss in the period to which the contributions relate.

Defined contribution plans

The Group maintains a defined contribution 401(k) retirement savings plan for its U.S. employees. Each participant in the 401(k) retirement savings plan may elect to contribute a percentage of his or her annual compensation up to a specified maximum amount allowed under U.S. Internal Revenue Service regulations. The Group matches employee contributions to a maximum of 4% of the participant annual compensation.

 

Redundancy and termination benefits

Redundancy and termination benefits are payable when employment is terminated before the normal retirement or contract expiry date. The Group recognises redundancy and termination benefits when it is demonstrably committed to have terminated the employment of current employees according to a detailed formal plan without possibility of withdrawal. Benefits falling due more than 12 months after the balance sheet date are discounted to present value. There are currently no redundancy and termination benefits falling due more than 12 months after the balance sheet date.

 

Key management personnel

The Group discloses the total remuneration of key management personnel ("KMP") as required by IAS 24 - Related party disclosures. The Group includes within KMP all individuals who have authority and responsibility for planning, directing and controlling the activities of the Group. KMP include all members of the Board and the Executive management team of the Group. Other related parties include family members if applicable. See Note 36 for more details.

 

Financial instruments

 

Financial assets and liabilities are recognised on the Group's Consolidated Statement of Financial Position when the Group becomes a contractual party to the instrument. When financial instruments are recognised initially, they are measured at fair value, which is the transaction price plus, in the case of financial assets and financial liabilities not measured at fair value through profit and loss, directly attributable transaction costs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

· Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities;

· Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and

· Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

 

Trade and other receivables

 

Trade receivables are at initial recognition recorded at the original invoice amount, including value-added tax and other sales taxes. At subsequent reporting dates, the carrying amount is decreased by the expected lifetime loss allowance attributable to the receivable or group of receivables based on a credit assessment of the counterparty or estimate for relevant group of receivables respectively.

 

The Group uses the expected credit loss model for impairment of receivables. The Group applies practical expedients when measuring the expected credit loss. The Group applies a simplified approach and recognises expected lifetime loss allowances for to trade receivables and contract assets. The expected lifetime loss is calculated using the provision matrix, which assigns provision rates to classes of receivables based on number of days they are overdue, based on the Group's historical credit loss experience adjusted for forward-looking development. The classes of receivables are stratified by types of customer and by operating segments between the Consumer and SMB receivables.

 

Bad debts are written off in the period in which they are determined to be completely irrecoverable.

 

Cash and cash equivalents

 

For the purpose of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash at bank, cash in hand and short-term deposits with an original maturity of three months or less.

 

The Group´s Consolidated Statement of Cash Flows is prepared based on the indirect method from the Consolidated Statement of Financial Position and Consolidated Statement of Profit and Loss.

 

Pledged or restricted assets

 

Financial assets transferred to third parties as collateral, assets that are pledged and assets as to which the Group has otherwise restricted dispositions are classified as other long-term receivables, if the period until which the restriction ends or return of the assets in question will take place is more than 12 months from the balance sheet date.

 

Trade payables and other liabilities

 

Trade payables and other liabilities are recognised at their amortised cost which is deemed to be materially the same as the fair value.

 

Loans

 

Loans are initially recognised at their fair value net of transaction costs and subsequently measured at amortised cost using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial liability.

 

Derivative financial instruments

 

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured at fair value at the end of each reporting period. The resulting gain or loss is recognised in profit and loss immediately.

 

A derivative embedded within a host contract containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.

 

De-recognition of financial instruments

 

A financial asset or liability is generally de-recognised when the contract that gives right to it is settled, sold, cancelled or expires.

 

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the Consolidated Statement of Profit and Loss.

 

Provisions

 

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

 

Onerous contracts

 

If the Group has a contract that is onerous, the present obligation under the contract is recognised and measured as a provision. However, before a separate provision for an onerous contract is established, the Group recognises any impairment loss that has occurred on assets dedicated to that contract.

 

An onerous contract is a contract under which the unavoidable costs (i.e., the costs that the Group cannot avoid because it has the contract) of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.

 

Interest income and expense

 

Interest income consists of interest income on deposits. Interest expense consists of interest expense on term loans including amortisation of arrangement fees, and interest expense on leases.

 

Other finance income and expense

 

Other financial income and expenses consist of realized and unrealized foreign exchange gains and losses, changes in fair value of derivatives, unwinding of discounts on non-current provisions and other liabilities discounted to net present value and other financial expense.

 

Exceptional items

 

Exceptional items are material or non-recurring items of income and expense which the Group believes should be separately disclosed to show the business performance of the Group more accurately. Such items are separately disclosed in the notes to the consolidated financial statements. Examples of such items include legal and advisory costs related to acquisition, disposals, integration, strategic restructuring program costs and cost of impairment. 

3.  Significant accounting judgements, estimates and assumptions

Significant judgements

 

Leases - Extension options

When the Group has the option to extend a lease, management uses its judgement to determine whether or not an option would be reasonably certain to be exercised. The Group has the option, under some of its leases, to lease the assets for additional terms of up to ten years. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew and therefore considers all relevant factors including long-term business strategy, conditions of the lease, availability of alternative options and potential relocation costs for it to exercise the renewal. Potential future cash outflows of $7.4 million have not been included in the lease liability because it is not reasonably certain that the lease will be extended (or not terminated).

Impairment testing

Significant management judgment and estimates are required to determine the individual cash generating units ("CGUs") of the Group, the allocation of assets to these CGUs and the determination of the value in use or fair value less cost to sell of these individual assets. Management has concluded that the operating segments used for segment reporting represents the lowest level within the Group at which the Goodwill is monitored. Therefore, the operating segments correspond to groups of CGUs at which goodwill is tested for impairment.

Loans

The terms of the Credit Agreement offer the Company significant flexibility, allowing it to prepay, reprice, refinance, substitute or replace any drawn loans without penalty (except within a six-month period following issue or a repricing, a term intended to provide a degree of protection to the lenders' income).  The terms also provide for the Company to be able to request a reduction in the interest rate margin payable. Although any such reduction would, as a matter of form, be made through re-negotiation, the agreement was drawn up on the understanding by both the Company and the lenders that the Company would routinely make such requests where it was supported by appropriate evidence (that market perception of the credit risk of the company had improved) and that such requests would generally be granted (as has been the experience in 2017 to 2019 - see Note 27). If not granted the Company would be able to obtain replacement financing at the reduced market price, repay the original loan at par and the lenders would lose their income stream.

Consequently, management's judgement is that the term loan is in substance a floating rate loan for which the interest margin is reset every six months to the market rate, provided it is favorable to the Company. The reduction in margin is accounted for as a change in effective interest rate prospectively from the moment the change in estimate takes place rather than by treating it as a modification of terms.

Significant estimates

 

Deferred tax

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits.

 

The Group recognizes substantial deferred tax assets from unused tax losses in its US based subsidiaries excluding Jumpshot Inc. The management assesses that these deferred tax assets are recoverable, with key elements of judgement being the fact that US tax losses carry over indefinitely, and the significant business presence of the Group in the US market give the group ability to generate sufficient taxable profit for the forseeable future.

 

Based on expectations of future profitability, management expect to recover the deferred tax asset over a 20-year time frame. The recovery period is sensitive to the level of profitability of the underlying business, however, there are no significant assumptions which would impact our expectation of recovery.

 

The Group also recognises substantial deferred tax assets from the 2018 transfer of intellectual property to the Czech Republic, which is being recovered linearly over a 15-year period. The management assesses that this deferred tax asset is recoverable, with key elements of judgment being that the major portion of the Group's profit is generated in the Group's Czech entity and this structure is expected to remain for the foreseeable future.

 

Share-based payments

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the volatility and dividend yield and making assumptions about them. The Group initially measures the cost of equity-settled transactions with employees using a Black-scholes model. In addition, at each reporting date before vesting, management uses the best estimate of the performance achievement of the number of equity instruments that will ultimately vest. The vesting of these awards is conditioned upon the achievement of the Group's basic EPS and adjusted revenue growth targets over the three-year period. The movements resulting from the estimates are recognised in the Consolidated Statement of Profit or Loss, with a corresponding entry in equity.

 

Redemption liability

The management believed that the estimated exercise value of the redemption liability described in Note 29 , as at the end of the period, was best estimated by the original transaction price. The exercise price was at the higher of the original cost and market value. The redemption liability was remeasured to the present value of the estimated exercise price at each period end until expiry or exercise.

Due to subsequent closure of Jumpshot business in January 2020 as decribed in the Note 39, the redemption obligation is void and will be reversed in 2020.

4.  Application of new and revised IFRS standards

Newly adopted standards

 

IFRS 16 Leases

IFRS 16 Leases supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single, on-balance sheet model.

The Group acts mainly as a lessee and the only significant lease contracts are leased office buildings.

The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 January 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application, without any restatement to comparatives. The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option ('short-term leases'), and lease contracts for which the underlying asset is of low value ('low-value assets'). The Group does not have any significant short-term or low value assets.

Right-of-use assets were measured at the amount of the lease liability on adoption using the incremental borrowing rate at the date of initial application (adjusted for any prepaid or accrued lease expenses and assessed for impairment).

The impact of the initial recognition on 1 January 2019 is as follows:

($'m )

1 January 2019

Right-of-use assets

69.7

Prepaid expenses

(2.0)

Accrued leased payments

4.0

Lease liabilities

(71.7)

Net assets impact

-

 

Application of IFRS 16 does not have any material impact on the Group's Net Profit or EPS comparability with the prior period. The impact is limited to differences in presentation - lease expenses are replaced by right-of-use asset amortisation and lease interest expense.

 

The Group also uses the following practical expedients permitted by the standard:

 

·

the use of a single discount rate to a portfolio of leases with reasonably similar characteristics

·

the adjustment of the right-of-use asset for any recognised onerous lease provisions, instead of performing an impairment review

·

applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial application

·

the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and

·

the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

 

The lease liabilities as at 1 January 2019 are reconciled to the operating lease commitments as of 31 December 2018 as follows:

 

 

($ 'm)

Operating lease commitments as at 31 December 2018

87.6

Recognition exemption:

 

  Commitments relating to short-term leases

(0.5)

  Other commitments

(0.3)

Net operating lease commitments as at 31 December 2018

86.8

Effect from discounting at the incremental borrowing rate as of 1 January 2019

(15.1)

Lease liabilities as at 1 January 2019

71.7

 

The lease liabilities were discounted at the incremental borrowing rates as at 1 January 2019. The weighted average discount rate was 3.3%.

 

IFRIC Interpretation 23 Uncertainty over Income Tax Treatment

 

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:

 

·

Whether an entity considers uncertain tax treatments separately;

·

The assumptions an entity makes about the examination of tax treatments by taxation authorities;

·

How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates;

·

How an entity considers changes in facts and circumstances.

 

Upon adoption of the Interpretation, the Group considered whether it had any uncertain tax positions, particularly those relating to transfer pricing. The Company's and the subsidiaries' tax filings in different jurisdictions include deductions related to transfer pricing and the taxation authorities may challenge those tax treatments. The Group determined, based on its tax compliance and transfer pricing study, that it is probable that its tax treatments (including those for the subsidiaries) will be accepted by the taxation authorities. The Interpretation did not have an impact on the consolidated financial statements of the Group.

 

Standards issued but not yet effective and not early adopted

 

IFRS 3 Business Combinations (Amendments)

 

The IASB issued amendments in Definition of a Business (Amendments to IFRS 3) aimed at resolving the difficulties that arise when an entity determines whether it has acquired a business or a group of assets. The Amendments are effective for business combinations for which the acquisition date is in the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period, with earlier application permitted.

 

IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: Definition of 'material' (Amendments)

 

The Amendments are effective for annual periods beginning on or after 1 January 2020 with earlier application permitted. The Amendments clarify the definition of material and how it should be applied. The new definition states that, 'Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity'. In addition, the explanations accompanying the definition have been improved. Management has assessed no significant impact from the implementation of this amendment is expected by the Group.

5.  Segment information and other disclosures

Management monitors operating results in two customer segments: consumer products (which generate direct and indirect revenue streams) and products for the SMB market. For management reporting purposes, the operating and reportable segments are determined to be Consumer and Small and Medium-sized business (''SMB''). This is the level on which the Chief Operating Decision Maker decides about the allocation of the Group's resources.

 

The principal products and services offered by each segment are summarised below:

 

Consumer -The Group's consumer products include direct revenue streams through its offerings for desktop security and mobile device protection and consist of free and premium paid products for the individual consumer market. The Group also has several value-added solutions for performance, privacy and other tools. The Group also focuses on monetising the user base indirectly, via dynamic secure search solution, including the browser toolbar, which gives users a convenient way to access a search engine at any time.

 

SMB - The Group's SMB segment focuses on delivering high-level security and protection solutions for Small and Medium sized business customers.

 

Billings is one of the important metrics used to evaluate and manage operating segments. Billings represent the full value of products and services being delivered under subscription and other agreements and include sales to new end customers plus renewals and additional sales to existing end customers. Under the subscription model, end customers pay the Group for the entire amount of the subscription in cash upfront upon initial delivery of the applicable products. Although the cash is paid up front, under IFRS, subscription revenue is deferred and recognised rateably over the life of the subscription agreement, whereas non-subscription revenue is typically recognised immediately.

 

The Group evaluates the performance of its segments based primarily on Billing, Revenue and Operating profit. Billings are not defined or recognised under IFRS and considered as a non-IFRS financial measure used to evaluate current business performance.

 

Certain costs that are not directly applicable to the segments are identified as "Corporate Overhead" costs and represent general corporate costs that are applicable to the consolidated group. In addition, costs relating to share-based payments and exceptional items are not allocated to the segments since these costs are not directly applicable to the segments, and therefore not included in the evaluation of performance of the segments.

 

The following tables present summarised information by segment:

 

For the year ended 31 December 2019 ($'m )

Consumer

SMB

Total

Billings

865.1

45.9

911.0

Deferral of revenue

(42.2)

2.3

(39.9)

Revenues

822.9

48.2

871.1

Deferred revenue haircut reversal

0.8

1.0

1.8

Segment revenue

823.7

49.2

872.9

Segment cost of revenues

(84.7)

(5.3)

(90.0)

Segment sales and marketing costs

(78.7)

(18.9)

(97.6)

Segment research and development costs

(57.7)

(4.7)

(62.4)

Segment general and administrative costs

(5.4)

3.1

(2.3)

Total Segment operating profit

597.2

23.4

620.6

Corporate overhead

 

 

(137.5)

Deferred revenue haircut reversal

 

 

(1.8)

Depreciation and amortisation

 

 

(110.0)

Exceptional items

 

 

(1.8)

Share-based payments

 

 

(20.7)

Employer's taxes on share-based payments

 

 

(4.2)

Consolidated operating profit

 

 

344.6

 

For the year ended 31 December 2018 ($'m )

Consumer

SMB

Total

Billings

801.6

60.5

862.1

Deferral of revenue

(50.7)

(3.1)

(53.8)

Revenues

750.9

57.4

808.3

Deferred revenue haircut reversal

10.0

5.5

15.5

Segment revenue

760.9

62.9

823.8

Segment cost of revenues

(74.0)

(7.2)

(81.2)

Segment sales and marketing costs

(70.6)

(23.5)

(94.1)

Segment research and development costs

(44.0)

(6.6)

(50.6)

Segment general and administrative costs

(4.7)

-

(4.7)

Total Segment operating profit

567.6

25.6

593.2

Corporate overhead

 

 

(146.2)

Deferred revenue haircut reversal

 

 

(15.5)

Depreciation and amortisation

 

 

(143.7)

Exceptional items

 

 

(25.6)

Share-based payments

 

 

(13.9)

Consolidated operating profit

 

 

248.3

 

Corporate overhead costs primarily include the costs of the Group's IT, Technology (R&D), HR, Finance and Central Marketing functions, legal and office related costs, which are not allocated to the individual segments.

 

The following table presents depreciation and amortisation by segment:

 

($'m )

Year-ended

31 December 2019

Year-ended

31 December 2018

Consumer

91.6

130.5

SMB

0.2

0.4

Corporate overhead

18.2

12.8

Total depreciation and amortisation

110.0

143.7

 

 

The following table presents revenue of subsegments:

 

($'m )

Year-ended

31 December 2019

Year-ended

31 December 2018

Consumer Direct Desktop

631.1

568.4

Consumer Direct Mobile

75.4

81.2

Consumer Indirect

106.7

85.8

SMB

49.2

57.4

Other

8.7

15.5

Total

871.1

808.3

       

 

The following table presents the Group´s non-current assets, net of accumulated depreciation and amortisation, by country. Non-current assets for this purpose consist of property and equipment, right-of-use assets and intangible assets.

 

31 December 2019

31 December 2018

 

($'m )

(in %)

($'m )

(in %)

Czech Republic

257.7

86.2%

263.5

88.9%

UK

20.9

7.0%

22.2

7.5%

USA

16.1

5.4%

8.6

2.9%

Other countries*

4.1

1.4%

2.3

0.8%

Total

298.8

100.0%

296.6

100.0%

  *No individual country represented more than 5% of the respective totals.

 

The following table presents revenue attributed to countries based on the location of the end user:

 

Year-ended

31 December 2019

Year-ended

31 December 2018

 

($'m )

(in %)

($'m )

(in %)

United States

358.9

41.2%

349.6

43.3%

United Kingdom

75.8

8.7%

68.6

8.5%

France

66.2

7.6%

61.1

7.6%

Germany

56.6

6.5%

50.7

6.3%

Other countries*

313.6

36.0%

278.3

34.3%

Total

871.1

100%

808.3

100.0%

  *No individual country represented more than 5% of the respective totals.

 

Revenues from relationships with certain third parties exceeding 10% of the Group's total revenues were as follows:

 

 

Year-ended

31 December 2019

Year-ended

31 December 2018

 

($'m )

(in %)

($'m )

(in %)

Revenues realised through online resellers:

 

 

 

 

  Digital River

521.8

59.9%

370.1

45.8%

           

 

In 2019, revenues realized through Digital River significantly increased by $151.7 million due to the transfer of part of the business from in-house payment processing to the external vendor. The majority of revenues from Digital River were reported in the Consumer segment, while the remaining $12.0 million of revenues were reported in the SMB segment.

6.  Exceptional items

The following table presents the exceptional items by activity:

 

($'m )

Year-ended

31 December 2019

Year-ended

31 December 2018

Exceptional items in the operating profit

1.8

25.6

Net gain on disposal of business operation

17.5

-

 

 

Exceptional items in operating profit

 

The Group incurred $1.8 million of legal and professional fees related to the various acquisitions and a disposal of a subsidiary and related business operation that incurred during 2019. The tax impact on these exceptional items amounted to $0.2 million (2018: $1.5 million)

 

During 2018, the Group incurred costs in the amount of $18.8 million related to one-time advisory, legal and other professional service fees of the IPO that occurred in May 2018. The majority of these costs were tax non-deductible. Total IPO costs comprise of $18.8 million recorded to the Consolidated Statement of Profit and Loss in 2018, $4.1 million already accrued in trade payables in 2017 and additional $4.0 million of direct share issue expenses recorded to equity, which gives total IPO costs of $26.8 million. The full cash impact of the IPO costs was recorded in 2018 showing $(4.0) million under the cash flows from financing activities as directly linked to the share issue and the remaining $(22.8) million is included in the cash flows from operating activities.

 

The remaining portion of 2018 exceptional costs of $6.8m related to the AVG integration and other programs implemented in prior years that were completed in 2018.

 

Net gain on disposal of a business operation

 

On 30 January 2019, the Group sold all activities of Managed Workplace business recognising a gain of $17.5 million as an exceptional item (Note 16), with a tax impact of $2.3 million.

7.  Auditor´s Remuneration

The Group paid the following amounts to its auditors in respect of the audit of the financial statements and for other non-audit services provided to the Group.  

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Audit of the financial statements

0.9

1.1

Audit of the financial statements of subsidiaries

0.2

0.2

Total audit fees

1.1

1.3

 

 

 

Other assurance services

0.1

2.5

Corporate finance services

-

2.2

Tax services

-

0.2

Total non-audit fees

0.1

4.9

Total fees

1.2

6.2

       

 

The majority of other services in 2018 related to the Company's IPO, including work as reporting accountant, and related tax and other advisory work, which is an exceptional cost. See Note 6 .

 

8.  Cost of revenues

 

Cost of revenues consist of the following:

 

($ 'm)

 

Year-ended

31 December 2019

Year-ended

31 December 2018

Amortisation

 

89.9

129.4

Depreciation

 

7.2

7.4

Personnel costs of product support and virus updates

 

19.1

17.3

Digital content distribution costs

 

16.4

15.4

Third party licence costs

 

5.3

5.2

Other product support and virus update costs

 

13.2

13.9

Commissions, payment and other fees

 

59.6

52.8

Total

 

210.7

241.4

 

9.  Operating costs

 

Operating costs are internally monitored by function; their allocation by nature is as follows:

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Depreciation

11.7

6.0

Amortisation

1.2

0.9

Personnel expenses

180.1

168.3

Purchases of services from third party vendors (legal, advisory and other services)

116.5

135.8

Gifts and charities

5.0

5.0

Other operating expenses

1.3

2.6

Total

315.8

318.6

 

Purchases of services from third party vendors decreased to due adoption of IFRS 16, according to which office costs are now being capitalized.

 

10. Personnel expenses

 

Personnel expenses consist of the following:

($ 'm)

Year-ended

 31 December 2019

Year-ended

 31 December 2018

 

Employees

Non-executive directors

Employees

Non-executive directors

Wages and salaries

135.1

0.9

135.2

0.8

Social security and health insurance*

27.2

-

23.5

0.1

Pension costs

0.2

-

0.5

-

Social costs

8.0

-

6.7

-

Severance payments and termination benefits

2.9

-

4.9

-

Share-based payments (including employer's costs)

24.9

-

13.7

0.2

Total personnel expense

198.3

0.9

184.5

1.1

  *State and Government pension costs of Czech employees are also included in the social security and health insurance costs.

 

The average number of employees by category during the period was as follows:

 

 

Year-ended

31 December 2019

Year-ended

31 December 2018

Sales and marketing

635

559

Research and development

911

807

General and administrative

246

215

Total average number of employees

1,792

1,581

 

11. Finance income and expenses

 

Interest income:

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Interest on bank deposits

1.5

0.3

Total finance income

1.5

0.3

 

Interest expense:

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Term loan interest expense

(56.4)

(85.8)

Lease interest expense

(2.3)

-

Total interest expense

(58.7)

(85.8)

 

Other finance income and expense (net):

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Changes of fair values of derivatives

(0.8)

1.9

Revolving loan - commitment fee

(0.8)

(1.3)

Foreign currency gains/(losses)

(3.3)

(7.1)

Unrealised foreign exchange gains/(losses) on borrowings

13.9

26.4

Other financial expense

0.7

(0.2)

Total other finance income and expense (net)

9.7

19.7

 

12. Depreciation and amortisation

Amortisation by function:

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Cost of revenues

88.3

127.5

Total amortisation of acquisition intangible assets

88.3

127.5

Cost of revenues

1.6

1.9

Sales and marketing

0.2

0.1

Research and development

0.1

0.1

General and administration

0.9

0.7

Total amortisation of non-acquisition intangible assets

2.8

2.8

Total amortisation

91.1

130.3

       

 

Depreciation by function:

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Cost of revenues

7.2

7.4

Sales and marketing

0.1

0.3

Research and development

0.6

1.1

General and administration*

11.0

4.6

Total depreciation

           18.9

13.4

       

    *$7.7 million is attributable to the depreciation of right-of-use assets (see Note 22)

 

Tangible and intangible assets are allocated to each department of the Group. The depreciation and amortisation of these assets is reported as part of operating costs and cost of revenues.

13. Income tax

In the Consolidated Statement of Financial Position, the Corporate Income tax receivable of $17.2 million (2018: $5.8 million) is part of the caption Tax receivables.

 

The major components of the income tax in the consolidated statement of comprehensive income are:

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Current income tax

 

 

Related to current year

(54.8)

(86.7)

Related to prior year

(0.9)

(0.6)

Current income tax total

(55.7)

(87.3)

 

 

 

Deferred tax

 

 

Related to current year

(4.8)

145.9

Related to prior year

(5.2)

0.1

Deferred tax total

(10.0)

146.0

Total income tax (expense)/income through P&L

(65.7)

58.7

 

On 1 May 2018, AVG E-comm web shop was transferred to Avast Software B.V. ("Avast BV") and subsequently, the former Dutch AVG business (including the web shop) from Avast BV was sold to Avast Software s.r.o.  As a result, the deferred tax asset was increased by $143.8 million. In addition, an exit charge of $49.4 million was agreed upon with the Dutch tax authorities. The net tax effect of the transaction in the year ended 31 December 2018 was a tax benefit of $94.4 million.

 

On 1 August 2018, intangible assets of Piriform IP were sold to Piriform UK. As a result, a deferred tax asset of $5.6 million was recognized by the Group. The current tax expense related to the transaction was $0.7 million. The net tax effect of the transaction in the year ended 31 December 2018 was a tax benefit of $4.8 million.

 

The Group generates a temporary difference relating to an intragroup loan denominated in USD received by Avast Software s.r.o., a subsidiary with a USD functional currency (but with a tax currency of CZK). This loan is subject to hedging in its local statutory books (with the effect that current tax relief does not cover the full period exchange differences). The tax impact related to the loan is a deferred tax benefit of $0.4 million (2018: $9.8 million) and the Group reports a deferred tax asset of $10.1 million (2018: $9.8 million) related to the loan.

 

The reconciliation of income tax (expense)/benefit applicable to accounting profit before income tax at the statutory income tax rate to income tax expenses at the Group's effective income tax rate is as follows:

 

($ 'm)

Year-ended

31 December 2019

Year-ended

31 December 2018

Profit/(loss) before tax

314.6

182.5

Group effective income tax rate (20%* in 2019 and 2018)

(62.9)

(36.5)

 

 

 

Recurring adjustments

 

 

Non-deductible expenses

(3.7)

(3.2)

Share-based payments

(1.6)

(2.8)

FX effect on Intercompany loans

0.4

9.8

 

 

 

Non recurring adjustments

 

 

Non-deductible expenses (IPO related)

-

(3.8)

AVG IP transfer net tax benefit

-

94.4

Piriform IP transfer net tax benefit

-

4.8

Current year deferred tax assets not recognised

(0.1)

(4.9)

Derecognition of previously recognized deferred tax assets

-

(8.9)

Usage of previously not recognized deferred tax assets

4.7

1.6

Effect of prior year taxes

(6.1)

(0.5)

Effect of enacted changes in tax rates on deferred taxes

0.2

(2.5)

 

 

 

Remaining impact of tax rate variance and other effects

3.4

11.2

Total income tax

(65.7)

58.7

  *Estimated as a Group's blended rate across the jurisdictions where the Group operates.

The deferred tax relates to following temporary differences:

($ 'm)

31 December 2019

31 December 2018

Temporary differences

  Asset / (Liability)

  Asset / (Liability)

Fixed assets

(38.2)

(53.1)

IP transfer tax benefit

122.9

142.9

Deferred revenue and unbilled receivables

3.5

15.9

Tax loss carryforward

45.8

16.6

Tax credits carryforward

4.2

3.7

Loans and derivatives

2.1

11.0

Carryforward of unutilised interest

2.7

-

Share-based payments transactions

5.7

-

Provisions

0.8

1.8

Tax impact from FX difference on intercompany loans

10.1

9.8

Other

8.0

0.8

Net

167.6

149.4

 

Tax losses carried forward as at 31 December 2019 are recorded by the following subsidiaries:

($ 'm)

 

 

 

Deferred tax from

tax losses carryforward

Tax jurisdiction

Avast Software Inc. (tax group incl. Location Labs and AVG Technologies USA)

44.6

United States

Avast plc

0.9

United Kingdom

Other

0.3

-

Total deferred tax from tax losses carryforward

45.8

-

 

Tax losses carried forward in United States and United Kingdom are related mainly to share-based payments exercises.

 

As a result of share-based payments exercises there was a $147.6 million (2018: $70.0 million) tax deduction in Avast Software Inc., Location Labs LLC, Jumpshot Inc., Avast plc and AVG UK that created a tax benefit of $34.2 million (2018: $14.8 million). A tax benefit of $31.8 million (2018: $14.8 million) exceeding related cumulative remuneration expenses is recognized directly in equity, of which the current tax benefit is $3.4 million (2018: nil) and deferred tax benefit is $28.4 million (2018: $14.8 million).

 

Tax losses reported by Avast Software Inc. can be utilised by all subsidiaries incorporated in the United States (Note 40) excluding Jumpshot, Inc. Tax credit of $4.5 million from federal and state tax losses generated during the years 2011 - 2017 can be utilized over 20 years. Tax credit of $40.1 million from federal and state tax losses can be carried forward for indefinite period of time.

 

The tax deduction for share-based payments is not received until the instruments are exercised. Therefore, a temporary difference of $5.7 million (2018: nil) arises between the tax deduction (pro rated for the period to vesting) and the tax effect of the related cumulative remuneration expense. The deferred tax asset is measured as an estimated tax deduction at the date of exercise (pro rated for the period to vesting), based on the year end share price. As the amount of the deferred tax asset exceeded the tax effect of the related cumulative remuneration expense, the excess of the associated deferred tax of $3.1 million was recognized directly in equity.

 

Following the transactions of IP transfer in 2018, described above, the Group reports a deferred tax asset of $122.9 million (2018: $142.9 million), of which the major part of $119.5 million relates to the transfer of the former Dutch AVG business from Avast BV to Avast Software s.r.o. The temporary difference is amortised and deducted from the tax base of Avast Software s.r.o. registered in the Czech Republic linearly over 15 years.

 

The Group does not recognise the following potential deferred tax asset of $21.1 million (2018: $13.8 million), mostly related to Jumpshot tax losses, for which the Group considers future recoverability to be uncertain.

 

($ 'm)

 

31 December 2019

31 December 2018

 

 

Asset / (Liability)

Asset / (Liability)

Tax losses carried forward - expiration 20 years

 

7.2

5.6

Tax losses carried forward -  indefinite

 

1.8

1.9

Tax losses carried forward - expiration 1-6 years

 

4.5

-

Temporary differences related to loans and interests - indefinite

 

5.2

6.3

Other temporary differences - expiration n/a

 

2.4

-

Total deferred tax asset not recognised

 

21.1

13.8

 

The movement in deferred tax balances:

 

($ 'm)

 

31 December 2019

31 December 2018

 

 

Asset / (Liability)

Asset / (Liability)

Deferred tax as at 1 January

 

149.4

(12.0)

Effect of business combination (Note 15)

 

(3.3)

-

Deferred tax recognised in the profit & loss

 

(10.0)

146.0

Deferred tax recognised in equity

 

31.5

14.8

Translation difference

 

-

0.6

Deferred tax as at 31 December

 

167.6

149.4

 

The deferred tax asset increased significantly due to tax losses realized in 2018 and 2019 from significant share-based payments' exercises. Such significant share-based payments' transactions are not expected to repeat in future periods and management expect the underlying business to remain profitable for the foreseeable future.

14. Earnings per share

Basic earnings per share ("EPS") is calculated by dividing the net profit for the period attributable to equity holders of the Group by the weighted average number of shares of ordinary shares outstanding during the year.

Diluted EPS is calculated by dividing the net profit for the period attributable to equity holders of the Group by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of shares that would be issued if all dilutive potential ordinary shares were converted into ordinary shares.

Adjusted EPS is calculated by dividing the adjusted net profit for the period attributable to equity holders by the weighted average number of ordinary shares outstanding during the period.

The following reflects the income and share data used in calculating EPS:

 

Year-ended

31 December 2019

Year-ended

31 December 2018

Net profit attributable to equity holders ($ 'm)

248.7

241.2

 

 

 

Basic weighted average number of shares

973,788,157

914,567,949

Effects of dilution from share options, performance and restricted share units

44,313,005

62,120,397

Total number of shares used in computing dilutive earnings per share

1,018,101,162

976,688,346

Basic earnings per share ($/share)

0.26

0.26

Diluted earnings per share ($/share)

0.24

0.25

 

Adjusted earnings per share measures:

 

 

Year-ended

31 December 2019

Year-ended

31 December 2018

Net profit attributable to equity holders ($ 'm)

248.7

241.2

Deferred Revenue Haircut reversal / Other

1.8

17.2

Share-based payments (including employers' costs)

24.9

13.9

Exceptional items

1.8

25.6

Amortisation of acquisition intangible assets

88.4

127.5

Unrealised FX gain/(loss) on EUR tranche of bank loan

(13.9)

(26.4)

Tax impact from FX difference on intercompany loans

(0.4)

(9.8)

COGS Deferral Adjustments

(0.1)

(1.1)

Tax impact of COGS deferral adjustment

-

0.3

Tax impact on adjusted items

(20.3)

(18.5)

Tax impact of IP transfer

6.3

(99.2)

Gain on disposal of business operation

(17.5)

-

Tax impact from disposal of business operation

2.3

-

Adjusted net profit attributable to equity holders ($ 'm )

322.1

270.8

Basic weighted average number of shares

973,788,157

914,567,949

Adjusted basic earnings per share ($/share)

0.33

0.30

Diluted weighted average number of shares

1,018,101,162

976,688,346

Adjusted diluted earnings per share ($/share)

0.32

0.28

       

 

Management regard the above adjustments necessary to give a fair picture of the adjusted results of the Group for the period.

15. Business combinations

2019 Acquisitions

Acquisition of Emerald Cactus Ventures Inc. ("Tenta")

On 6 November 2019 , Avast Software, Inc. purchased a 100% stake in the American company Emerald Cactus Ventures Inc. that has been offering the Tenta Browser providing a privacy-first mobile web browser to hundreds of thousands of Android users worldwide . Tenta Browser will be paired with the current desktop-based Avast Secure Browser with its tens of millions of active users, resulting in a true multi-platform, people-centric solution for private and secure web browsing.

The transaction represents a business combination with Avast Software Inc. being the acquirer. The fair value of the consideration at the acquisition date was determined by the Group to be $5.3 million and comprised the following components:

·

Initial payment - $3.3 million was paid to the owners of Tenta on the acquisition date.

·

Holdback amount - $0.6 million will be paid in 12 months.

·

Earn-out payment - four milestone payments of $0.4 million represents a contingent consideration payable within the next 20 months after the acquisition date to the extent that specific milestones of Tenta are met. As of the acquisition date, the probability weighted value of the earn-out was determined to be $1.4 million.

 

The fair value of assets acquired and liabilities incurred on the acquisition date was determined on final basis as follows:

 

($ 'm)

Fair Value at

6 November 2019

Intangible assets

2.3

Total Assets

2.3

Deferred tax liability

0.5

Total Liabilities

0.5

Net assets acquired

1.8

Consideration paid

5.3

Goodwill

3.5

 

The business combination resulted in the recognition of goodwill of $3.5 million, which is allocated to the Consumer CGU and is tested for impairment at least annually. The goodwill of $3.5 million comprises the workforce in place and the value of expected synergies arising from the acquisition. The carrying value of goodwill is not expected to be tax deductible.

 

The business combination resulted in the recognition of intangible assets in the amount of $2.3 million that represents the intellectual property of Tenta, and will be amortised over the estimated useful life of 5 years.

 

Analysis of cash flows on acquisition:

 

($'m )

31 December 2019

Cash consideration

(5.3)

Holdback consideration payable in 12 months

0.6

Earn-out

1.4

Net cash flow on acquisition

(3.3)

 

Transaction costs of $0.2 million have been expensed and are included in General and administrative expenses in the Consolidated Statement of Profit or Loss and are part of operating cash flows in the statement of cash flows.

The revenues and net profit of the Group for the year ended 31 December 2019 would not have been significantly different had the acquisition occurred at the beginning of the reporting period (1 January 2019).

 

Acquisition of TrackOFF, Inc. ("TrackOFF")

On 24 May 2019, Avast Software, Inc. purchased a 100% stake in the American company TrackOFF, a developer of tools to protect users' identities and personal lives. The Group has acquired TrackOFF to strengthen further the development of Avast's anti-tracking products and other products that help users maintain their privacy online.

 

The transaction represents a business combination with Avast Software Inc. being the acquirer. The fair value of the consideration at the acquisition date was determined by the Group to be $13.1 million for 100% ownership. The consideration given was paid in cash.

 

The fair value of assets acquired and liabilities incurred on the acquisition date was determined on final basis as follows:

 

($'m)

 

Fair Value at

24 May 2019

ASSETS

 

 

Current Assets

 

 

Cash and cash equivalents

 

0.6

Trade and other receivables

 

0.2

Total current assets

 

0.8

 

 

 

Non-current assets

 

 

Intangible assets

 

11.2

Deferred tax assets

 

0.4

Total non-current assets

 

11.6

TOTAL ASSETS

 

12.4

LIABILITIES

 

 

Trade payables

 

0.2

Deferred revenues

 

1.7

Other current liabilities

 

0.2

Total current liabilities

 

2.1

 

 

 

Deferred tax liability

 

2.3

Total non-current liabilities

 

2.3

TOTAL LIABILITIES

 

4.4

Net assets acquired

 

8.0

Consideration paid

 

 

13.1

Goodwill

 

5.1

 

The business combination resulted in the recognition of goodwill of $5.1 million, which is allocated to the Consumer CGU and is tested for impairment at least annually. The goodwill of $5.1 million comprises the workforce in place and the value of expected synergies arising from the acquisition. The carrying value of goodwill is not expected to be tax deductible.

The business combination resulted in the recognition of intangible assets in the amount of $11.2 million that represents intellectual property of TrackOFF, and will be amortised over the estimated useful life of 5 years.

 

Analysis of cash flows on acquisition:

 

($'m )

31 December 2019

Cash consideration

(13.1)

Net cash acquired with the business (included in cash flow from investing activities)

0.6

Holdback consideration payable in 12 months

1.0

Net cash flow on acquisition

(11.5)

 

Transaction costs of $0.2 million have been expensed and are included in General and administrative expenses in the Consolidated Statement of Profit or Loss and are part of operating cash flows in the statement of cash flows.

 

Revenues and net profit of the Group for the twelve month period ended 31 December 2019 would not have been significantly different had the acquisition occurred at the beginning of the reporting period (1 January 2019).

 

2018 Acquisitions

 

Acquisition of Inloop s.r.o ("Inloop'')

On 1 August 2018, Avast Software s.r.o. acquired a 100% stake in Inloop s.r.o. ("Inloop") on behalf of INLOOPX s.r.o ("INLOOPX"), a mobile engineering services firm based in Slovakia. The reason for the acquisition was to obtain the skilled team of engineers to strengthen Avast's Mobile business.

The transaction represented a business combination with Avast Software s.r.o. being the acquirer. The acquisition date was determined to be 1 August 2018. The former shareholders of Inloop do not have ongoing involvement in the business or with the Avast Group, following the acquisition.

The fair value of the consideration including contingent payment at the acquisition date was determined by the Group to be EUR 7.3 million ($8.6 million).

The fair value of assets acquired and liabilities incurred on the acquisition date was determined on final basis as follows:

 

($ 'm)

Fair Value at

1 August 2018

Cash

0.4

Personal property

0.2

Trade and other receivables

1.5

Total Assets

2.1

 

 

Total Liabilities

0.5

Net assets acquired

1.6

Consideration paid

8.6

Goodwill

7.0

 

The business combination results in the recognition of goodwill of $7.0 million which is allocated to the Consumer CGU and is tested for impairment at least annually. The large proportion of goodwill to other identified assets is due to Inloop not having any significant identifiable assets other than the skilled workforce (the obtaining of which was the main purpose of the acquisition). The carrying value of goodwill is not expected to be tax deductible.

 

The revenues and net profit of the Group for the year ended 31 December 2018 would not have been significantly different had the acquisition occurred at the beginning of the reporting period (1 January 2018).

16. Disposal of a business operation

 

On 30 January 2019, the Avast Group sold all activities of Managed Workplace business, its remote monitoring and management product, to Barracuda Networks, Inc ("Barracuda"). The transaction consisted of the sale of a subsidiary AVG Technologies Canada, Inc. ("AVG CAN") owned by Avast Software B.V., the sale of intellectual property ("IP") owned by Avast Software s.r.o. and the sale of other assets, notably receivables, by Avast Deutschland GmbH, Avast Switzerland AG, AVG Technologies Norway A/S and AVG Distribuidora de Tecnologias do Brasil LTDA.

 

The total selling price for the transaction was $30.0 million, on a cash-free, debt-free basis, of which $3.0 million was withheld in escrow for a 12-month period to satisfy any potential indemnity claims against the Group under the applicable share and asset purchase agreement entered into between the parties.

 

As a result, the Group derecognised all assets and liabilities of the sold subsidiary AVG CAN. Because the sale of the subsidiary is part of a single transaction of the sale of a part of the business, the Group presents the result of the whole transaction (except for tax impacts) within a single line in the statement of comprehensive income, including the sale of IP and other assets.

 

The carrying amounts of assets and liabilities as of the date of sale were as follows:

 

($'m)

 

30 January 2019

 

Cash and cash equivalents

 

6.0

Trade and other receivables

 

1.3

Prepaid expenses

 

0.2

Current assets

 

7.5

Tangible assets

 

1.4

Deferred tax assets

 

0.8

Non-current assets

 

2.2

Total assets

 

9.7

Trade and other payables

 

0.2

Lease liability

 

0.2

Deferred revenues

 

0.9

Other current liabilities

 

0.2

Current liabilities

 

1.5

Lease liabilities

0.7

Non-current liabilities

 

0.7

Total liabilities

2.2

Net assets

7.5

 

Because the sold business was part of the group of CGUs to which goodwill was allocated, a portion of the goodwill has to be disposed as part of the transaction. The Group have determined that the appropriate amount of goodwill disposed of is $11.0 million which was part of the SMB CGU.

 

The resulting gain on disposal of a business operation is shown in the table below:

 

($'m)

 

30 January 2019

Consideration received or receivable:

 

 

  Cash

 

33.0

  Receivable - holdback

 

3.0

Total disposal consideration

 

36.0

Carrying amount of net assets sold

 

 

(7.5)

Gain on disposal of a business operation

 

28.5

Other adjustments:

 

 

  Goodwill write-off

 

(11.0)

Net gain on disposal of a business operation

 

17.5

 

Analysis of cash flows on disposal:

 

($'m )

31 December 2019

Cash received

33.0

Net cash sold of the business (included in cash flow from investing activities)

(6.0)

Transaction costs paid

(0.3)

Net cash flow on disposal

26.7

 

17. Cash and cash equivalents

For purposes of the statement of cash flows, cash and cash equivalents comprise of the following :

($ 'm)

 

31 December 2019

31 December 2018

Cash on hand and cash equivalents

 

1.4

2.0

Cash in bank

 

215.2

270.3

Total

 

216.6

272.3

18. Trade and other receivables

($ 'm)

31 December 2019

31 December 2018

Trade receivables

30.4

35.7

Unbilled revenues

48.9

49.2

Other receivables

6.4

4.0

Trade receivables, gross

85.7

88.9

Less: Expected loss allowance on trade receivables,

unbilled revenues and other receivables

(6.8)

(6.0)

Trade receivables, net

78.9

82.9

 

Trade receivables are non-interest bearing and are generally payable on 30-day terms. The fair value
of receivables approximates their carrying value due to their short term maturities. The expected loss allowance relates to trade receivables (with only insignificant amounts relating to other classes of receivable).

Unbilled revenues represent sold products (for which the revenue has been deferred over the term
of the product licence) but for which an invoice has not yet been issued.

 

Other receivables represent mainly advances to, and receivables from, employees.

 

($ 'm)

Amount

Allowances at 31 December 2017

5.3

Additions

2.7

Write-offs

(2.2)

Reversals

0.2

Allowances at 31 December 2018

6.0

Additions

1.1

Write-offs

(0.3)

Reversals

-

Allowances at 31 December 2019

6.8

Movements in the allowances described above relate mainly to trade receivables.

As of 31 December 2018 and 2019, the nominal value of receivables overdue for more than 360 days are $2.0 million (carrying value: $0.1 million) and $4.5 million (carrying value: nil), respectively.

The ageing analysis of trade receivables, unbilled receivables and other receivables was as follows (carrying amounts after valuation allowance):

 

Not past due

 

 

($ 'm)

Past due
1 - 90 days

Past due more than 90 days

Past due more than 180 days

Past due more than 360 days

Total

31 December 2018