Days before coronavirus became an existential threat to the global economic system, Avast Software received a dramatic jolt that led to a fight for its future.
Until the last days of January, the world’s biggest provider of anti-virus software with around 450 million users had been a darling of the FTSE-250 since its IPO in September 2018, that valued it at £3bn after a series of major acquisitions.
The market cap of Avast, which was launched 30 years in the Czech Republic, then soared to over £5bn by the beginning of this year. Last full year results to December 31, 2019 saw EBITDA up 7.9 percent to $483m and revenue up 5.6 percent to $873.1m.
But when a series of articles revealed that its Jumpshot subsidiary had been harvesting and selling on data of users of its various products, the entity was rapidly closed down as investors raised concerns.
On January 27, Vice reported: “An Avast antivirus subsidiary sells ‘Every search. Every click. Every buy. On every site.’ Its clients have included Home Depot, Google, Microsoft, Pepsi, and McKinsey.” Three days later Avast announced Jumpshot would cease operations.
On February 11 the Czech Office for Personal Data Protection, invoking the country’s Personal Data Protection Act 2019 (DPA), launched a preliminary investigation into the firm.
The rapid decision to close Jumpshot – which had 300 employees – was not enough to prevent a slide in Avast’s share price, which lost over £1bn or a fifth of the market value of the group almost overnight. Now, along with the rest of the group’s executive team, CFO Phil Marshall is scrambling to keep Avast on track as the economic downturn created by coronavirus continues to bite.
Marshall says Jumpshot, which was launched in 2014, contributed only about 1.5 percent of and four percent of group profit and revenues respectively, and had been earmarked to be sold off. “Last year I think we made it clear to investors since the IPO this was never a core part of the business, not a core part of our strategy,” he says.
“Our business is security and privacy products, so we always saw this as a separate business, for which we had the intent to exit. We created a joint venture July last year, and we had a two-year path to exit that business, so there was always the intent to exit,” says Marshall.
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Marshall says that with no likely buyer for “a high growth part of the business,” with a separate management, separate board, the business was shut down, following the media storm in which he says “not necessarily all the facts were presented in the right way”.
Marshall insists Avast has been transparent throughout, that it “went to the DPA in December…we regularly talk to them,” he says. “We went in with our findings when we closed it down, we did our own internal audit, we shared all our findings. They’ve come back as you’d expect and asked for some more information and that’s what we’re doing,” he says.
Why did the share price collapse so dramatically in the space of a couple of days in late January if the group’s business model wasn’t heavily impacted by the issue? Marshall says. “It was more the concern it would impact the mother ship, it would impact the Avast company, so people would start uninstalling our software, people wouldn’t accept our new offerings around privacy,” he argues.
Given that data was sold on from its Avast’s core programmes through Jumpshot to companies such as Google and Microsoft, surely there would be concerns that the group’s entire proposition was in jeopardy given the need for trust with such products?
Marshall confirms that data was harvested from millions of users of its core products, of which only 17 million pay for usage, but was done with their approval. “It wasn’t surreptitiously collected, it was with approval.”
“When you downloaded the software there was a screen, a box that came up and asked you and told you specifically there was an option here to allow us to use your anonymised data for marketing services for our subsidiary,” he says.
Marshall’s travails at Avast are a long way from a career forged in senior finance roles around the world, notably 17 years at US conglomerate General Electric (GE), where he started as a commercial finance manager at GE Plastics EMEA and finished as president and CEO of the consumer and industrial solutions business in the region.
“I started in the [CEO] Jack Welch days in my mid-20s, and my whole career has been formed by GE. It was an incredible company- it was a meritocracy, where I think 90 percent-plus of all CEOs originated in finance, which is what I did,” he says.
“Jack Welch was so financially driven in the sense of delivering numbers, every quarter it was a relentless machine- it toughened me up but I always had someone who could guide, mentor or sponsor me. It was a great environment for growing,” adds Marshall.
A move to become CFO of energy industry consultancy Wood Mackenzie as CFO, owned by private equity firm Hellman & Friedman, saw Marshall prepare the business for IPO, but it was acquired for £1.85bn by Verisk Analytics a year later. Another CFO role at Exova, a FTSE-listed laboratory testing business, lasted two years before it was acquired by Element Materials Technology in 2017.
Marshall says his GE experience taught him the ability to learn quickly, and adapt and survive in a fast changing environment, leading him to join Avast where he had the chance to execute the IPO and experience life in a large scale business to consumer (B2C) player.
“I had the skill set that could be applied and I was confident that I could be successful. But the real desire for me was just learning, another opportunity to learn a new business model, a new environment and a new culture,” he says.
Marshall began at Avast in February 2018, the Czech firm began its investor roadshow the next month and he delivered the IPO in May, what he describes as transformative, especially for founders Pavel Baudiš and Eduard Kucera, who still own around 37 percent of the firm.
On arrival, Marshall hired a financial controller and FP&A head, he describes as his “left and right arm”. He says: “That allows you to do more than what I would call classic finance, whether it be treasury and tax matters, financing, classic finance activities.
“I don’t get so much involved in core finance because I don’t need to. Most of my time is actually working with the operational folks on the commercial front end, trying to understand where we might want to allocate more capital, on the M&A side looking at potential transactions, and generally looking at core strategy. Only 30% of my time is on core finance. One thing I learned from GE is that I’m not so worried about reporting lines.
“I don’t need lots of reports. I think for any successful CFO, or a successful executive, you have to have the ability to influence folks without having them report to you,” he says.
With innovation a key element of Avast, Marshall says: “We have discussions around where we see the markets going, where we think we need to be invested. For example we see privacy as a strong area, so how do we allocate more resources there?
“Then it gets translated into the budget discussion, what do we need to do in a 12 month window to bring products to market in a natural timeframe- and the sort of resources needed for that. And more importantly what’s the three to five year cycle where we’re going to do swings. And you have to have tollgates to understand if you want to kill it or amend it,” he says.
Addressing the challenge
Avast’s business, based on the ‘fremium’ model of massive scale with a free product which the company tries to upsell and cross-sell is dependent on vast amounts of data. “The more data you have, the better your AI is,” says Marshall.
“Initially when we started this journey it was all about going from free anti-virus, to the classic anti-virus product, to a paid version of anti-virus. Ultimately we never saw this as a growth market, anti-virus is obviously a mature market, we have a relatively decent share, we’ve obviously got strong competitors, so the whole point here was to leverage the user base, find new opportunities, new products.
“Now we’re selling VPN- a privacy product, it encrypts as you go in across the internet, so privacy people can’t snoop on what you’re doing, anti-track which stops the sophistication of advertisers today, how it can track you, it’s gone well beyond cookies, they’re now fingerprinting your device.
“So anti-track is another product that has resonated very well, and then there’s utilities products, the classic products that basically maintain the health of your machine, involve files and ensure its running efficiently. And then associated products around like driver updater- where we have a password manager.
“It gives you privacy and protects your log-ins with a password manager and then basically we have various brands around that, so we have the Avast AVG and CCleaner, we have different brands around those products, and the intent here is that every year try to find one or two solutions that might resonate with customers,” says Marshall.
He says the role of finance at Avast has been about supporting the business in allocating capital to drive innovation in growth areas, particularly privacy-related products. But another key priority for Marshall is making sure finance has a voice. “The classic mistake is you produce a lot of reports, you produce a lot of numbers, but you don’t see anything with it, or you say there’s your report, go and interpret it yourself.
“I think it’s very important for finance to take the data, see insights and trends, and go into the organisation and force a set of actions,” he says.
In the meantime, Marshall, like the rest of Avast’s executive team is focused on trying to rebuild the reputation of the firm, in the eyes of users and investors alike. He concedes mistakes were made. “Being a security company, and being in data analytics, doesn’t necessarily sit well together,” he says.
But Marshall insists Avast’s share price is still performing well compared to peers and user numbers haven’t dropped off. “You could look at a graph that says over the last 12 months since IPO we’ve been one of the top performing stocks. Even with the correction we’ve outperformed most on the FTSE-250. Our inclination is not to panic here,” he maintains.
In the meantime, the investigation by the Czech Office for Personal Data Protection is ongoing, something that will hang over the firm as Marshall says he has no idea how long the probe will take. It may be a time for reflection for Marshall and other members of Avast’s senior management team. “I think you always have to look at the things that you could have done differently,” hesays.
“Accountability is very important, you have to look at yourself and think about what you could have done. If somebody has been upset by this, we are apologetic,” he adds.