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Registration No. 333-              

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



Avast Software B.V.
(Exact Name of Registrant as Specified in its Charter)



The Netherlands
(State or Other Jurisdiction of
Incorporation or Organization)
  7372
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification No.)

Avast Software B.V.
Prins Bernhardplein 200
1097JB Amsterdam
The Netherlands
+31 20 521 4777

(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)



AVAST Software, Inc.
1840 Gateway Drive, Suite 200
San Mateo, California 94404
+ 1 650 378-1390

(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

Colin Diamond
Michal Dlouhý
Eva Svobodová
White & Case
advokátní kancelár
Na Príkope 8
110 00 Prague 1
Czech Republic
Tel: +420 255 771 111
Fax: +420 255 771 122

 

Lisa L. Jacobs
Richard Price
Shearman & Sterling LLP
Broadgate West
9 Appold Street
London, EC2A 2AP
United Kingdom
Tel: +44 20 7655 5000
Fax: +44 20 7655 5500

Approximate date of commencement of proposed sale to the public:
As soon as practicable after effectiveness of this registration statement.

          If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

          If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

          If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

          If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o



CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of Securities
to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)(2)

  Amount of
Registration Fee

 

Common stock, par value €0.10

  U.S.$200,000,000   U.S.$22,920

 

(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

(2)
Includes shares to be sold upon exercise of the underwriters' option. See "Underwriting."



          The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

   


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Subject to completion, dated December 21, 2011

Preliminary Prospectus

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

                           Shares

LOGO

Common Stock

        This is an initial public offering of common stock by Avast Software B.V. AVAST is selling           shares of common stock and the selling stockholders identified in this prospectus, including certain of our directors, are selling           shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. Prior to this offering, there has been no public market for our common stock. The estimated initial public offering price is between $           and $           per share.

        We intend to apply to list our common stock on           under the symbol "AVST."

 
  Per share   Total

Initial public offering price

  $            $         

Underwriting discounts and commissions

  $            $         

Proceeds to us, before expenses

  $            $         

Proceeds to selling stockholders, before expenses

  $            $         

        We and the selling stockholders have granted the underwriters an over-allotment option for a period of 30 days to purchase up to           and            additional shares of common stock, respectively, at the initial public offering price, less underwriting discounts and commissions.

        Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 13 of this prospectus.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares of common stock to purchasers on or about                  , 2012.



UBS Investment Bank   Deutsche Bank Securities



Pacific Crest Securities   Morgan Keegan   Macquarie Capital



                          , 2012


Table of Contents

 
  Page  

Prospectus Summary

    1  

Risk Factors

    13  

Special Note Regarding Forward-looking Statements

    36  

Use of Proceeds

    37  

Dividend Policy

    38  

Capitalization

    39  

Dilution

    41  

Selected Consolidated Financial and Other Data

    43  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    47  

Business

    73  

Management

    89  

Principal and Selling Stockholders

    108  

Certain Relationships and Related Party Transactions

    111  

Description of Capital Stock

    114  

Shares Eligible for Future Sale

    121  

Taxation

    123  

Underwriting

    133  

Legal Matters

    140  

Experts

    140  

Enforceability of Civil Liabilities

    140  

Where You Can Find Additional Information

    142  

Index to Consolidated Financial Statements

    F-1  



        Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus prepared by us or on our behalf. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of shares of our common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares in any circumstances under which the offer or solicitation is unlawful.

        For investors outside the United States: neither we, the selling stockholders, nor any of the underwriters have done anything that would permit the offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

Market and Industry Data and Forecasts

        This prospectus includes data, forecasts and information obtained from industry publications and surveys and other information available to us. Some data is also based on our good faith estimates, which are derived from management's knowledge of the industry and independent sources. Forecasts and other metrics included in this prospectus to describe the security software industry are inherently uncertain and speculative in nature and actual results for any period may materially differ. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying assumptions relied upon therein. While we are not aware of any

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misstatements regarding the industry data presented herein, estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed under the headings "Special Note Regarding Forward-looking Statements" and "Risk Factors" in this prospectus. We believe our internal research is reliable, even though such research has not been verified by any independent sources.

        Except where the context otherwise requires, references in this prospectus to "actively protected devices" means computers or other Internet-connected devices with at least one product or virus database update downloaded in the prior 30 days.

        Our reporting currency and the functional currency of our Czech operating subsidiary, AVAST Software a.s., is the U.S. dollar. Although we expect that the functional currency of Avast Software B.V., our Dutch parent, will be the U.S. dollar in future periods, through the end of December 31, 2010, its functional currency was determined to be the Euro. The balance sheet of Avast Software B.V. has been translated into U.S. dollars using the exchange rate at the balance sheet date. The statement of comprehensive income has been translated using the average exchange rate for the fiscal period. Translation gains and losses are reported as a component of stockholders' equity. Unless otherwise stated, other financial data appearing in this prospectus that are not included in our consolidated financial statements and that relate to transactions that occurred prior to June 30, 2011 are reflected using the exchange rate on the relevant transaction date. Unless otherwise stated, with respect to all transactions after June 30, 2011, U.S. dollar translations of Czech koruna ("CZK") amounts presented in this prospectus are translated at the rate of $1.00 = CZK 16.845, the representative exchange rate published by the Czech National Bank on June 30, 2011.

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Prospectus Summary

        This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and our consolidated financial statements and notes to those consolidated financial statements, before making an investment decision.

        The terms "Company," "AVAST," "we," "our" or "us," as used herein, refer to Avast Software B.V. and its affiliates prior to the Conversion (as defined below) and to AVAST Software N.V. and its affiliates upon and after the Conversion, including, in each case, AVAST Software a.s., unless otherwise stated or indicated by context. The term "affiliates" means our direct and indirect subsidiaries.

Company overview

        We are a leading global provider of security software delivered through a free-to-premium, or "freemium," model. Our software is currently the world's most widely-used consumer security software, with over 142 million actively protected devices as of October 31, 2011 in almost every country in the world. We also have a growing presence in the small and medium business, or SMB, market. Our success has been driven by our community-focused and online-based freemium business model, through which we provide our users with a high-quality security product for free. We then offer them the opportunity to upgrade to our premium paid products that provide advanced functionalities. We also seek to provide additional value-added solutions to our users over time. Our business model and our high quality security products have enabled us to build a strong brand and loyal user community, which in turn has driven highly-efficient "viral" marketing for our products.

        We have designed our flagship free product, avast! Free Antivirus, from the perspective that comprehensive protection against malicious software, or "malware," such as viruses, worms and spyware should be made available to everyone. We provide full malware protection in our free product, as well as additional advanced security functions in our premium paid product, such as antispam and enhanced safeguards for online commerce and banking activities. Our products consistently rank among the highest-rated anti-malware solutions by both users and editors on leading download sites and popular media around the world. We believe that the easy-to-use nature, high quality and performance of our free product have been key factors in the growth and loyalty of our user community.

        Our large and highly diversified user community is one of our most valuable assets. In addition to driving "viral" marketing and brand recognition, a majority of our users opt into our CommunityIQ platform, which acts as a source of continuously updated threat data. We believe that the scale of this critical, real-time threat intelligence is unparalleled in the industry, and directly enhances the level of protection provided by our products. Committed members of our user community also contribute with technical support postings on our online support forum. As a result, our user community has been instrumental in helping to minimize costs associated with supporting additional users and has helped drive our rapid growth. We intend to stay true to our "community first" philosophy by continuing to provide a high quality, comprehensive security product for free and are committed to continuing to build long-term relationships with our users. Through this strategy, we believe that we will continue to grow our user community and identify opportunities to generate increased revenues from these relationships over the long-term.

        We have grown our business rapidly in recent years while maintaining strong levels of profitability and cash flow generation. Our revenues grew from $25.3 million in 2009 to $48.5 million in 2010, an increase of 91.6%, and from $20.2 million to $37.9 million for the six months ended

 

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June 30, 2010 and 2011, respectively, an increase of 87.1%. Our adjusted comprehensive income was $12.4 million, $23.9 million and $20.7 million in 2009, 2010 and the six months ended June 30, 2011, respectively, representing 48.9%, 49.4% and 54.6% as a percent of revenues. Our free cash flow was $21.1 million, $37.1 million and $30.2 million in 2009, 2010 and the six months ended June 30, 2011, respectively. See "Summary Consolidated Financial and Other Data—Supplemental information" for how we define and calculate adjusted comprehensive income and free cash flow, and a discussion about the limitations of these non-IFRS financial measures.

Industry background

        A number of trends in the consumer security software market, including a challenging threat environment and the rapid adoption of mobile devices, are driving continued demand for security software. At the same time, the steady shift of consumer buying patterns to online purchases and the emergence of the freemium business model are causing significant market disruption and changes.

 

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Our competitive strengths

        We believe the following strengths have contributed to our success and differentiate us from our competitors:

Our growth strategies

        To further strengthen our position as a leading global provider of security software delivered through a freemium model, we intend to pursue the following strategies:

 

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Risk Factors

        Investing in our common stock involves risks. You should carefully consider the risks described in "Risk Factors" before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and

 

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you may lose all or part of your investment. The following is a summary of some of the principal risks we face:

Our principal stockholders

        Our principal stockholders are Eduard Kucera, our co-founder and Chairman, and Pavel Baudis, our co-founder and Executive Director. In addition, certain funds affiliated with Summit Partners, L.P. (collectively, "Summit"), a global growth equity firm, invested in our company in August 2010 through the acquisition of outstanding equity securities from existing stockholders. Following the completion of this offering, each of Messrs. Kucera and Baudis will beneficially own         % of our outstanding shares, or         % if the underwriters exercise their over-allotment option in full, and Summit will beneficially own approximately         % of our outstanding shares, or         % if the underwriters exercise their over-allotment option in full.

 

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Corporate information

        Avast Software B.V. is a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkeid), incorporated in January 2006 under the laws of the Netherlands. We are a holding company whose material assets are shares of our operating subsidiaries, including our principal operating subsidiary, AVAST Software a.s., a Czech joint stock company.

        Prior to the completion of this offering, our stockholders intend (i) to convert Avast Software B.V. into a Dutch public company with limited liability (naamloze vennootschap) incorporated under the laws of the Netherlands, and change our name to AVAST Software N.V. and (ii) to amend our articles of association. These actions are collectively referred to herein as the "Conversion."

        Our registered office is located at Prins Bernhardplein 200, 1097JB Amsterdam, the Netherlands and we are registered with the Dutch Trade Register under file number 17182514. Our telephone number in the Netherlands is +31 20 521 4777. Our headquarters is located at the Trianon Office Building, Budejovicka 1518/13a, 140 00, Prague 4, Czech Republic and our telephone number in Prague is +420 274 005 777. Our website address is www.avast.com. The information contained therein or connected thereto is not a part of, nor shall it be deemed to be incorporated into, this prospectus or the registration statement of which it forms a part, and should not be relied upon in determining whether to make an investment decision.

        Throughout this prospectus, we refer to various trademarks, service marks and trade names that we use in our business. AVAST® and avast!® are two of our registered trademarks. We also have several other registered trademarks, service marks and pending applications relating to our products. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.

 

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The Offering

Common stock offered by us

               shares (or             shares if the underwriters exercise their over-allotment option in full)

Common stock offered by the selling stockholders

 

             shares (or             shares if the underwriters exercise their over-allotment option in full)

Total common stock offered

 

             shares (or             shares if the underwriters exercise their over-allotment option in full)

Common stock to be outstanding after this offering

 

             shares (or             shares if the underwriters exercise their over-allotment option in full)

Use of proceeds

 

We estimate that the net proceeds to us from this offering, after deducting the underwriting discount and estimated offering expenses, will be approximately $     million (or approximately $     million if the underwriters exercise their over-allotment option in full), assuming the shares are offered at $    per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus.
We intend to use net proceeds for working capital and other general corporate purposes. We may also use all or a portion of the net proceeds to acquire or invest in complementary companies, products or technologies.
We will not receive any of the proceeds from the sale of shares by the selling stockholders.

Dividend policy

 

We do not intend to pay dividends on our common stock for the foreseeable future following this offering.

 

We have declared an interim dividend of $22.0 million that we intend to pay to our existing stockholders in the fourth quarter of 2011. We intend to declare a special dividend of $        million that we intend to pay to our existing stockholders immediately prior to the closing of this offering. Investors in this offering will not receive any portion of the foregoing dividends to our existing stockholders.

 

See "Dividend Policy."

Risk factors

 

See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed         symbol

 

"AVST"

        The number of shares of common stock to be outstanding after this offering is based on         shares outstanding as of         , 2012 and excludes    shares reserved for issuance under our equity incentive plan of which, as of       , 2012 options to purchase    shares had been granted at a weighted average exercise price of $       . The amount of options granted excludes options to purchase         shares of our common stock that we intend to grant to our director nominees

 

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immediately following the pricing of this offering with an exercise price equal to the initial public offering price.

        Unless otherwise indicated, all information in this prospectus:

 

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Summary Consolidated Financial and Other Data

        The following tables set forth our summary consolidated financial and other data. You should read the following summary consolidated financial and other data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not indicative of the results to be expected in the future. Our financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the International Accounting Standards Board ("IFRS").

        The summary consolidated statement of comprehensive income data for each of the years in the three-year period ended December 31, 2010 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated balance sheet data as of June 30, 2011 and the summary consolidated statement of comprehensive income data for the six months ended June 30, 2010 and 2011 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. In the opinion of management, these unaudited interim consolidated condensed financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for these periods. Results from interim periods are not necessarily indicative of results that may be expected for the entire year.

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (in thousands, except share and per share data)
 

Consolidated Statement of Comprehensive Income Data:

                               

Revenues

  $ 14,970   $ 25,309   $ 48,495   $ 20,238   $ 37,874  

Cost of revenues

    1,833     2,169     4,084     1,782     2,344  
                       

Gross profit

    13,137     23,140     44,411     18,456     35,530  

Operating costs:

                               

Sales and marketing

    1,207     1,760     3,667     1,448     2,738  

Research and development

    1,103     1,324     3,541     1,299     2,759  

General and administrative(1)

    1,473     8,242     11,275     5,528     4,216  
                       

Total operating costs

    3,783     11,326     18,483     8,275     9,713  
                       

Operating profit

    9,354     11,814     25,928     10,181     25,817  

Finance income and expenses, net

    2,165     223     2,882     3,335     1,950  
                       

Profit before income tax

    7,189     12,037     23,046     6,846     27,767  

Income tax

    1,553     3,306     5,837     2,457     4,794  
                       

Profit

    5,636     8,731     17,209     4,389     22,973  

Foreign exchange differences

            (6 )       (10 )
                       

Comprehensive income

  $ 5,636   $ 8,731   $ 17,203   $ 4,389   $ 22,963  
                       

Basic and diluted earnings per share

  $ 31.31   $ 48.51   $ 95.61   $ 24.38   $ 127.63  
                       

Weighted average number of shares used in computing basic and diluted earnings per share(2)

    180,000     180,000     180,000     180,000     180,000  
                       

Pro forma basic and diluted comprehensive income per share(3)

              $ 95.57         $ 127.57  
                             

Weighted average number of shares used in computing pro forma basic and diluted comprehensive income per share

                180,000           180,000  
                             

Dividends declared per share:

                               

Czech korunas

  CZK 188.9   CZK 611.1   CZK 1,666.7   CZK 1,666.7   CZK  

U.S. dollars

  $ 12.1   $ 33.6   $ 79.5   $ 79.5   $  

 

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  As of June 30, 2011
 
  Actual   Pro Forma(4)   Pro Forma
As
Adjusted(4)
 
  (in thousands)

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

  $ 84,257        

Deferred revenues

    53,492        

Working capital(5)

    44,442        

Total assets

    104,600        

Total borrowings

           

Total liabilities

    62,006        

Stockholders' equity

    42,594        

 

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (in thousands, except operating data)
 

Supplemental Financial Metrics:

                               

Bookings(6)

  $ 22,658   $ 37,158   $ 63,799   $ 27,834   $ 46,981  

Free cash flow(6)

    13,598     21,135     37,112     17,575     30,181  

Adjusted comprehensive income(6)

    7,432     12,378     23,939     11,450     20,661  

Supplemental Operating Metrics:

                               

Number of actively protected devices at period end (in millions)(7)

    62.8     88.0     119.0     95.7     131.6  

Bookings per protected device (in cents)(8)

    36.1¢     42.2¢     53.6¢     29.1¢     35.7¢  

(1)
Includes stock-based compensation expense of $4.5 million recorded in 2009, $4.9 million in 2010, $3.3 million in the six months ended June 30, 2010 and $0.6 million in the six months ended June 30, 2011. We did not incur any additional stock-based compensation expense during any other period presented.

(2)
See footnote 15 to our annual consolidated financial statements included elsewhere in this prospectus for an explanation of the number of shares used in calculating basic and diluted earnings per share.

(3)
Pro forma basic and diluted comprehensive income per share and pro forma weighted number of average shares gives effect to the automatic conversion of all outstanding shares of preferred stock into         shares of common stock on a one-for-one basis immediately prior to the closing of this offering.

(4)
Pro forma gives effect to the declaration and payment of an interim dividend of $22.0 million that we intend to pay to our existing stockholders in the fourth quarter of 2011 in addition to a special dividend of $         that we intend to pay to our existing stockholders immediately prior to the closing of this offering. Pro forma as adjusted additionally gives effect to our receipt of net proceeds of $          million from the sale by us of         shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the initial public offering price range on the cover of this prospectus, after deducting the underwriting discounts and estimated offering expenses payable by us.

(5)
Working capital is defined as total current assets minus total current liabilities.

(6)
See "—Supplemental information" for how we define and calculate bookings, free cash flow and adjusted comprehensive income, a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS measures, and a discussion about the limitations of these non-IFRS financial measures.

(7)
Defined as the number of computers or other Internet-connected devices with at least one update downloaded in the 30 days before the end of the period.

(8)
Defined as bookings during the applicable period divided by the average number of actively protected devices during the last month of the period.

 

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Supplemental information

Bookings

        Bookings is a non-IFRS financial measure consisting of all amounts invoiced to customers during a specified period and is important since it corresponds directly to our near-term cash flow. Bookings includes amounts from sales of software licenses (which are deferred and recognized in revenues over the terms of the licenses), as well as amounts from cross-distribution and cross-selling arrangements (which are fully recognized in the period in which they are generated). Bookings can be derived by adding the change in deferred revenues between the start and end of a period to the revenue recognized during the same period. The following table reconciles revenues, the most directly comparable IFRS measure, to bookings for the periods presented:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (in thousands)
 

Reconciliation of revenues to bookings:

                               

Revenues

  $ 14,970   $ 25,309   $ 48,495   $ 20,238   $ 37,874  

Change in deferred revenues

    7,688     11,849     15,304     7,596     9,107  
                       

Bookings

  $ 22,658   $ 37,158   $ 63,799   $ 27,834   $ 46,981  
                       

        We use bookings internally to evaluate our results of operations, generate future operating plans and assess the performance of our company. While we believe that this non-IFRS financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenues recognized in accordance with IFRS.

Free cash flow

        Free cash flow is a non-IFRS measure defined as net cash flows from operating activities minus capital expenditures. The following table reconciles net cash flows from operating activities, the most directly comparable IFRS measure, to free cash flow:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (in thousands)
 

Reconciliation of net cash flows from operating activities to free cash flow:

                               

Net cash flows from operating activities

  $ 14,572   $ 24,102   $ 40,003   $ 17,856   $ 30,485  

Capital expenditures(1)

    (974 )   (2,967 )   (2,891 )   (281 )   (304 )
                       

Free cash flow

  $ 13,598   $ 21,135   $ 37,112   $ 17,575   $ 30,181  
                       

(1)
Capital expenditures include both intangible expenditures (such as capitalized research and development expenses) and tangible expenditures (such as property, plant and equipment). Since February 2010, research and development expenses no longer meet the IFRS criteria for capitalization. Acquisition of intangible assets in 2010 is also affected by a one-time purchase of trademarks and domains for $2.1 million.

        We use free cash flow to evaluate our business because, although it is similar to net cash flows from operating activities, we believe it typically presents a more conservative measure of cash flows as purchases of fixed assets, software developed for internal use and website development costs

 

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are necessary components of ongoing operations. While we believe that this non-IFRS financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for net cash flows from operating activities presented in accordance with IFRS.

Adjusted comprehensive income

        Adjusted comprehensive income is a non-IFRS financial measure defined as comprehensive income excluding stock-based compensation expenses and the effect of exchange rate changes on cash and cash equivalents held in foreign currencies. The following table reconciles comprehensive income, the most directly comparable IFRS measure, to adjusted comprehensive income:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (in thousands)
 

Reconciliation of comprehensive income to adjusted comprehensive income:

                               

Comprehensive income

  $ 5,636   $ 8,731   $ 17,203   $ 4,389   $ 22,963  

Stock-based compensation

        4,465     4,919     3,339     556  

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

    1,796     (818 )   1,817     3,722     (2,858 )
                       

Adjusted comprehensive income

  $ 7,432   $ 12,378   $ 23,939   $ 11,450   $ 20,661  
                       

        We present adjusted comprehensive income as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by eliminating the impact on our results of operations caused by changes in foreign exchange rates that affect cash and cash equivalents denominated in currencies other than our functional currency (affecting finance income and expenses, net) and non-cash charges resulting from stock-based compensation (affecting our operating costs). Because adjusted comprehensive income facilitates internal comparisons of operating performance on a more consistent basis, we also use adjusted comprehensive income in measuring our performance relative to that of our competitors. While we believe that this non-IFRS financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for comprehensive income presented in accordance with IFRS.

        Other companies, including companies in our industry, may calculate bookings, free cash flow and adjusted comprehensive income differently or not at all, which reduces their usefulness as a comparative measure. You should consider bookings, free cash flow and adjusted comprehensive income along with other financial performance measures, including revenues, net cash flow provided by operating activities and comprehensive income, and our financial results presented in accordance with IFRS.

 

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Risk Factors

        This offering and an investment in our common stock involve a high degree of risk. You should consider carefully the risks described below and all other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock would likely decline and you might lose all or part of your investment.

Risks related to our business and our industry

Our business and results of operations may be adversely affected if our user community does not agree with our business strategy.

        One of our core values is to make strategic decisions based on the best interest of our user community, which we believe is essential to maintaining long-term relationships with our users. Therefore, we have historically forgone, and may in the future forgo, certain expansion or short-term revenue opportunities that we do not believe are in the best interests of our user community. We believe that a key element in our success to date has resulted from tech-savvy users who have supported our products and solutions at no cost both through recommendations and through providing support to other users via our online forum. For example, based on a recent user survey, nearly 60% of our new users came to us through personal recommendations. In 2010, we logged over 57 million page views in our technical support forum where substantially all responses are provided by users. These users may not agree with our business strategies going forward. In particular, as we generate revenues in the future and, as a public company, disclose the amount of these revenues and our profitability, the loyalty of our user community may be adversely affected, leading them to cease using, recommending or supporting our products. A loss of recommendations and support from our user community could result in a decline in the growth rate and size of our user community and impact sales of our premium paid products, which could lead to higher marketing and technical support expenses, all of which could materially and adversely affect our profitability and undermine our freemium business strategy.

We operate in a highly competitive environment and may not be able to compete successfully.

        The market for security software products is intensely competitive and we expect competition to intensify in the future. Our competitors include other security software companies employing the freemium business model, principally AVG Technologies. In addition, Microsoft Corporation offers Microsoft Security Essentials, a free anti-malware product for its most recent Windows operating systems, and is expected to begin offering a built-in antivirus program for its upcoming Windows 8 platform, scheduled for release in late 2012. Industry analysts estimate that approximately one quarter of users switch to a new computer each year, and the majority of computers run Windows operating systems. With a built-in Windows antivirus program, purchasers of new computers may not look to install security software, such as our products, in addition to the Microsoft software that is or will be pre-installed on their computers. Other competitors in the security software industry, with whom we compete with respect to both free and premium paid products, also include traditional security software providers, such as Symantec, McAfee (recently acquired by Intel), Trend Micro and Kaspersky Lab. Symantec has recently attempted to enter the freemium market through the acquisition of PC Tools, a free but less comprehensive version of its traditional antivirus software. Many of these companies have significantly greater brand recognition and greater financial, technical, marketing and other resources than we do. In addition, in order to more actively promote their products, computer manufacturers, such as Dell or Hewlett-Packard or semiconductor chip manufacturers, such as Intel, may bundle security software products and solutions competitive with ours in their products and solutions or may limit our access to standard product interfaces and

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thereby inhibit our ability to develop products for their platforms. Users may accept these bundled products and solutions rather than separately purchasing our products and solutions. Moreover, new entrants into the security software industry, including those in emerging markets, may become our direct competitors and erode our market share. Our results of operations will be materially and adversely affected if our competitors succeed in marketing products with better performance, functionality or at lower prices than our products.

If we fail to develop and introduce new products and functionalities, and keep up with rapid changes in technologies, malware and virus threats, our business may be materially and adversely affected.

        The security software industry is characterized by rapid technological change. Our future success will depend on our ability to respond to rapidly changing threats and improve the performance and reliability of our products and solutions. Development and introduction of products and functionalities involve a significant commitment of time and resources and is subject to a number of risks and challenges, including the following:

        Our revenues and competitive position could be materially and adversely affected if we do not succeed in keeping pace with the rapid technological change in the security software industry or if our new products and product upgrades fail to achieve widespread acceptance.

We have experienced a high growth rate of our users, revenues and adjusted comprehensive income in recent years and do not anticipate being able to sustain the same growth rate in the future.

        Our growth rate to date has reflected rapid acquisition of users in line with our freemium business model through which we provide users with a comprehensive and high-quality security software product that can be used for free for an unlimited period. Our strategy is to continue

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growing our user community by providing the best possible free product to our users and developing long-term relationships with them. We believe that growing our user community will also provide us with a broader platform for offering premium paid products and solutions. We expect that we will be unable to maintain the rapid growth in protected devices that we have experienced in recent years. In that event, in order to maintain or continue increasing our revenues, we will seek to increase the number of users that purchase or upgrade to our premium paid products or otherwise increase our revenues per user by generating revenues from cross-selling opportunities or the sale or distribution of value-added solutions. From 2008 through 2010, we experienced a compound annual growth rate of 37.7% in our number of protected devices, 80.0% in our revenues and 79.5% in our adjusted comprehensive income. Nevertheless, we anticipate that we will be unable to maintain the same growth rate of revenues and adjusted comprehensive income and expect our long-term annual revenue growth rate and adjusted comprehensive income margin to be lower than they are currently. The challenge in maintaining or increasing our revenues may be compounded if we need to reduce the price of our premium paid products as we have done in the past.

We face significant challenges introducing solutions for devices other than personal computers, such as mobile phones, smartphones and tablet computers.

        The number of people accessing the Internet through devices other than Windows-powered personal computers, including mobile phones, smartphones, tablets or other computers powered by other operating systems, has increased dramatically in the past few years and is projected to continue to increase. A key element of our growth strategy is the development of security products for these mobile computing devices. The mobile device market is characterized by the frequent introduction of new products and solutions, short product life cycles, especially for hardware devices, evolving industry standards, continuous improvement in performance characteristics, rapid adoption of technological and product advancements, as well as price sensitivity on the part of users. As new devices and new platforms are continually being released, we may need to devote significant resources to the creation, support and maintenance of products and solutions for such devices and it is difficult to predict the challenges we may encounter in their development. While we launched our first free mobile device security product during the fourth quarter of 2011 for the Android operating system with functionalities such as anti-theft and firewall protection, we may not be successful in penetrating the mobile market through our existing user community. We may incur significant additional costs if we need to use traditional marketing and distribution channels. Additionally, we may incur additional costs in order to adapt our current functionalities to other operating systems, such as BlackBerry OS and Windows Mobile, and we may face technical challenges adapting our products to different versions of already supported operating systems, such as Android variants offered by different mobile phone manufacturers. Moreover, other security software companies launched freemium and paid mobile device security products and solutions earlier than we did, and could potentially impede our successful penetration into the mobile device security market. If we are not able to create and support additional products and solutions for these devices or if users of these devices do not widely adopt products and solutions we develop, we may be unable to compete in these markets and achieve our desired growth. As a result, our business and results of operations could be materially and adversely affected.

Our growth prospects may be adversely affected if consumers and small to medium businesses, or SMBs, do not perceive the need to secure mobile devices or if mobile device manufacturers and operators impede our entry into the mobile device security market.

        The mobile device security market is relatively new and underpenetrated, as mobile device users often do not perceive the need to secure mobile devices because they are unaware of the threats. We and other mobile device security software providers face significant challenges in

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marketing products for devices manufactured by Apple, which has a strong presence in the tablet computer and smartphone markets. Apple customers generally perceive security as unnecessary or less critical. Moreover, the designs of some mobile platforms, most notably Apple iOS and Microsoft Windows Phone, do not currently permit the integration of products that offer meaningful malware protection. Applications on these platforms run in isolated environments and do not protect other applications and data. While some companies have attempted to introduce malware protection products for these platforms, the functionality of these products has been limited to scanning individual files imported into the application's environment and do not provide any meaningful real-time protection to users. In the future, we may also face competition from other mobile device manufacturers and from operators who could also exclude us and other developers of mobile device security software from segments of the mobile device security market. These factors could further impede our penetration into the mobile device security market, which could materially and adversely affect our business, financial growth and results of operations.

Our revenues and comprehensive income may not increase even if we continue to gain additional users.

        Numerous factors could adversely impact the growth of our revenues and comprehensive income even if we continue to grow our user community. In particular, we have traditionally incorporated premium functionalities into updated versions of our free product. As a result, users may find our free product sufficient for their needs and not purchase our premium paid products. Since we routinely migrate some of the functions from our premium paid products into our free products, we must continue to develop new and enhanced functionalities for our premium paid products in order to attract new premium users. To date, a meaningful number of premium paid users have not renewed their licenses after the initial subscription period, which is usually one, two or three years. We do not automatically renew our users' licenses as we believe such a practice would adversely affect our reputation with our user community. We cannot assure you that our revenues will grow or remain at current levels even if we continue to gain new users since the proportion of existing users who do not renew is also high. A high attrition rate of users is typical in our industry since users replace their computers every few years and may not reinstall our software on their new computer or may delay doing so. If we need to expend additional resources in order to maintain existing users, it could have a significant impact on our business and financial conditions. Alternatively, if we do not take measures to improve the attrition rate, it could have a significant impact on the size of our user base in the long-term.

If we fail to expand our user community in key markets, our financial condition could be materially and adversely affected.

        Currently, our largest markets are the United States, France, Brazil and United Kingdom, which accounted for approximately 29%, 18%, 6% and 5% of our bookings, respectively, in the six months ended June 30, 2011. Unlike most of our key competitors, a majority of our actively protected devices are located in countries where English is not the primary language, with these countries accounting for approximately 80% of our actively protected devices as of October 31, 2011. We intend to focus significant resources on growing our user community in English-speaking countries, most notably, in the United States. In the United States, we face challenges of relatively low awareness of our brand compared to our competitors and a perception that free products are not as effective as paid products. Moreover, governments of a number of countries in which we are seeking to expand our user community, such as China, South Korea and Russia, have passed laws requiring government approval and testing of security products. In some cases, the legislation requires us to provide to governmental authorities information that we consider to be trade secrets. Such legislation, if enforced, may prevent us from growing our user community in those markets. If we fail to expand our user community and to penetrate these or other new markets that we target,

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our revenues and revenue growth rate may decrease over time, which could materially and adversely affect our financial condition.

Defects or vulnerabilities in our products and solutions may lead to negative publicity, damage to our reputation, and cause a decline in our revenues and comprehensive income.

        Our users rely on our security software products and related solutions for safe access to the Internet. New malware and malicious websites are continuously being created and modified, and the detection technologies underlying our products and solutions may not immediately detect all forms of malware or malicious websites to which our users are exposed. Additionally, our users may experience errors, failures or bugs in our products that are undetected by our pre-launch testing, especially when our products and solutions are first introduced or when updates are first released. Moreover, early access to the full range of newly released malware is important, since signature-based detection and blocking methods rely on this. If our current methods of receiving malware samples break down, our detection and protection rates may decline as our virus database will not be as up-to-date as it is currently and we may not be able to produce countermeasures to threats that are not detected as early as possible. In the past, we discovered software errors, failures and bugs in certain of our products after their introduction and, in some cases, experienced delayed or lost revenues as a result of these errors. Failure to detect malware or malicious websites, defects in our products or complications or disruptions caused by our periodic upgrades, may result in security breaches, disruption or damage to our users' computers or networks and theft of confidential information or other negative consequences, which may result in negative publicity, damage to our brand, withdrawals from contracts, loss of or delay in market acceptance of our products, loss of competitive position or claims by users or others.

        Furthermore, security software products and solutions may falsely identify programs or websites as malicious or otherwise undesirable (i.e., false positives). Parties whose programs are incorrectly blocked by our products or solutions, or whose websites are incorrectly identified as unsafe or malicious, may seek redress against us for labeling them as malicious and interfering with their businesses. Moreover, these false positives may render a computer's entire operating system unusable and disrupt or damage our users' computers. We and other providers of security software products have experienced problems with false positives in the past that have impacted large numbers of users. Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays, or cessation of our product licensing, which could cause us to lose both existing and potential users and could materially and adversely affect our results of operations.

We derive a portion of our revenues from Google under a contract that expires in November 2012.

        In September 2009, we entered into a promotion and distribution agreement with Google that terminates on November 30, 2012 or earlier, if we reach a pre-determined limit on payments in accordance with the terms of the contract. Under the agreement, we receive fees for the download, installation and first use of the Google Chrome browser and Toolbar by our end-users. We derived less than 10% of our revenues in 2010 and we derived 15.0% of our revenues in the first six months of 2011 from this agreement. If Google elects not to enter into a new agreement with us or if we elect not to renew the agreement, and we are unable to replace it with an alternative revenue stream, our revenues and total comprehensive income may be adversely impacted.

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We currently rely on one eCommerce service provider to process and collect a significant portion of our revenues.

        Our online sales model enables consumers and SMBs to purchase our products through our website. The substantial majority of our online sales are processed by Digital River, Inc. and Digital River Ireland Limited (together, "Digital River"), pursuant to a hosted reseller agreement with us which we have renewed in the past, but which currently terminates in September 2012. Digital River collects payments and user data from the transactions for us. In 2010, online sales processed by Digital River accounted for 71% of our revenues. Our agreement with Digital River includes an exclusivity provision that prohibits us from using another host reseller in certain of our key markets until June 2012 for purchases initiated through our website, with exceptions to the exclusivity provision, such as for transactions with users located in key markets where Digital River is unable to support a payment method for such locale within an agreed period of time. Any disruption to Digital River's ability to provide us with services could materially and adversely affect our operations and, in the event that Digital River is unable or unwilling to provide us services, it may take us a number of days or weeks to fully transition to one of our other eCommerce service providers. Additionally, we may in the future decide to perform these operations ourselves, which may increase the demand on our personnel and technological resources. Our business and results of operations could be materially and adversely affected as a result of any such occurrence.

We are subject to risks related to product concentration and our efforts to diversify our revenue streams through the growth of value-added solutions may not be successful.

        We derive the substantial majority of our revenues from our Pro Antivirus and Internet Security products and expect these products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of these products is therefore critical to our future success. A significant shift in consumer demand away from these products or our failure to maintain our current market position could reduce our sales or the prestige of our brands in our markets, which could harm our business. We recently commenced offering value-added solutions, such as CreditAlert Premium and Online Backup, which we believe will help diversify our revenue streams. While we have not yet derived any meaningful revenues from our newly launched value-added solutions, we expect to derive a meaningful portion of our revenues from these solutions in the future. The success of our value-added solutions depends on our ability to respond adequately and in a timely manner to accommodate our users' needs and source suitable third-party products and solutions on reasonable terms. If these and future value-added solutions are not accepted by our users, we may not achieve our desired growth and, as a result, our financial condition and results of operations may be materially and adversely affected. Developing new solutions such as these also entails risks and we cannot be certain that we will succeed in making substantial sales of these products. Additionally, we only intend to partner with third parties that offer products that we believe our users will perceive as beneficial to them. However, we may find it difficult to identify or enter into agreements with such third parties, which could have an adverse impact on our business and results of operations.

We may be unable to protect our intellectual property rights and proprietary information and prevent third parties from making unauthorized use of our products and technology.

        Our intellectual property rights are important to our business. We believe that the know-how incorporated into our products and the speed with which we are required to react to new online threats makes it difficult to copy our products or replicate their functionalities. We rely on a combination of confidentiality clauses, copyrights and trademarks to protect our intellectual property and know-how. We customarily require our employees and independent contractors to execute confidentiality agreements or otherwise agree to keep our proprietary information confidential when

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their relationship with us begins. Typically, our employment contracts also include clauses requiring our employees to assign to us all of the inventions and intellectual property rights they develop in the course of their employment and to agree not to disclose our confidential information. Despite our efforts, our know-how and trade secrets could be disclosed to third parties, which could cause us to lose any competitive advantage resulting from such know-how or trade secrets. Because our trade secrets and know-how, such as our virus databases and development tools, are stored electronically and thus are highly portable, we attempt to reduce access to our trade secrets by physically protecting our servers through the use of closed networks and with physical security systems that prevent their external access. We also seek to minimize disclosure of our source code to users or other third parties. We cannot be certain, however, that these measures will adequately prevent third parties from accessing our software, code or proprietary information. In addition, third parties could successfully reverse engineer our products. If any of our trade secrets, know-how or other technologies not protected by a patent or otherwise were to be disclosed or independently developed by a competitor, our business, financial condition and results of operations could be materially and adversely affected. Our click-wrap license agreements are not signed by licensees and therefore may be unenforceable under the laws of some jurisdictions. We currently do not rely on patents to protect our solutions and the nature of our solutions means that in some countries or regions, for example, in Europe, we may be unable to seek patent protection to the same extent as in the United States. Furthermore, the laws of some foreign countries do not offer a sufficient level of protection of our proprietary rights, and we face greater risk of being unable to prevent unauthorized use of our products in those countries.

        We have been in the past and may in the future be subject to opposition proceedings with respect to applications for registrations of our intellectual property, including but not limited to our trademarks. While we aim to acquire adequate protection of our brand through trademark registrations in all key markets, occasionally third parties may have already registered identical or similar signs for products or solutions that also address the software market. As we rely in part on brand names and trademark protection to enforce our intellectual property rights, efforts by third parties to limit use of our brand names or trademarks and barriers to our registration of our brand names and trademarks in various countries may restrict our ability to promote and maintain a cohesive brand throughout our key markets. There can also be no assurance that pending or future United States or foreign applications will be approved in a timely manner or at all, or that such registrations will effectively protect our intellectual property.

        From time to time, we may discover that third parties are infringing or otherwise violating our intellectual property rights. To protect our intellectual property rights, we may become involved in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays to the development or launch of our products, materially disrupt the conduct of our business or adversely affect our revenues, financial condition and results of operations. We may choose not to pursue patents or other protection for innovations that later turn out to be important or we may choose not to enforce our intellectual property rights. Some foreign laws do not protect intellectual property rights to the same extent as the laws of the United States. If we are unable to adequately protect our trademarks, third parties may use our brand names or trademarks similar to ours in a manner that may cause confusion to our users and confusion in the market, which could decrease the value of our brand. Any infringement of our intellectual property rights by third parties may eliminate any competitive advantage such intellectual property rights provide and harm our results of operations.

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We may become subject to claims of intellectual property infringement by third parties that, regardless of merit, could result in litigation and materially adversely affect our business, results of operations or financial condition.

        There can be no assurance that third parties will not assert that our products and intellectual property infringe, or may infringe, their proprietary rights. Any such claims, regardless of merit, could result in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays, materially disrupt the conduct of our business and have a material and adverse effect on our financial condition and results of operations. As a consequence of such claims, we could be required to pay substantial damages, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop selling some or all of our products or re-brand our products. If it appears necessary, we may seek to license intellectual property that we are alleged to infringe, potentially even if we believe such claims to be without merit. Such licensing agreements may not be available on terms acceptable to us, or at all. If required licenses cannot be obtained, or if existing licenses are not renewed, litigation could result. Litigation is inherently uncertain and any adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others and otherwise negatively affect our business. In the event of a successful claim of infringement against us and our failure or inability to develop non-infringing technology or license the infringed or similar technology, our business, results of operations or financial condition could be materially and adversely affected.

Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our solutions.

        From time to time, we incorporate open source software into our products. For example, we use third-party open source libraries in our antivirus engine for unpacking and decompressing files in various formats, such as ZIP, RAR, 7ZIP and LHA, to scan "inside" these archives. Open source software is accessible, usable and modifiable by anyone, provided that users and modifiers abide by restrictions and requirements imposed by the applicable open source license. Under certain conditions, the use of some open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. We monitor our use of open source code carefully in an effort to avoid situations that would require us to make parts of our core proprietary technology freely available as open source code and we generally use only code licensed under open source licenses that allow us to freely redistribute and sell the resulting products without restriction. However we cannot guarantee that we will not use code governed by more restrictive licenses or that a court will not interpret a license to require certain of our technology to be made available as open source code. Under that circumstance, if we fail to make the code available, we would be in breach of the license which could cause its termination and our liability for copyright infringement or breach of contract. As a result, we may have to take remedial action, such as replacing certain code used in our products, paying a royalty to use some proprietary code, making certain proprietary source code available to others or discontinuing certain products. Furthermore, the original developers of open source code provide no warranties on such code and have no obligation to fix bugs and errors in it. Fixing such bugs and errors may be more difficult and take us longer than fixing code developed by us.

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Our international operations involve risks that could increase our expenses, adversely affect our results of operations and require increased time and attention of our management.

        As a Netherlands-incorporated company with headquarters in the Czech Republic and worldwide distribution of our products and solutions, we are subject to a number of risks resulting from our international operations, including:

We may not be able to manage the growth of our operations effectively.

        Although we have significantly expanded our operations in recent years, almost all of our employees through October 31, 2011 were based in our Prague headquarters. As we seek to expand our user community in existing and new countries and regions, we plan to establish marketing and support operations in a number of countries. We expect this expansion to continue as we grow our user community and explore new opportunities. To manage this growth of our operations and personnel, we need to continuously improve our operational and financial systems and procedures and controls. For example, our customer relationship management software and our enterprise resource planning software will eventually need to be upgraded to a version better suited for global operations. We will also need to train, manage and maintain good relations with a larger and more geographically dispersed employee base. If we fail to manage our expansion

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effectively, our business, results of operations and prospects may be materially and adversely affected.

Our software products and website may be subject to intentional disruption that could adversely affect our reputation and future sales.

        We expect to be an ongoing target of attacks specifically designed to impede the performance of our products and harm our reputation as a company. Similarly, experienced computer programmers may attempt to penetrate our network security or the security of our website and cause interruptions to our services. Because the techniques used by computer programmers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Interference with the proper functioning of our products and solutions or the theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could materially and adversely affect our competitive position, reputation, brand and future sales of our products, which could subject our business to significant disruption and result in monetary and other losses and reputational harm.

Disruption to our Internet infrastructure could adversely affect our reputation and have a material adverse effect on our business and results of operations.

        While a number of key servers are owned by us and operated in-house, we rent our virus update servers, web servers and bandwidth capacity from third-party providers. All of these servers are located in the United States and Europe. We are developing back-up storage for key data; however, there can be no assurance that our back-up storage arrangements or redundant server structure will become operational, or, if they do, will be effective if it becomes necessary to rely on them. Disruption of the servers and/or bandwidth due to technical reasons, natural disaster or other unanticipated catastrophic events, including power interruptions, storms, fires, floods, earthquakes, terrorist attacks and wars could significantly impair our ability to produce continuous updates to our virus definitions and materially and adversely affect our business and results of operations. Additionally, we may be required to invest significant resources to protect against system architecture and network failure and disruption.

We depend on the expertise of key personnel. If these individuals leave or change their roles without effective replacements, our operations may suffer.

        Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense. In particular, the Czech labor market is small and we face challenges in recruiting sales, marketing, eCommerce and virus research personnel in Prague. In the future, we may incur increased expenses to recruit qualified personnel in the Czech Republic or in other countries into which we expand. Additionally, the success of our business is dependent to a large degree on the continued services of our directors and executive officers and our other key personnel who have extensive experience in our industry. If we lose the services of any of these integral personnel and fail to manage a smooth transition to new personnel, our business could suffer. We do not carry key person insurance on any of our executive officers or other key personnel.

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We may be subject to periodic litigation and other regulatory proceedings, which could result in unexpected expense of time and resources that could have a material adverse impact on our results of operation, financial condition and liquidity.

        From time to time we may be called upon to defend ourselves against lawsuits and regulatory actions in the ordinary course of our business. In 2008, 2009 and 2010, we did not record any contingent liability relating to pending litigation. However, any future litigation could generate negative publicity that significantly harms our reputation, which could materially and adversely affect our user community and the number of our paying users. In addition to the related cost, managing and defending litigation and related indemnity obligations can significantly divert management's and the board of directors' attention from operating our business. We may also need to pay damages or settle the litigation with a substantial amount of cash. All of these could have a material adverse effect on our business, results of operation and cash flows.

Our results of operations may be adversely affected by fluctuations in currency exchange rates.

        We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency exchange rates. In 2010, 59.8% of our revenues were denominated in U.S. dollars and 38.5% were denominated in Euros. Conversely, in 2010, 68.0% of our expenses (excluding currency losses and changes in deferred tax) were denominated in Czech korunas, 5.6% in Euros and 26.1% in U.S. dollars. As a result, weakening of the U.S. dollar and the Euro relative to the Czech koruna presents the most significant risk to us. Fluctuations in currency exchange rates may impact our business significantly. For example, assuming a 10% decrease in the U.S. dollar relative to the Czech koruna and assuming no other change, our operating income would have decreased by $1.1 million in 2010 and by $0.7 million in the six months ended June 30, 2011. We do not currently engage in hedging transactions to seek to offset the impact of fluctuations in currency exchange rates. In addition, a significant portion of our cash is held in deposits denominated in Euros and Czech korunas. The change in the U.S. dollar-translated value of these investments during each financial reporting period is a non-cash gain or loss that is reported in our income statement and impacts our results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and qualitative disclosure about market risk—Foreign currency risk."

A meaningful portion of our revenues is derived from emerging markets, such as Brazil, China and Russia, which are subject to greater risks than more developed markets, including legal, economic, tax and political risks.

        Expanding our business into emerging markets may present additional risks beyond those associated with more developed international markets. For example, in China and Russia, we may encounter risks associated with the ongoing transition from state business ownership to privatization. Regulations or restrictions on the use of local credit cards to purchase our products online could constrain our growth in certain countries, such as Russia or Brazil. Moreover, emerging markets have higher instances of piracy and license misuse, and therefore may require additional time, precautions and resources to develop our business and presence in such markets. In any emerging market, we may also face the risks of dealing with inconsistent government policies and encountering sudden currency revaluations. In order to enter new markets in highly regulated countries such as China or Russia, modifications to our business plans or operations to comply with changing regulations or certain actions taken by regulatory authorities may increase our costs of providing our products and solutions and materially and adversely affect our financial condition.

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Increased user demands on our technical support services may adversely affect our relationships with our users and our financial results.

        We offer technical support for our products, primarily in the form of an online forum and, in certain countries, in the form of a call center operated by a third party. We may be unable to respond quickly enough to accommodate short-term increases in user demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors or successfully integrate support for our users. Further user demand for these services, without corresponding revenues, could increase costs and adversely affect our results of operations.

        We have outsourced a substantial portion of our telephone support functions to third-party service providers. If these companies experience financial difficulties, do not maintain sufficiently skilled workers and resources to satisfy our contracts, or otherwise fail to perform at a sufficient level under these contracts, the level of support services to our users may be significantly disrupted, which could materially harm our relationships with these users. In addition, two of our third-party service providers are allowed to cross-sell their services (general support services in the area of electronics/IT) to our users who request support through the call center. If these or other third-party service providers do not maintain the appropriate balance between providing support and cross-selling their solutions, our reputation and relationship with our users could be materially harmed.

Adverse global economic events may harm our business, results of operations and financial condition.

        Since our business model is premised on providing our users with free and high-quality consumer security software, our business may be more susceptible than traditional software companies to users delaying or forgoing decisions to purchase or upgrade to premium paid products during challenging economic conditions. Furthermore, challenging economic conditions can often result in users delaying or forgoing decisions to upgrade their existing hardware or operating system, which can be a catalyst to purchase our premium paid products. As a result, adverse global economic events may harm our business, results of operations and financial condition.

Our business involves significant bookings from Europe, and disruptions in European economies could have a material adverse effect on our operations or financial performance.

        In 2010 and the six months ended in June 30, 2011 we derived 45% and 47% of our bookings, respectively, from European countries. The financial markets remain concerned about the ability of certain European countries, particularly Greece, Ireland and Portugal, but also others such as Spain and Italy, to finance their deficits and service growing debt burdens amidst difficult economic conditions. This loss of confidence has led to rescue measures for Greece, Portugal and Ireland by Euro-zone countries and the International Monetary Fund. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the Euro and the suitability of the Euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries. In addition, the actions required to be taken by those countries as a condition to rescue packages, and by other countries to mitigate similar developments in their economies, have resulted in increased political discord within and among Euro-zone countries. The interdependencies among European economies and financial institutions have also exacerbated concern regarding the stability of European financial markets generally. These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible dissolution of the Euro currency entirely. Should the Euro dissolve entirely, the legal and contractual

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consequences for holders of Euro-denominated obligations would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could adversely affect the value of the Company's Euro-denominated assets and obligations. In addition, concerns over the effect of this financial crisis on financial institutions in Europe and globally could have an adverse impact on the capital markets generally, and more specifically, may cause users to delay or forgo decisions to purchase or upgrade to premium paid products. In addition, this uncertainty could also result in users delaying or forgoing decisions to upgrade their existing hardware or operating system, which can be a catalyst to purchase our premium paid products. Given the scope of our European bookings and user base, persistent disruptions in the European financial markets, the overall stability of the Euro and the suitability of the Euro as a single currency or the failure of a significant European financial institution, could have a material adverse impact on our operations or financial performance.

Failure to adequately protect personal information of our users may adversely affect our business.

        We and our eCommerce service providers handle personally identifiable information pertaining to our users, including payment card and other personal information. Many jurisdictions have adopted privacy, security and data protection laws and regulations intended to prevent improper use and disclosure of personally identifiable information. In addition, some jurisdictions impose database registration requirements for which significant monetary and other penalties may be imposed for failure to comply. These laws, which are subject to change and may be inconsistent, may impose costly administrative requirements, limit our handling of information and subject us to increased government oversight and financial liabilities, all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We rely on search engines and download sites to attract a meaningful portion of our users, and if those search engines or download sites change their listings, increase their pricing or suffer problems, it may limit our ability to attract new users.

        We rely on search engines to attract new users, and many of our users locate our product and website by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic search results are determined and organized solely by automated criteria set by the search engine and a ranking level cannot be purchased. Advertisers can also pay search engines to place listings more prominently in search results in order to attract users to advertisers' websites. While most of the traffic to our website is direct traffic, we rely almost entirely on algorithmic, or organic, searches to attract search traffic to our website. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, our websites may not appear at all or may appear less prominently in search results, which could result in fewer users clicking through to our websites. In addition, our competitors and others have in the past, and may in the future, purchase our name from search services in an attempt to capture potential traffic. Preventing such actions and recapturing potential traffic could increase our expenses.

Fluctuations in our business caused by seasonality or unusual malware activity could cause fluctuations in quarterly bookings and volatility in the market price of our shares of common stock.

        We expect to experience a decline in bookings for all products during the third quarter as a result of low computer usage during the summer months and an increase in sales during the fourth quarter as a result of the December holiday season. In 2010, this seasonality was not clearly visible

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in our quarterly results of operations because the effects of seasonality were offset by the growth of our user community. As the growth rate of our user community slows in the future, we believe that seasonal factors may have a more significant impact on our bookings which may in turn affect our revenues and results of operations. In addition to potential seasonal fluctuations, our business is sensitive to unusual or widely broadcast malware activity. For example, at times, when there have been news stories of significant malware activity, we have experienced a spike in sales followed by increased revenues. Because of the anticipated summer seasonal slow down in future periods and sensitivity to unusual malware activity of our business, results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. These fluctuations may also cause volatility in the market price of our common stock.

Our financial position and results of operations could be materially and adversely affected if we become subject to unexpected taxes.

        For periods through June 30, 2011, we were subject to income tax solely in the Czech Republic. Sales of our products are also subject to tax in a number of jurisdictions. Such taxes include VAT, corporate tax and excise duties. In the Czech Republic and many other jurisdictions, particularly those in emerging markets, there is limited guidance or interpretation of the laws related to these taxes, many of which have not been in force for a significant period. As a result, implementing regulations are often unclear or nonexistent. For example, we have determined our taxable income in the Czech Republic in part based on revenues recognized under Czech Generally Accepted Accounting Principles ("Czech GAAP") pursuant to which 30% of our revenues from sold licenses were recognized immediately and the remaining 70% of our revenues were deferred ratably over the license term. In this instance and with respect to other determinations, few precedents exist and different opinions regarding legal interpretations exist both among and within government authorities and organizations. While we make the significant majority of our sales through third-party hosted resellers who undertake to comply with any local taxing requirements, we do make certain sales ourselves. Furthermore, local taxing authorities could seek to impose penalties on us notwithstanding our agreement with hosted resellers. In addition, our tax position, including matters related to our corporate structure and intercompany transactions, are subject to review and audit by taxing authorities, who may impose significant fines, penalties and interest charges. We have not been subject to an audit by the Czech tax authorities in the past and our taxable returns for the 2008 fiscal year and subsequent periods remain open to audit. If our tax positions were to be disputed by tax authorities, we could be subject to substantial tax liabilities that could have a material adverse effect on our financial position and results of operations.

We have not yet assessed the effectiveness of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

        We will be required to comply with the internal control, evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in our Annual Report on Form 20-F for the year ending December 31, 2013. We have not yet commenced the process of assessing the effectiveness of our internal control over financial reporting. We are just beginning the costly and challenging process of compiling the system and processing documentation needed to comply with such requirements. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective control over financial reporting. Implementation of remedial actions required could result in us incurring additional costs that we did not anticipate and any failure of our internal controls could result in, or increase the risk of, a material misstatement in our financial statements. Even if no such misstatement occurs, if we

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identify one or more material weaknesses in our internal control over financial reporting during the evaluation and testing process, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors express an opinion that our internal control over financial reporting is ineffective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our common stock.

Our auditors identified a material weakness in our internal control over financial reporting in connection with our most recent audit.

        Although we are not yet subject to the certification or attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, in the course of auditing our financial statements for the year ended December 31, 2010, our independent registered public accounting firm considered our internal controls and identified a deficiency that it concluded represented a material weakness. In particular, our auditors noted that the design of our financial statement closing process was deficient because we had insufficient personnel with appropriate experience, which also led to a lack of segregation of duties and insufficient review of financial statement closing journal entries. Our auditors assessed that these circumstances resulted in misstatements in areas of deferred taxes, foreign exchange translation and certain accruals that were corrected during the audit process. Under auditing standards established by the U.S. Public Company Accounting Oversight Board, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The finding by our independent registered public accounting firm reflects aspects of our internal control infrastructure as of December 31, 2010. We have invested in our internal control infrastructure in preparation for being a public company; however, we cannot provide any assurance that we have remedied the material weakness identified by our independent registered public accounting firm or there will not be other material weaknesses that our independent registered public accounting firm or we will identify. If we identify such issues or if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with listing requirements of our stock exchange.

We may not be able to integrate future acquisitions, or those acquisitions may not provide the expected benefits.

        Any acquisition that we effect will be accompanied by a number of risks, including the difficulty of integrating the technologies of the acquired business, the potential disruption of our ongoing business, the potential distraction of management, expenses related to the acquisition and potential unknown liabilities associated with acquired businesses. Even if we obtain indemnification from the seller of an acquired business, the indemnification may be insufficient or unavailable for the particular liabilities incurred. Any inability to integrate completed combinations or acquisitions in an efficient and timely manner could have an adverse impact on our results of operations. In addition, we may not recognize the expected benefits in connection with a future acquisition. If we are not successful in completing acquisitions that we pursue in the future, we may incur substantial expenses and devote significant management time and resources without a successful result. In addition, future acquisitions could require the use of substantial portions of our available cash or result in dilutive issuances of securities.

Risks related to our common stock and this offering

Our share price may be volatile, and you may lose all or part of your investment.

        The initial public offering price for the common stock sold in this offering will be determined by negotiation among us, the selling stockholders and representatives of the underwriters. This price

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may not reflect the market price of our common stock following this offering and the price of our common stock may decline. In addition, the market price of our common stock could be highly volatile and may fluctuate substantially as a result of many factors, including:

        In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation we could incur substantial costs and our management's attention and resources could be diverted.

There has been no prior public market for our common stock, and an active trading market may not develop.

        Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using our shares as consideration.

If we do not meet the expectations of equity research analysts, if they do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

        The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. The analysts' estimates are based upon their own opinions and are often different from our estimates or expectations. If our results of operations are below the estimates or expectations of public market analysts and investors, our stock price could decline. Moreover, the price of our common stock could decline if one or more securities analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

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The significant stock ownership positions of our co-founders and Summit will limit your ability to influence corporate matters.

        Following the completion of this offering, our co-founders, Eduard Kucera and Pavel Baudis, will each beneficially own         % of our common stock, totaling         % of our common stock. If the underwriters exercise their over-allotment option in full, these percentages will decrease to         % and         %, respectively, and         % in total. As a result of this concentration of stock ownership, Messrs Kucera and Baudis on their own will have sufficient voting power to effectively control all matters submitted to our stockholders for approval that do not require a special majority. These matters include:

        In addition, following the completion of this offering, Summit will beneficially own         % of our common stock or         % if the underwriters exercise their over-allotment option in full. As a result, Summit will be able to exercise significant influence over certain matters put to a vote of our stockholders, especially those that require a special majority.

        This concentration of ownership of our common stock could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our common stock that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our stock. The interests of Messrs Kucera and Baudis and Summit may not always coincide with the interests of our other stockholders. This concentration of ownership may also adversely affect our stock price.

We currently intend to take advantage of              's "controlled company" exemption from certain corporate governance requirements to a limited extent, and therefore, our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements.

        As a result of the number of shares beneficially owned by Messrs Kucera and Baudis as well as Summit, after the completion of this offering, we will be eligible to take advantage of the "controlled company" exemption under             corporate governance rules. A "controlled company" is a company of which more than 50% of the voting power is held by an individual or group of stockholders. Pursuant to the "controlled company" exemption, a company is not required to comply with the requirements that: (1) a majority of its board of directors consist of independent directors, and (2) it has a compensation committee and a nominating and governance committee composed entirely of independent directors with a written charter addressing each committee's purpose and responsibilities. See "Management—Board committees." We currently intend to rely on this exemption only to the extent necessary to permit                  to serve on our compensation committee and our nominating and governance committee, respectively, even though they do not satisfy              's definition of an "independent director" because each was one of our founders and an employee within the last three years. If available to us, we may elect to use the controlled company exemption more broadly in the future. If we do that, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of                  .

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As a foreign private issuer whose shares are listed on       , we may in the future elect to follow certain home country corporate governance practices instead of certain       requirements.

        We have elected to apply the corporate governance rules of       even though, as a foreign private issuer, we are permitted to follow our home country corporate governance practices, those of the Netherlands, instead of these requirements. Nevertheless, we may in the future follow home country corporate governance practices instead of some or all of             's requirements, including in the event we are no longer eligible for the "controlled company" exemption. For example, we may follow our home country practices to permit                  , who do not currently satisfy compensation committee independence standards, to serve on our compensation committee and our nominating and governance committee, respectively, if the controlled company exemption is not available to us. A foreign private issuer that elects to follow a home country practice instead of                  requirements must submit          in advance a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission each such requirement that it does not follow and describe the home country practice followed instead of any such requirement. The Dutch Corporate Governance Code (the "Dutch Code") is based on a "comply or explain" principle. As a result, we could opt out of both U.S. and Dutch corporate governance rules and/or provisions. In addition, certain         corporate governance requirements are not reflected in Dutch law, such as the requirements to obtain stockholder approval for certain dilutive issuances of shares, including the sale of our shares of common stock in below market private placement transactions if greater than 20% of our pre-transaction issued and outstanding shares are sold, or are subject to different approval requirements, such as in connection with the establishment or amendment of equity compensation plans. See "Management—Corporate governance." Accordingly, our stockholders may not be afforded the same protection as provided under         corporate governance rules.

        In addition, as a foreign private issuer, we will be exempt from the rules and regulations under the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), related to the furnishing and content of proxy statements, and our officers, directors and principal stockholders will be exempt from the reporting and short swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.

We do not comply with all the provisions of the Dutch Corporate Governance Code. This may affect your rights as a stockholder.

        We are subject to the Dutch Code, which applies to all Dutch companies listed on a government-recognized stock exchange, whether in the Netherlands or elsewhere, including                  . The Dutch Code contains principles and best practice provisions for boards of directors, stockholders and general meetings of stockholders, financial reporting, auditors, disclosure, compliance and enforcement standards. The Dutch Code is based on a "comply or explain" principle. Accordingly, companies are required to disclose in their annual reports, filed in the Netherlands, whether they comply with the provisions of the Dutch Code relating to the board of directors and, if they do not comply with those provisions, to give the reasons for such non-compliance. The principles and best practice provisions apply to the board (relating to, among other matters, the board's role and composition, conflicts of interest and independence requirements, board committees and remuneration), stockholders and the general meeting of stockholders (for example, regarding anti-takeover protection and obligations of a company to provide information to its stockholders) and financial reporting (such as external auditor and internal

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audit requirements). We have decided not to comply with a number of the provisions of the Dutch Code because such provisions conflict, in whole or in part, with the corporate governance rules of              and U.S. securities laws that apply to our company whose common stock is traded on             , or because such provisions do not reflect customary practices of U.S. public companies. See "Management—Corporate governance" for details on those provisions of the Dutch Code that we do not intend to comply with following this offering. This may affect your rights as a stockholder and you may not have the same level of protection as a stockholder in a Dutch company that fully complies with the Dutch Code.

The market price of our common stock could be negatively affected by future sales of our common stock.

        After this offering, there will be         shares of our common stock outstanding. Sales by us or our stockholders of a substantial number of our shares of common stock in the public market following this offering, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares acquired by our "affiliates," as that term is defined in Rule 144 under the U.S. Securities Act of 1933. Following completion of this offering, approximately       % of our outstanding shares of common stock (or       % if the underwriters exercise their over-allotment option in full) will be considered restricted stock and will be held by our affiliates. Such securities can be resold into the public markets in the future in accordance with the requirements of Rule 144, including volume limitations, manner of sale requirements and notice requirements. See "Shares Eligible for Future Sale."

        We, our executive officers, directors and all of our stockholders have agreed with the underwriters that, subject to limited exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of common stock, or cause a registration statement covering any shares of common stock to be filed except for the common stock offered in this offering, without the prior written consent of the designated representatives of the underwriters, who may, in their sole discretion and at any time without notice, release all or any portion of the shares subject to these lock-up agreements.

        Starting six months after the closing of this offering, the founders and Summit are entitled to require that we register their shares under the U.S. Securities Act of 1933 for resale into the public markets. All shares sold pursuant to an offering covered by such registration statement will be freely transferable. See "Certain Relationships and Related Party Transactions—Amended and restated stockholders' agreement."

        In addition to our current stockholders' registration rights,       of our shares of common stock are issuable under currently outstanding stock options granted to employees. Following this offering, we intend to file a registration statement on Form S-8 under the U.S. Securities Act of 1933 registering       shares under our stock incentive plans. Shares included in such registration statement will be available for sale in the public market immediately after such filing except for shares held by affiliates who will have certain restrictions on their ability to sell.

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We currently do not expect to pay any dividends and cannot provide assurances regarding the amount or timing of dividend payments, if any, in the future.

        Although we have paid dividends in the past, we currently intend to retain all future earnings, if any, to finance the operation and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition, future prospects and other factors our board of directors may deem relevant. Payment of future dividends may be made only to the extent stockholders' equity exceeds the sum of our paid-up and called-up capital stock plus the reserves that must be maintained in accordance with provisions of Dutch law and our articles of association. We cannot provide assurances regarding the amount or timing of dividend payments and may decide not to pay dividends in the future. As a result, you should not rely on an investment in our shares of common stock to provide dividend income and the success of an investment in our shares of common stock may depend upon an appreciation in their value. There is no guarantee that our shares of common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

        The initial public offering price of our common stock substantially exceeds the net tangible book value per share of our common stock immediately after this offering. Therefore, based on an assumed public offering price of $       per share, the midpoint of the initial public offering price range set forth on the cover page of this prospectus, if you purchase our shares of common stock in this offering, you will suffer, as of June 30, 2011, immediate dilution of $       , per share or $       if the underwriters exercise their over-allotment option in full, in net tangible book value after giving effect to the sale of       shares of common stock in this offering at an initial public offering price of $       per share less underwriting discounts and commissions and the estimated expenses payable by us and the selling stockholders. If outstanding options to purchase our shares of common stock are exercised in the future, you will experience additional dilution. See "Dilution."

We have broad discretion over the use of proceeds we receive in this offering and may not apply the proceeds in ways that increase the value of your investment.

        We intend to use the net proceeds of this offering for working capital and other general corporate purposes. We may also use all or a portion of the net proceeds to acquire or invest in complementary companies, products or technologies. Our management will have broad discretion in the application of these net proceeds and, as a result, you will have to rely upon the judgment of our management with respect to the use of these proceeds. Our management may spend a portion or all of the net proceeds in ways that not all stockholders approve of or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business.

Risks related to the Netherlands and the Czech Republic

After the Conversion, we will be a Dutch public company with limited liability, which may grant different rights to our stockholders than the rights granted to stockholders of companies organized in the United States.

        The rights of our stockholders are different from the rights of stockholders governed by the laws of U.S. jurisdictions. After the Conversion, we will be a Dutch public company with limited liability (naamloze vennootschap). Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands. The rights of stockholders

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and the responsibilities of the members of our board of directors may be different from the rights and obligations of stockholders in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, our board of directors is required by Dutch law to consider the interests of our company, its stockholders, its employees and other stakeholders, in all cases with due observation of the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a stockholder. See "Management—Corporate governance."

        Although stockholders will have the right to approve legal mergers or demergers, Dutch law does not grant appraisal rights to a company's stockholders who wish to challenge the consideration to be paid upon a legal merger or demerger of a company. In addition, if a third-party is liable to a Dutch company, under Dutch law stockholders generally do not have the right to bring an action on behalf of the company or to bring an action on their own behalf to recover damages sustained as a result of a decrease in value, or loss of an increase in value, of their stock. Only in the event that the cause of liability of such third-party to the company also constitutes a tortious act directly against such stockholder and the damages sustained are permanent, may that stockholder have an individual right of action against such third-party on its own behalf to recover damages. The Dutch Civil Code provides for the possibility to initiate such actions collectively. A foundation or an association whose objective, as stated in its articles of association, is to protect the rights of persons having similar interests may institute a collective action. The collective action cannot result in an order for payment of monetary damages but may result in a declaratory judgment (verklaring voor recht), for example declaring that a party has acted wrongfully or has breached a fiduciary duty. The foundation or association and the defendant are permitted to reach (often on the basis of such declaratory judgment) a settlement which provides for monetary compensation for damages. A designated Dutch court may declare the settlement agreement binding upon all the injured parties with an opt-out choice for an individual injured party. An individual injured party, within the period set by the court, may also individually institute a civil claim for damages if such injured party is not bound by a collective agreement. See "Description of Capital Stock—Stockholder suits."

        The provisions of Dutch corporate law and our articles of association have the effect of concentrating control over certain corporate decisions and transactions in the hands of our board of directors. As a result, holders of our shares may have more difficulty in protecting their interests in the face of actions by members of the board of directors than if we were incorporated in the United States.

Our articles of association and Dutch corporate law contain provisions that may discourage a takeover attempt.

        Provisions contained in our articles of association following the Conversion and the laws of the Netherlands could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Provisions of our articles of association impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions. Among other things, these provisions:

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        These provisions, alone or together, could delay hostile takeovers and changes in control of our company or changes in our management. See "Description of Capital Stock—Anti-takeover provisions."

Dutch and Czech insolvency laws to which we are subject may not be as favorable to you as U.S. or other insolvency laws.

        As a company incorporated under the laws of the Netherlands with its registered offices in the Netherlands, subject to applicable EU insolvency regulations, any insolvency proceedings in relation to us may be based on Dutch insolvency law. In the event it should be established that the "center of our main interest," as defined under EU insolvency regulations, is situated within the territory of another EU member state and not in the Netherlands, such as in the Czech Republic, the courts of such member state would have jurisdiction to open insolvency proceedings. Both Dutch and Czech insolvency proceedings differ significantly from insolvency proceedings in the United States and may make it more difficult for stockholders to recover the amount they may normally expect to recover in a liquidation or bankruptcy proceeding in the United States.

Any U.S. or other foreign judgments you may obtain against us may be difficult to enforce against us in the Czech Republic or the Netherlands.

        We have only very limited assets in the United States. Most of our assets are located in the Czech Republic, our company is incorporated in the Netherlands, and most of our directors and senior management are located outside the United States. As a result, it may be difficult to serve process on us or these persons within the United States. Although arbitration awards are generally enforceable in the Czech Republic and the Netherlands, you should note that judgments obtained in the United States or in other foreign courts, including those with respect to U.S. federal securities law claims, may not be enforceable in the Czech Republic or the Netherlands. There is no mutual recognition treaty between the United States and the Czech Republic or the Netherlands, and therefore, it may be difficult to enforce any U.S. or other court judgment from a non-EU member state obtained against our company, any of our operating subsidiaries or any of our directors in the Czech Republic or the Netherlands. See "Enforceability of Civil Liabilities."

Social, economic or political developments in the Czech Republic could adversely affect our operations.

        Our headquarters is located in Prague in the Czech Republic and almost all of our 191 employees as of October 31, 2011 were located in the Czech Republic. The Czech Republic has undergone dramatic economic, political and social changes since the fall of the former Communist regime in 1989, including currency fluctuations, evolving regulatory environment, inflation, economic recession, changes in disposable income and gross national product, variations in interest rates and taxation policies, levels of economic growth and other similar changes. Public discussion still

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continues as to the need to reform pension and healthcare systems and to balance the fiscal budget of the Czech Republic. Even if an agreement is reached on reforms among political parties in the Czech Republic, no assurance can be given that any such reforms will not adversely affect our business, results of operations or prospects. A failure to safeguard the sustainability of the public finances could potentially destabilize the Czech koruna against foreign currencies, increase inflation and deteriorate the overall economic situation, which may thereby adversely affect us. Many of these factors are beyond our control. Any economic, political or social instability or adverse development in the Czech Republic could have an adverse effect on our business, results of operations, financial condition, liquidity, prospects or reputation.

Legal and regulatory safeguards in the Czech Republic are not as developed compared to some Western European countries.

        Legal and regulatory safeguards in the Czech Republic have undergone significant changes since the fall of the former Communist regime in 1989 and the entry of the Czech Republic into the European Union in 2004. Nevertheless, in many cases they are not yet as developed as in countries with more developed democracies or legislative or judicial systems, which may result in insufficient enforceability of existing laws and regulations. For instance, the restrictions on the inappropriate use of funds to influence official decisions are not regularly enforced, which has had an adverse effect on Czech business culture. Additionally, in some circumstances, it may not be possible to obtain legal remedies to enforce contractual or other rights in a timely manner or at all. Although institutions and legal and regulatory systems characteristic of parliamentary democracies have developed in the Czech Republic, the lack of an institutional history remains a problem. As a result, shifts in government policies and regulations tend to be less predictable than in countries with more developed democracies. A lack of legal certainty, as well as unclear interpretations of the law, or the inability to obtain effective legal remedies in a timely manner or at all may have a material adverse effect on our business, results of operations, financial condition, liquidity, prospects or reputation.

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Special Note Regarding Forward-looking Statements

        We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "potential," or the negative of these terms or other similar expressions. The statements we make regarding the following subject matters are forward-looking by their nature:

        The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks provided under "Risk Factors" in this prospectus.

        You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

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Use of Proceeds

        We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $          million (or approximately $          million if the underwriters exercise their over-allotment option in full), assuming the shares are offered at $         per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus. We will not receive any proceeds from the sale of common stock by the selling stockholders.

        A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting the underwriting discounts and commissions. Similarly, each increase (decrease) of             shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions.

        We intend to use net proceeds for working capital and other general corporate purposes. We may also use all or a portion of the net proceeds to acquire or invest in complementary companies, products or technologies.

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Dividend Policy

        We do not intend to pay dividends on our common stock for the foreseeable future following this offering and currently intend to retain all future earnings, if any, to finance the operation of our business and to expand our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition, future prospects and other factors our board of directors may deem relevant.

        We have declared an interim dividend of $22.0 million that we intend to pay to our existing stockholders in the fourth quarter of 2011.

        We intend to declare a special dividend of $          million that we intend to pay to our existing stockholders immediately prior to the closing of this offering. Investors in this offering will not receive any portion of the foregoing dividend to our existing stockholders.

        We did not pay any dividends in fiscal year 2007. The following table sets forth our historical dividends declared in 2008, 2009, 2010 and the six months ended 2010 and 2011:

 
  Year Ended December 31,   Six Months Ended June 30,  
 
  2008   2009   2010   2010   2011  
 
  (in thousands, except per share data)
 

Dividends Declared:

                               

Total in Czech korunas

    CZK34,000     CZK110,000     CZK300,000     CZK300,000     CZK—  

Per share in Czech korunas

    188.9     611.1     1,666.7     1,666.7      

Total in U.S. dollars

  $ 2,182   $ 6,039   $ 14,304   $ 14,304   $  

Per share in U.S. dollars

    12.1     33.6     79.5     79.5      

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Capitalization

        The following table sets forth our cash and cash equivalents and total capitalization as of June 30, 2011, as follows:

        You should read this information in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this prospectus, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other financial information contained in this prospectus.

 
  As of June 30, 2011  
 
  Actual   Pro Forma   Pro Forma
As Adjusted
 
 
  (unaudited)
 
 
  (in thousands)
 

Cash and cash equivalents

  $ 84,257   $     $    
               

Common stock, par value €0.10 per share;             shares authorized,              shares issued and outstanding, actual 144,000;             shares authorized,              issued and outstanding, pro forma;             shares authorized,              shares issued and outstanding, pro forma as adjusted

  $ 18   $     $    

Preferred stock, par value €0.10 per share;             shares authorized;             shares issued and outstanding, actual 36,000;             shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

    5              

Cumulative preferred stock series PA, par value             per share; zero shares authorized, actual and pro forma;             shares authorized and no shares issued or outstanding, pro forma as adjusted

                 

Cumulative preferred stock series PB, par value             per share; zero shares authorized, actual and pro forma;             shares authorized and no shares issued or outstanding, pro forma as adjusted

                 

Additional paid-in capital

    10,064              

Accumulated other comprehensive income (loss)

                 

Foreign currency translation adjustments

    (16 )            

Retained earnings

    32,523              
               

Total stockholders' equity

    42,594              
               

Total capitalization

  $ 42,594   $     $    
               

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        A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the initial public offering price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders' equity and total capitalization by approximately $          million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

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Dilution

        If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share of common stock after this offering. Our pro forma net tangible book value as of June 30, 2011 was $     million, corresponding to a net tangible book value of $    per share of common stock. Pro forma net tangible book value per share represents our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of common stock outstanding after giving effect to the conversion of all outstanding preferred shares upon the closing of this offering.

        After giving effect to (1) the sale of common stock that we are offering at an assumed initial public offering price of $    per share (the midpoint of the initial public offering price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (2) the declaration and payment to our existing stockholders of an interim dividend of $22.0 million that we intend to pay in the fourth quarter of 2011 in addition to a special dividend of $    that we intend to pay immediately prior to the closing of this offering, our pro forma as adjusted net tangible book value as of June 30, 2011 would have been approximately $    per share of common stock. This amount represents an immediate increase in pro forma net tangible book value of $    per share of common stock to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $    per share of common stock to new investors purchasing common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock.

        The following table illustrates this dilution:

Assumed initial public offering price per share

      $         

Pro forma net tangible book value per share as of June 30, 2011

  $             

Increase per share attributable to this offering

       
         

Decrease in pro forma net tangible book value per share attributable to the special dividend discussed above

       
         

Pro forma as adjusted net tangible book value per share after this offering

       
         

Dilution per share to new investors

      $         
         

        A $1.00 increase (decrease) in the assumed initial public offering price of $    per share, which is the midpoint of the initial public offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders' equity and total capitalization by approximately $     million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        If the underwriters exercise their over-allotment option in full in this offering, the pro forma as adjusted net tangible book value after the offering would be $    per share, the increase in pro forma net tangible book value per share to existing stockholders would be $    and the dilution per share to new investors would be $    per share, in each case assuming an initial public offering price of $    per share, which is the midpoint of the initial public offering price range set forth on the cover page of this prospectus.

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        The following table summarizes, as of June 30, 2011, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that existing stockholders and new investors paid. The calculation below is based on an assumed initial public offering price of $    per share (the midpoint of the initial public offering price range set forth on the cover page of this prospectus) before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 
   
   
  Total
Consideration
   
 
 
  Shares Purchased    
 
 
  Average Price
Per Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders

                          % $                       % $            

New investors

                                                                   
                         

Total

          100 %         100 %      
                         

        The foregoing tables and calculations exclude         shares of common stock reserved for issuance under our equity incentive plans, of which options to purchase          shares have been granted at a weighted-average exercise price of $    per share.

        To the extent any of these outstanding options is exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of June 30, 2011, the pro forma as adjusted net tangible book value per share after this offering would be $    , and total dilution per share to new investors would be $    .

        If the underwriters exercise their over-allotment option in full:

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Selected Consolidated Financial and Other Data

        The following tables set forth our selected consolidated financial and other data. You should read the following selected consolidated financial and other data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not indicative of the results to be expected in the future. Our financial statements have been prepared in accordance with IFRS.

        The selected consolidated statement of comprehensive income data for each of the years in the four-year period ended December 31, 2010 and the consolidated balance sheet data as of December 31, 2007, 2008, 2009 and 2010 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated balance sheet data as of June 30, 2011 and the selected consolidated statement of comprehensive income data for the six months ended June 30, 2010 and 2011 have been derived from our unaudited interim consolidated condensed financial statements included elsewhere in this prospectus. In the opinion of management, these unaudited interim consolidated condensed financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for these periods. Results from interim periods are not necessarily indicative of results that may be expected for the entire year.

 
  Year Ended December 31,   Six Months
Ended June 30,
 
 
  2007   2008   2009   2010   2010   2011  
 
  (in thousands, except share and per share data)
 

Consolidated Statement of Comprehensive Income Data:

                                     

Revenues

  $ 4,947   $ 14,970   $ 25,309   $ 48,495   $ 20,238   $ 37,874  

Cost of revenues

    1,445     1,833     2,169     4,084     1,782     2,344  
                           

Gross profit

    3,502     13,137     23,140     44,411     18,456     35,530  

Operating costs:

                                     

Sales and marketing

    579     1,207     1,760     3,667     1,448     2,738  

Research and development

    775     1,103     1,324     3,541     1,299     2,759  

General and administrative(1)

    671     1,473     8,242     11,275     5,528     4,216  
                           

Total operating costs

    2,025     3,783     11,326     18,483     8,275     9,713  
                           

Operating profit

    1,477     9,354     11,814     25,928     10,181     25,817  

Finance income and expenses, net

    (605 )   (2,165 )   223     (2,882 )   (3,335 )   1,950  
                           

Profit before income tax

    872     7,189     12,037     23,046     6,846     27,767  

Income tax

    313     1,553     3,306     5,837     2,457     4,794  
                           

Profit

    559     5,636     8,731     17,209     4,389     22,973  

Foreign exchange differences

                (6 )       (10 )
                           

Comprehensive income

  $ 559   $ 5,636   $ 8,731   $ 17,203   $ 4,389   $ 22,963  
                           

Total profit attributable to equity holders of the Company

    559     5,636     8,731     17,209     4,389     22,973  

Comprehensive income attributable to equity holders of the Company

    559     5,636     8,731     17,203     4,389     22,963  

Basic and diluted earnings per share

  $ 3.11   $ 31.31   $ 48.51   $ 95.61   $ 24.38   $ 127.63  
                           

Weighted average number of shares used in computing basic and diluted earnings per share(2)

    180,000     180,000     180,000     180,000     180,000     180,000  
                           

Pro forma basic and diluted comprehensive income per share(3)

                    $ 95.57         $ 127.57  
                                   

Weighted average number of shares used in computing pro forma basic and diluted comprehensive income per share

                      180,000           180,000  
                                   

Dividends declared per share:

                                     

Czech korunas

  CZK   CZK 188.9   CZK 611.1   CZK 1,666.7   CZK 1,666.7   CZK  

U.S. dollars

  $   $ 12.1   $ 33.6   $ 79.5   $ 79.5   $  

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  Actual   Actual   Pro
Forma(4)
  Pro Forma
As
Adjusted(4)
 
 
  As of December 31,    
   
   
 
 
  As of
June 30, 2011
 
 
  2007   2008   2009   2010  
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                                           

Cash and cash equivalents

  $ 8,745   $ 17,674   $ 33,998   $ 51,378   $ 84,257              

Deferred revenues

    9,544     17,232     29,081     44,385     53,492              

Working capital(5)

    2,400     6,688     13,805     20,661     44,442              

Total assets

    15,383     25,618     47,697     71,312     104,600              

Total borrowings

                                 

Total liabilities

    14,729     21,510     36,432     52,237     62,006              

Stockholders' equity

    654     4,108     11,265     19,075     42,594              

 

 
  Year Ended December 31,   Six Months
Ended June 30,
 
 
  2007   2008   2009   2010   2010   2011  
 
  (in thousands, except operating metrics)
 

Supplemental Financial Metrics:

                                     

Bookings(6)

  $ 14,491   $ 22,658   $ 37,158   $ 63,799   $ 27,834   $ 46,981  

Free cash flow(6)

    8,901     13,598     21,135     37,112     17,575     30,181  

Adjusted comprehensive income(6)

    361     7,432     12,378     23,939     11,450     20,661  

Supplemental Operating Metrics:

                                     

Number of actively protected devices at period end (in millions)(7)

    n/a     62.8     88.0     119.0     95.7     131.6  

Average bookings per protected device (in cents)(8)

    n/a     36.1¢     42.2¢     53.6¢     29.1¢     35.7¢  

n/a
Not available.

(1)
Includes stock-based compensation expense of $4.5 million recognized in 2009, $4.9 million in 2010, $3.3 million in the six months ended June 30, 2010 and $0.6 million in the six months ended June 30, 2011. We did not incur any additional stock-based compensation expense during any other period presented.

(2)
See footnote 15 to our annual consolidated financial statements included elsewhere in this prospectus for an explanation of the number of shares used in calculating basic and diluted earnings per share.

(3)
Pro forma basic and diluted comprehensive income per share and pro forma weighted number of average shares gives effect to the automatic conversion of all outstanding shares of preferred stock into         shares of common stock on a one-for-one basis immediately prior to the closing of this offering.

(4)
Pro forma gives effect to the declaration and payment of a special dividend of $       to our existing stockholders immediately prior to the closing of this offering. Pro forma as adjusted additionally gives effect to our receipt of net proceeds of $     million from the sale by us of       shares of common stock in this offering at an assumed initial public offering price of $    per share, the mid-point of the initial public offering price range on the cover of this prospectus, after deducting the underwriting discounts and estimated offering expenses payable by us.

(5)
Working capital is defined as total current assets minus total current liabilities.

(6)
See "—Supplemental information" below for how we define and calculate bookings, free cash flow and adjusted comprehensive income, a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS measures, and a discussion about the limitations of these non-IFRS financial measures.

(7)
Defined as the number of computers or other Internet-connected devices with at least one update downloaded in the 30 days before the end of the period.

(8)
Defined as bookings during the applicable period divided by the average number of actively protected devices during the last month of the period.

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Supplemental information

Bookings

        Bookings is a non-IFRS financial measure consisting of all amounts invoiced to customers during a specified period and is important since it corresponds directly to our near-term cash flow. Bookings includes amounts from sales of software licenses (revenues from which are deferred and recognized over the terms of the licenses), as well as amounts from cross-distribution and cross-selling arrangements (which are fully recognized in the period in which they are generated). Bookings can be derived by adding the change in deferred revenues between the start and end of a period to the revenue recognized during the same period. The following table reconciles revenues, the most directly comparable IFRS measure, to bookings for the periods presented:

 
  Year Ended December 31,   Six Months
Ended June 30,
 
 
  2007   2008   2009   2010   2010   2011  
 
  (in thousands)
 

Reconciliation of revenues to bookings:

                                     

Revenues

  $ 4,947   $ 14,970   $ 25,309   $ 48,495   $ 20,238   $ 37,874  

Change in deferred revenues

    9,544     7,688     11,849     15,304     7,596     9,107  
                           

Bookings

  $ 14,491   $ 22,658   $ 37,158   $ 63,799   $ 27,834   $ 46,981  
                           

        We use bookings internally to evaluate our results of operations, generate future operating plans and assess the performance of our company. While we believe that this non-IFRS financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenues recognized in accordance with IFRS. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure.

Free cash flow

        Free cash flow is a non-IFRS measure defined as net cash flows from operating activities minus capital expenditures. The following table reconciles net cash flows from operating activities, the most directly comparable IFRS measure, to free cash flow:

 
  Year Ended December 31,   Six Months
Ended June 30,
 
 
  2007   2008   2009   2010   2010   2011  
 
  (in thousands)
 

Reconciliation of net cash flows from operating activities to free cash flow:

                                     

Net cash flows from operating activities

  $ 9,845   $ 14,572   $ 24,102   $ 40,003   $ 17,856   $ 30,485  

Capital expenditures(1)

    (944 )   (974 )   (2,967 )   (2,891 )   (281 )   (304 )
                           

Free cash flow

  $ 8,901   $ 13,598   $ 21,135   $ 37,112   $ 17,575   $ 30,181  
                           

(1)
Capital expenditures include both intangible expenditures (such as capitalized research and development expenses) and tangible expenditures (such as property, plant and equipment). Since February 2010, research and development expenses no longer meet the IFRS criteria for

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  Year Ended December 31,   Six Months
Ended June 30,
 
 
  2007   2008   2009   2010   2010   2011  
 
  (in thousands)
 

Reconciliation of comprehensive income to adjusted comprehensive income:

                                     

Comprehensive income

  $ 559   $ 5,636   $ 8,731   $ 17,203   $ 4,389   $ 22,963  

Stock-based compensation

            4,465     4,919     3,339     556  

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

    (198 )   1,796     (818 )   1,817     3,722     (2,858 )
                           

Adjusted comprehensive income

  $ 361   $ 7,432   $ 12,378   $ 23,939   $ 11,450   $ 20,661  
                           

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Management's Discussion and Analysis of
Financial Condition and Results of Operations

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        For a reconciliation of bookings to revenues, free cash flow to cash flow from operations and adjusted comprehensive income to comprehensive income, see "Prospectus summary—Summary Consolidated Financial and Other Data" and "—Quarterly results of operations."

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Operating metrics

Geographical breakdown of bookings

        The following table sets forth the approximate geographic breakdown of our bookings by region for the periods indicated:

 
  Year Ended
December 31,
  Six Months
Ended
June 30,
 
 
  2008   2009   2010   2010   2011  

EMEA

    64 %   54 %   52 %   47 %   45 %

Americas

    31     39     42     47     50  

Asia Pacific

    5     7     6     6     5  
                       

Total

    100 %   100 %   100 %   100 %   100 %
                       

        For the six months ended June 30, 2011 compared with the six months ended June 30 2010, our bookings grew in all regions, driven by a significant increase in the Americas (primarily in the United States and Brazil), as well as in EMEA (primarily in France) and to a lesser extent in the Asia Pacific region. In addition to bookings from premium paid users, bookings growth in the United States and France was favorably affected by bookings as a result of revenue from our agreement with Google.

        For the year ended December 31, 2010 compared to the year ended December 31, 2009, our bookings growth was driven by a strong increase in EMEA (primarily in France and in the United Kingdom), and in the Americas (primarily in the United States and Brazil), with much smaller growth in absolute terms in the Asia Pacific region (primarily in Australia).

        For the year ended December 31, 2009 compared to the year ended December 31, 2008, our bookings growth was driven by a significant increase in absolute terms in the Americas (primarily in the United States and Brazil) and in EMEA (primarily in France and the United Kingdom), with

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further growth in the Asia Pacific region (primarily in Australia). The main reason for growth in these regions was an increase in premium customers.

Factors affecting our results of operations

        Our results of operations have been affected in the past or may be affected in the future by the following factors:

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Components of statements of income

Revenues

        Sources of revenues.    We derive the substantial majority of our revenues from the sale of software licenses to our users with terms of one, two or three years, entitling such users to services and updates provided by our premium paid security software. The significant majority of our users are individual consumers, however, we derive a portion of our revenues from licenses to SMBs. We also derive an insignificant portion of our revenues from sales to OEMs that license our software for use in other products. We are deemphasizing this aspect of our business and expect the amount of revenues that we derive from OEMs to decrease in absolute and percentage terms in the future.

        We derive a growing portion of our revenues from distribution arrangements with third parties, most notably with Google. These arrangements accounted for no or negligible revenues in 2008 and 2009, 9.6% of our revenues in 2010 and 16.7% of our revenues in the six months ended June 30, 2011.

        Payment and revenue recognition.    We make all of our sales to individual consumers through eCommerce service providers, primarily Digital River. After seeking to purchase a product through our website, the user is directed to the section of our website hosted by the provider for payment and download of our product. Our eCommerce service providers fulfill administrative functions for us, such as collecting payment and remitting any required sales tax. In 2010, we derived $34.7 million, or 71.5%, of our revenues from sales of licensed software through Digital River. Business users usually purchase our products through one of our authorized resellers, which is processed online by each individual reseller. Our relationship with our users is governed by an end-user license agreement. Our downloadable premium paid product is typically valid for one, two or three years.

        Users of our premium paid software products pay the full purchase price for the license at the start of the license term irrespective of its length. Users are entitled to cancel the license and receive a full refund within 30 days of purchase. We are also subject to a lesser extent to chargebacks which occur when a user disputes a payment card transaction with the issuer. We generally do not contest chargebacks. As a percentage of bookings, we had refunds and chargebacks of 1.2% in 2009, 2.4% in 2010 and 1.5% in the six months ended June 30, 2011. Since the impact of refunds and chargebacks on total sales has been insignificant and relatively stable over the years, we do not maintain a reserve for cancellations in our accounts or financial statements. In addition, we recognize revenues ratably over the term of the license, commencing in the month in which the user entered into the license agreement with us (with our eCommerce service provider acting as an intermediary) which is when we are obligated to start providing updates and services to that user. We recognize revenues net of discounts, commissions to our eCommerce service providers (including Digital River) and resellers, VAT and other sales taxes. Our eCommerce service providers collect the fees, such as interchange, payment card or PayPal payments, and transfer cash payments to us on a monthly basis within 30 days after the end of the month with respect to which payment is being made.

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Cost of revenues and operating costs

        Cost of revenues.    Cost of revenues consists primarily of costs directly associated with the distribution of products and provision of services, namely, costs of digital content distribution consisting of the full server and downloading costs for our products and solutions. Additionally, cost of revenues include; (i) amortization of the capitalized development costs of Avast 5.0, (ii) amortization of leased intellectual property, (iii) expenses related to the support of our free and premium paid users, and (iv) the wages and benefits for personnel who provide the daily virus database updates. Except for the amortization of leased intellectual property and capitalized development costs, we expect all remaining components of cost revenues to increase in absolute terms as we continue to increase our number of premium paid customers and the complexity of our products and solutions over time but to remain relatively constant as a percentage of revenues.

        Sales and marketing.    Our sales and marketing costs consist primarily of compensation and related benefits for personnel engaged in sales, marketing, distribution and technical support, as well as advertising and promotional expenses, support and hosting service expenses. To date, we have maintained efficient sales and marketing operations as a result of the significant word of mouth marketing and community based technical support operations as a result of responses provided on our forum by our users responding to other users' inquiries. We intend to continue to use this business model to minimize such expenses. However, in light of the anticipated continued growth in our user community, we expect sales and marketing costs to continue to increase in absolute terms and as a percentage of revenues as we add offices and increase personnel.

        Research and development.    Our research and development costs consist primarily of compensation and related benefits for personnel engaged in research and development. A small portion of research and development costs and expenses is the cost of bandwidth and utilities, license and technical service fees and depreciation of equipment and amortization of acquired intangible assets. We expect research and development costs and expenses to continue to increase in absolute terms as we continue to invest in developing new products and adding functionalities to our existing products, but to remain constant or slightly increase as a percentage of revenues, as we continue to develop new functionalities for our products and seek to extend our product portfolio into high growth adjacent and complementary markets, such as smartphones and tablets. Development costs for our version 5.0 products were capitalized in accordance with IFRS. After the launch of our version 5.0 products in January 2010, we implemented an annual release cycle for our software and, as a result, we began to expense all subsequent research and development costs when incurred as they no longer met the IFRS criteria for capitalization. We expect research and development expenses to continue to increase in absolute terms and increase slightly as a percentage of revenues as we develop additional products and solutions and expand our product offerings.

        General and administrative.    Our general and administrative costs and expenses primarily consist of compensation and related benefits, including stock-based compensation, for our management and administrative personnel and fees that we pay to legal, accounting and other professional service providers. Commencing in 2010, general and administrative costs and expenses also include our charitable contributions. We intend to donate 2% of the 2011 profit before income tax of AVAST Software a.s. calculated in accordance with Czech GAAP to the AVAST Foundation, which supports charitable causes in the Czech Republic. We expect to increase this donation to 2.5% of AVAST Software a.s.'s profit before income tax in 2012. General and administrative costs have increased significantly in recent years largely due to the expansion of our operations and engagement of management personnel. We expect general and administrative costs, net of stock-based compensation, to remain constant or increase as a percentage of revenues and to increase in absolute terms as a result of the growth of our business and expenses associated with being a public company following the completion of this offering.

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        Finance income and expenses, net.    The substantial majority of our finance income and expenses, net result from currency translation gains and losses on monetary assets and liabilities, primarily cash deposits, denominated in currencies other than the U.S. dollar. Such gains or losses only impact the dollar value of our non-dollar denominated cash deposits and result from changes in reported values due to exchange rate fluctuations between the beginning and the end of reporting periods. In 2008 and 2010, due to the size of our cash deposits, the amount of finance expenses recorded was relatively significant as a result of significant fluctuations between the Euro and the U.S. dollar. A small portion of finance income and expenses, net consists of interest from trademarks, domains and other intangible assets classified as finance leases, where the recorded lease liability represents the discounted present value of future lease payments, which are increased each year by an interest charge. We expect financial income to increase as we temporarily invest the proceeds of this offering in cash, cash equivalents and marketable securities pending their application to grow our business.

        Income tax.    The standard corporate tax rate for Czech companies in 2008 was 21% of their taxable income. It declined to 20% in 2009, 19% in 2010 and remained at 19% in 2011 with no future changes currently proposed. Our consolidated provision for income taxes and deferred tax assets and liabilities for the periods presented through June 30, 2011 is based solely on income tax rates in the Czech Republic. Our Czech operating subsidiary, AVAST Software a.s., is subject to taxation based upon Czech GAAP. Our effective tax rate is higher than the statutory tax rate in the Czech Republic as a result of employee stock-based compensation, which is not a tax deductible expense, and the impact of foreign currency translations. In the future, as a result of establishing a subsidiary in the United States and other subsidiaries that we may establish, we expect to generate a small amount of taxable income outside of the Czech Republic. We believe that non-Czech income taxes will have a negligible impact on our results of operations.

        Foreign exchange differences.    Foreign exchange differences represents the impact of presenting in U.S. dollars the financial results and position of Avast Software B.V., which does not use the U.S. dollar as its functional currency. We expect that the functional currency of Avast Software B.V. will be the U.S. dollar in future periods; however, we expect that in future periods the functional currencies of our subsidiaries in Germany and Austria will be the Euro. See "—Critical accounting policies and estimates—functional and reporting currency". All other exchange differences are presented within finance income and expenses.

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Results of operations

        The following tables set forth our results of operations for the periods presented and as a percentage of revenues for those periods:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (in thousands)
 

Revenues

  $ 14,970   $ 25,309   $ 48,495   $ 20,238   $ 37,874  

Cost of revenues

    1,833     2,169     4,084     1,782     2,344  
                       

Gross profit

    13,137     23,140     44,411     18,456     35,530  

Operating costs:

                               

Sales and marketing

    1,207     1,760     3,667     1,448     2,738  

Research and development

    1,103     1,324     3,541     1,299     2,759  

General and administrative

    1,473     8,242     11,275     5,528     4,216  
                       

Total operating costs

    3,783     11,326     18,483     8,275     9,713  
                       

Operating profit

    9,354     11,814     25,928     10,181     25,817  

Finance income and expenses, net

    (2,165 )   223     (2,882 )   (3,335 )   1,950  
                       

Profit before income tax

    7,189     12,037     23,046     6,846     27,767  

Income tax

    1,553     3,306     5,837     2,457     4,794  
                       

Profit

    5,636     8,731     17,209     4,389     22,973  

Foreign exchange differences

            (6 )       (10 )
                       

Comprehensive income

  $ 5,636   $ 8,731   $ 17,203   $ 4,389   $ 22,963  
                       

 

 
  Year Ended
December 31,
  Six Months
Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (as a % of revenues)
 

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of revenues

    12.2     8.6     8.4     8.8     6.2  
                       

Gross profit

    87.8     91.4     91.6     91.2     93.8  

Operating costs:

                               

Sales and marketing

    8.1     7.0     7.6     7.2     7.2  

Research and development

    7.4     5.2     7.3     6.4     7.3  

General and administrative

    9.8     32.6     23.2     27.3     11.1  
                       

Total operating costs

    25.3     44.8     38.1     40.9     25.6  
                       

Operating profit

    62.5     46.7     53.5     50.3     68.2  

Finance income and expenses, net

    14.5     0.9     5.9     16.5     5.1  
                       

Profit before income tax

    48.0     47.6     47.5     33.8     73.3  

Income tax

    10.4     13.1     12.0     12.1     12.7  
                       

Profit

    37.6     34.5     35.5     21.7     60.6  

Foreign exchange differences

            0.0         0.0  
                       

Comprehensive income

    37.6 %   34.5 %   35.5 %   21.7 %   60.6 %
                       

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Comparison of six months ended June 30, 2010 and 2011.

Revenues

 
  Six Months Ended June 30,    
   
 
 
  2010   2011    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Revenues

  $ 20,238     100.0 % $ 37,874     100.0 % $ 17,636     87.1 %

        Revenues increased by $17.6 million, or 87.1%, from $20.2 million in the six months ended June 30, 2010 to $37.9 million in the six months ended June 30, 2011, primarily due to an increase of $12.3 million from sales of our premium paid security products. This increase resulted from a significant increase in the number of premium paid users partially offset by a decrease in the average selling price for our products in part due to adjustments to optimize bookings and unit sales. This increase in revenues was also driven by an increase of $5.3 million in revenues derived from our value-added solutions and distribution arrangements with third parties, almost all of which resulted from our agreement with Google. Bookings per protected device increased from 29.1¢ for the six months ended June 30, 2010 to 35.7¢ for the six months ended June 30, 2011 as a result of increased bookings from both our premium customers and from our value-added solutions and distribution arrangements.

Cost of revenues

 
  Six Months Ended June 30,    
   
 
 
  2010   2011    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Cost of revenues

    1,782     8.8 %   2,344     6.2 %   562     31.5 %

        Cost of revenues increased by $0.6 million, or 31.5%, from $1.8 million in the six months ended June 30, 2010 to $2.3 million in the six months ended June 30, 2011, primarily due to an increase of $0.3 million in costs associated with virus updates and increased salaries and benefits for personnel in the support and virus lab departments, as well as an increase of $0.3 million of third-party license fees as a result of a significant increase in the number of software licenses sold for products that contain technology licensed from third parties in the six months ended June 30, 2011.

Operating costs

 
  Six Months Ended June 30,    
   
 
 
  2010   2011    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Operating costs:

                                     

Sales and marketing

    1,448     7.2 %   2,738     7.2 %   1,290     89.1 %

Research and development

    1,299     6.4     2,759     7.3     1,460     112.4  

General and administrative

    5,528     27.3     4,216     11.1     (1,312 )   (23.7 )
                           

Total operating costs

  $ 8,275     40.9 % $ 9,713     25.6 % $ 1,438     17.4 %
                           

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        Sales and marketing.    Sales and marketing costs increased by $1.3 million, or 89.1%, from $1.4 million in the six months ended June 30, 2010 to $2.7 million in the six months ended June 30, 2011, primarily as a result of an increase of $0.7 million primarily related to purchases of advertising services and an increase of $0.5 million in salaries and benefits due to the addition of 12 new sales and marketing personnel to support the expansion of our business.

        Research and development.    Research and development costs increased by $1.5 million, or 112.4%, from $1.3 million in the six months ended June 30, 2010 to $2.8 million in the six months ended June 30, 2011, primarily as a result of an increase of $1.1 million in salaries and benefits due to the addition of 26 new research and development personnel as a result of increased investment in virus research, development of new products and solutions, such as for the mobile platform, and our move to an annual product update cycle.

        General and administrative.    General and administrative costs decreased by $1.3 million, or 23.7%, from $5.5 million in the six months ended June 30, 2010 to $4.2 million in the six months ended June 30, 2011, primarily due to a $2.8 million decrease in stock-based compensation expense, partially offset by an increase of $0.7 million in legal, audit and other service costs, an increase of $0.4 million in salary and benefits expenses due to the growth of our business, and an increase of $0.2 million in charitable contributions.

Finance income and expenses, net

 
  Six Months Ended June 30,    
   
 
  2010   2011    
   
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change
 
  (in thousands, except percentages)

Finance income and expenses, net

  $ (3,335 )   (16.5 )% $ 1,950     5.1 % $ 5,285   n/m

        We had finance income of $2.0 million in the six months ended June 30, 2011 compared to finance expenses of $3.3 million in the six months ended June 30, 2010. This was almost entirely attributable to $2.0 million of currency exchange gains recognized in the six months ended June 30, 2011. This compared to currency exchange losses of $3.2 million in the six months ended June 30, 2010 and other financial expenses such as interest costs from finance leases.

Income tax

 
  Six Months Ended June 30,    
   
 
 
  2010   2011    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Income tax

  $ 2,457     12.1 % $ 4,794     12.7 % $ 2,337     95.1 %

        Income tax expenses increased from $2.5 million in the six months ended June 30, 2010 to $4.8 million in six months ended June 30, 2011 because our taxable income in 2011 was higher than that in 2010.

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Year ended December 31, 2010 compared to year ended December 31, 2009

Revenues

 
  Year Ended December 31,    
   
 
 
  2009   2010    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Revenues

  $ 25,309     100.0 % $ 48,495     100.0 % $ 23,186     91.6 %

        Revenues increased by $23.2 million, or 91.6%, from $25.3 million in 2009 to $48.5 million in 2010, primarily due to an increase of $18.6 million from sales of our premium paid security products. This increase resulted from a significant increase in the number of premium customers partially offset by a decrease in the average selling price for our products in part due to adjustments to optimize bookings and unit sales. This increase in revenues was also driven by an increase of $4.6 million in revenues derived from our value-added solutions and distribution arrangements with third parties, of which $4.1 million resulted from our agreement with Google from which we commenced deriving revenues in December 2009. Bookings per protected device increased from 42.2¢ in 2009 to 53.6¢ in 2010 as a result of increased bookings from our value-added solutions and distribution arrangements.

Cost of revenues

 
  Year Ended December 31,    
   
 
 
  2009   2010    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Cost of revenues

  $ 2,169     8.6 % $ 4,084     8.4 % $ 1,915     88.3 %

        Cost of revenues increased by $1.9 million, or 88.3%, from $2.2 million in 2009 to $4.1 million in 2010, primarily due to a depreciation charge of $0.8 million in 2010 resulting from the completion of Avast 5.0 in January 2010, an increase of $0.8 million in support and virus update costs as a result of higher sales volume and increased salaries and benefits to additional personnel in the support department, an increase of $0.4 million in digital content distribution costs, and an increase of $0.4 million in license fees. These increases were partially offset by a decrease of $0.5 million in finance lease costs as a portion of intangible assets defined as finance leases were fully amortized as at the end of 2009.

Operating costs

 
  Year Ended December 31,    
   
 
 
  2009   2010    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Operating costs:

                                     

Sales and marketing

    1,760     7.0 %   3,667     7.6 %   1,907     108.4 %

Research and development

    1,324     5.2     3,541     7.3     2,217     167.4  

General and administrative

    8,242     32.6     11,275     23.2     3,033     36.8  
                           

Total operating costs

  $ 11,326     44.8 % $ 18,483     38.1 % $ 7,157     63.2 %
                           

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        Sales and marketing.    Sales and marketing costs increased by $1.9 million, or 108.4%, from $1.8 million in 2009 to $3.7 million in 2010. This increase was primarily due to an increase of $1.2 million in public relations and marketing costs, such as Google AdWords paid search and market research, and an increase of $0.7 million in salaries and benefits as a result of the addition of 16 new sales and marketing personnel to support the expansion of our business into new markets.

        Research and development.    Research and development costs increased by $2.2 million, or 167.4%, from $1.3 million in 2009 to $3.5 million in 2010. The increase in research and development costs was primarily due to an increase of $1.1 million in salaries and benefits due to the addition of 28 new research and development personnel and from an increase of $1.2 million in the amount of development costs that were expensed as opposed to capitalized. Development costs for our version 5.0 products were capitalized in accordance with IFRS. After the launch of our version 5.0 products in January 2010, we implemented an annual software release cycle and, as a result, we began to expense all development costs as they no longer meet the IFRS criteria for capitalization.

        General and administrative.    In 2009, we incurred a $4.5 million stock-based compensation expense related to the fair value of shares granted to our Chief Executive Officer, compared to $4.9 million in 2010. General and administrative costs and expenses increased by $3.1 million, or 36.8%, from $8.2 million in 2009 to $11.3 million in 2010. This increase resulted primarily from an increase of $0.5 million for advisory services related to Summit's investment in us, an increase of $0.5 in stock-based compensation expense, $0.5 million in charitable contributions, an increase of $0.3 million in salary and benefits expenses due to growth of our business and rental payments for our new office premises of $0.3 million, and $0.3 million of additional depreciation expense. The remaining increase of $0.6 million resulted from third party advisory fees and minor other costs.

Finance income and expenses, net

 
  Year Ended December 31,    
   
 
  2009   2010    
   
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change
 
  (in thousands, except percentages)

Finance income and expenses, net

  $ 223     0.9 % $ (2,882 )   (5.9 )% $ 3,105   n/m

        We had finance expenses of $2.9 million in 2010 compared to finance income of $0.2 million in 2009. This was mostly attributable to $2.6 million of currency exchange losses incurred in 2010, compared to a currency exchange gain of $0.5 million in 2009. In 2010 and 2009, we also incurred interest expenses from finance leases of $0.3 million.

Income tax

 
  Year Ended December 31,    
   
 
 
  2009   2010    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Income tax

  $ 3,306     13.1 % $ 5,837     12.0 % $ 2,531     76.6 %

        Income tax expenses increased by $2.5 million, or 76.6%, from $3.3 million in 2009 to $5.8 million in 2010. This increase was mostly attributable to the growth of our revenues and a corresponding increase in our taxable income. The increase was partially offset by the lower tax rate in the Czech Republic of 19% in 2010 compared to 20% in 2009.

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Year ended December 31, 2009 compared to year ended December 31, 2008

Revenues

 
  Year Ended December 31,    
   
 
 
  2008   2009    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Revenues

  $ 14,970     100.0 % $ 25,309     100.0 % $ 10,339     69.1 %

        Revenues increased by $10.3 million, or 69.1%, from $15.0 million in 2008 to $25.3 million in 2009, primarily due to an increase of $10.0 million in sales of premium paid security products. This increase resulted from a significant increase in the number of premium customers partially offset by a decrease in the average selling price for our products in part due to adjustments to optimize bookings and unit sales. Bookings per protected device increased from 36.1¢ in 2008 to 42.2¢ in 2009 as a result of increased bookings from our premium paid users.

Cost of revenues

 
  Year Ended December 31,    
   
 
 
  2008   2009    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Cost of revenues

  $ 1,833     12.2 % $ 2,169     8.6 % $ 336     18.3 %

        Cost of revenues increased by $0.3 million, or 18.3%, from $1.8 million in 2008 to $2.2 million in 2009, primarily due to an increase of $0.2 million in digital content distribution costs and an increase of $0.1 million in support and virus lab cost as a result of the increased sales volume of our products.

Operating costs

 
  Year Ended December 31,    
   
 
 
  2008   2009    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Operating costs:

                                     

Sales and marketing

  $ 1,207     8.1 %   1,760     7.0 % $ 553     45.8 %

Research and development

    1,103     7.4     1,324     5.2     221     20.0  

General and administrative

    1,473     9.8     8,242     32.6     6,769     459.5  
                           

Total operating costs

  $ 3,783     25.3 % $ 11,326     44.8 % $ 7,543     199.4 %
                           

        Sales and marketing.    Sales and marketing costs and expenses increased by $0.6 million, or 45.8%, from $1.2 million in 2008 to $1.8 million in 2009. This increase was primarily due to an increase of $0.3 million in salaries and benefits for the addition of new sales and marketing personnel and the remaining amounts due to public relations expenses and purchased marketing services.

        Research and development.    Research and development costs and expenses increased by $0.2 million, or 20.0%, from $1.1 million in 2008 to $1.3 million in 2009. This increase was primarily due to an increase in salaries and benefits of $0.5 million due to the addition of new full-time

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personnel hired to help with the development of Antivirus 5.0 and other expenses of $0.2 million, partially offset by an increase of $0.6 million of development costs capitalized as opposed to expensed.

        General and administrative.    General and administrative costs and expenses increased by $6.8 million, or 460%, from $1.5 million in 2008 to $8.2 million in 2009. This increase was primarily due to an increase of $4.5 million in stock-based compensation expense and $1.4 million in salaries and benefits resulting primarily from the expansion of our executive team, as well as an increase of $0.4 million from higher service expenses following our relocation into larger office premises. The remaining increase of $0.5 million resulted from other costs, such as advisory fees and purchases of office equipment.

Finance income and expenses, net

 
  Year Ended December 31,    
   
 
  2008   2009    
   
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change
 
  (in thousands, except percentages)

Finance income and expenses, net

  $ (2,165 )   (14.5 )% $ 223     0.9 % $ 2,388   n/m

        We had finance income of $0.2 million in 2009 compared to finance expenses of $2.2 million in 2008. This was attributable to $0.5 million of currency exchange gains recognized in 2009, compared to $1.9 million of currency exchange losses incurred in 2008. The remaining financial expenses consist of interest expenses from finance leases of $0.3 million in 2009 and $0.4 million in 2008, partly offset by interest accruing on bank balances of $0.1 million in 2008 and 2009.

Income tax

 
  Year Ended December 31,    
   
 
 
  2008   2009    
   
 
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Change   % Change  
 
  (in thousands, except percentages)
 

Income tax

  $ 1,553     10.4 % $ 3,306     13.1 % $ 1,753     112.9 %

        Income tax expenses increased by $1.8 million, or 112.9%, from $1.6 million in 2008 to $3.3 million in 2009. This increase was attributable to the growth of our revenues and a corresponding increase in our taxable income. The increase was partially offset by the lower tax rate in the Czech Republic of 20% in 2009 compared to 21% in 2008.

Quarterly results of operations

        The following table presents our unaudited condensed consolidated quarterly results of operations for the six quarters in the period from January 1, 2010 to June 30, 2011. We also present other financial and operations data, and a reconciliation of revenues to bookings, net cash flows from operating activities to free cash flow and comprehensive income to adjusted comprehensive income, for the same periods. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated quarterly financial information for the quarters presented below on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and results of operations for the quarters presented. The historical quarterly results

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presented below are not necessarily indicative of the results that may be expected for any future quarters or periods.

 
  Three Months Ended  
 
  March 31,
2010
  June 30,
2010
  September 30,
2010
  December 31,
2010
  March 31,
2011
  June 30,
2011
 
 
  (in thousands)
 

Consolidated Income Statement Data:

                                     

Revenues

  $ 9,403   $ 10,835   $ 12,733   $ 15,524   $ 18,149   $ 19,725  

Cost of revenues

    805     977     1,139     1,163     1,160     1,184  
                           

Gross profit

    8,598     9,858     11,594     14,361     16,989     18,541  

Operating costs:

                                     

Sales and marketing

    655     792     1,019     1,201     1,282     1,456  

Research and development

    576     723     1,020     1,222     1,268     1,492  

General and administrative

    2,773     2,755     2,822     2,925     1,930     2,286  
                           

Total operating costs

    4,004     4,270     4,861     5,348     4,480     5,234  

Operating profit

  $ 4,594   $ 5,588   $ 6,733   $ 9,013   $ 12,509   $ 13,307  

Comprehensive income

  $ 2,236   $ 2,153   $ 6,232   $ 6,582   $ 11,711   $ 11,252  
                           

 

 
  Three Months Ended  
 
  March 31,
2010
  June 30,
2010
  September 30,
2010
  December 31,
2010
  March 31,
2011
  June 30,
2011
 
 
  (as a % of revenues)
 

Consolidated Income Statement Data

                                     

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of revenues

    8.6     9.0     8.9     7.5     6.4     6.0  
                           

Gross profit

    91.4     91.0     91.1     92.5     93.6     94.0  

Operating costs:

                                     

Sales and marketing

    7.0     7.3     8.0     7.7     7.1     7.4  

Research and development

    6.1     6.7     8.0     7.9     7.0     7.6  

General and administrative

    29.5     25.4     22.2     18.8     10.6     11.6  
                           

Total operating costs

    42.6     39.4     38.2     34.4     24.7     26.5  

Operating profit

    48.9     51.6     52.9     58.1     68.9     67.5  

Comprehensive income

    23.8 %   19.9. %   48.9 %   42.4 %   64.5 %   57.0 %
                           

 

 
  Three Months Ended  
 
  March 31,
2010
  June 30,
2010
  September 30,
2010
  December 31,
2010
  March 31,
2011
  June 30,
2011
 
 
  (in thousands, except operating data)
 

Supplemental Financial Metrics:

                                     

Bookings(1)

  $ 13,501   $ 14,334   $ 16,677   $ 19,288   $ 23,567   $ 23,414  

Free cash flow(1)

    8,768     8,816     10,863     8,665     16,988     13,194  

Adjusted comprehensive income(1)

    5,149     6,301     4,561     7,928     9,928     10,733  

Supplemental Operating Metrics:

                                     

Number of actively protected devices at period end (in millions)(2)

    97.1     95.7     108.3     119.0     127.0     131.6  

Bookings per protected device(3)

    13.9¢     15.0¢     15.4¢     16.2¢     18.6¢     17.8¢  

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  Three Months Ended  
 
  March 31,
2010
  June 30,
2010
  September 30,
2010
  December 31,
2010
  March 31,
2011
  June 30,
2011
 
 
  (in thousands)
 

Reconciliation of revenues to bookings:

                                     

Revenues

  $ 9,403   $ 10,835   $ 12,733   $ 15,524   $ 18,149   $ 19,725  

Change in deferred revenues

    4,098     3,499     3,944     3,764     5,418     3,689  
                           

Bookings(1)

  $ 13,501   $ 14,334   $ 16,677   $ 19,288   $ 23,567   $ 23,414  
                           

Reconciliation of net cash flows from operating activities to free cash flow:

                                     

Net cash flows from operating activities

  $ 8,960   $ 8,905   $ 11,065   $ 11,073   $ 17,240   $ 13,246  

Capital expenditures

    192     89     202     2,408     252     52  
                           

Free cash flow(1)

  $ 8,768   $ 8,816   $ 10,863   $ 8,665   $ 16,988   $ 13,194  
                           

Reconciliation of comprehensive income to adjusted comprehensive income:

                                     

Comprehensive income

  $ 2,236   $ 2,153   $ 6,232   $ 6,582   $ 11,711   $ 11,252  

Stock-based compensation

    1,660     1,679     1,152     428     341     215  

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

    1,253     2,469     (2,823 )   918     (2,124 )   (734 )
                           

Adjusted comprehensive income(1)

  $ 5,149   $ 6,301   $ 4,561   $ 7,928   $ 9,928   $ 10,733  
                           

(1)
See "Selected Consolidated Financial and Other Data—Supplemental information" for how we define and calculate bookings, free cash flow, adjusted comprehensive income and a discussion about the limitations of these non-IFRS financial measures.

(2)
Defined as computers or other Internet-connected devices with at least one update downloaded in the 30 days before the period end.

(3)
Defined as total number of bookings during the applicable period divided by the number of devices protected at the end of the period.

        We have experienced significant growth of our revenues and bookings over the past six quarters. While our revenues have increased in each of the quarters presented, our bookings have experienced volatility due to seasonal fluctuations in demand for our products. We expect that our business will experience the seasonality typical of a consumer business, with a relatively large sequential increase in bookings during the fourth quarter as a result of the December holiday season and a relatively small sequential increase or sequential decline in bookings during the second and third quarters as a result of low computer usage during the summer months. In addition, we typically release a new version of our products in the first quarter of each year, which tends to drive increased demand for our products; as a result, we have experienced a relative

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increase in our bookings during the first quarter. In 2010, these seasonal factors were not clearly visible in our quarterly results of operations because the effects of seasonality were offset by the growth of our user community. As the growth rate of our user community slows in the future, we believe that seasonal factors may have a more significant impact on our bookings volume which may in turn affect our revenues and results of operations.

Liquidity and capital resources

        Since our inception, we have financed our operations exclusively through cash generated from operations. We generate significant amounts of cash compared to the amount of revenues we recognize in any particular period since our users pay the entire license fee when they register for our software. Amounts not recognized are reflected on our balance sheet as deferred revenues. At June 30, 2011, before distributing dividends, we had cash and cash equivalents of $84.3 million.

        The following table presents the major components of our cash flows for the periods presented:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2008   2009   2010   2010   2011  
 
  (in thousands)
 

Net cash flows from operating activities

  $ 14,572   $ 24,102   $ 40,003   $ 17,856   $ 30,485  

Net cash used in investing activities

    (868 )   (2,909 )   (2,815 )   (274 )   (237 )

Net cash used in financing activities

    (2,979 )   (5,687 )   (17,991 )   (2,463 )   (227 )

        Based on our current business plan, we believe that our cash and cash equivalents, together with the net proceeds from this offering after giving effect to the special dividend that we intend to pay to our existing stockholders, will be sufficient to meet our anticipated short-term cash needs for at least the next twelve months.

        Our long-term cash needs will depend on many factors including the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and solutions offerings, the costs to ensure access to adequate research and development capacity and the continuing market acceptance of our products. In connection with future development, expansion and acquisitions, we may need to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

Cash from operating activities

        Net cash flows from operating activities grew significantly each year from 2008 to 2010. This resulted from significant growth in bookings partially offset by an associated increase in trade receivables as well as taxes paid.

        Net cash flows from operating activities in the six months ended June 30, 2011 were $30.5 million and were generated primarily from $27.8 million in profit before income tax adjusted down by $0.7 million of non-cash items and adjusted up by a $9.1 million increase in deferred revenues. We experienced low impact from changes in trade and other receivables or payables. Income tax paid during the period totaled $5.9 million.

        Net cash flows from operating activities in the six months ended June 30, 2010 were $17.9 million and were generated primarily from $6.8 million in profit before income tax adjusted up by $7.2 million of non-cash items and by a $7.6 million increase in deferred revenues. Trade receivables increased by $1.3 million related to higher bookings. Income tax paid during the period totaled $2.7 million. Trade payables changed minimally.

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        Net cash flows from operating activities for the year ended December 31, 2010 were $40.0 million and was generated primarily from $23.0 in profit before income tax adjusted up by $9.3 million of non-cash items and by a $15.3 million increase in deferred revenues. Trade receivables increased by $4.3 million related to the higher bookings. Income tax paid during the year totaled $4.5 million. Trade and other payables increased by $1.2 million related to higher personnel cost and higher purchase of legal and audit services.

        Net cash flows from operating activities in the year ended December 31, 2009 were $24.1 million and were generated primarily from $12.0 million in profit before income tax adjusted up by $5.3 million of non-cash items and by $11.8 million in deferred revenues. Trade receivables increased by $3.2 million related to higher bookings. Income tax paid during the year totaled $2.6 million. Trade payables increased by $0.7 million.

        Net cash flows from operating activities in the year ended December 31, 2008 were $14.6 million and were generated primarily from $7.2 million in profit before income tax adjusted up by $3.0 million of non-cash items and by a $7.7 million increase deferred revenues. Trade receivables increased by $0.5 million and Income tax paid during the year totaled $2.9 million. Trade payables changed minimally.

Cash used in investing activities

        Cash used in investing activities was $0.2 million in the six months ended June 30, 2011, $0.3 million in the six months ended June 30, 2010, $2.8 million in 2010, $2.9 million in 2009 and $0.9 million in 2008. Investing activities have consisted primarily of acquisitions of intangible non-current assets, most notably trademarks and internet domains from our founders in 2010, and the acquisition of property, plant and equipment in 2009 related to our move to new office premises in Prague (such as fit-outs, purchases of furniture and IT equipment).

        We expect to incur capital expenditures of approximately $2.2 million in 2011 and approximately $2.0 million in 2012.

Cash used in financing activities

        Cash used in financing activities was $0.2 million in the six months ended June 30, 2011, $2.5 million in the six months ended June 30, 2010, $18.0 million in 2010, $5.7 million in 2009 and $3.0 million in 2008, and primarily resulted from the payment of dividends to our stockholders (usually in the second half of each year) and lease payments for intangible assets and for finance lease liabilities. Of the $2.5 million cash used in financing activities in the six months ended June 30, 2010, $2.2 million represents payment of withholding tax paid on dividends that were declared on May 19, 2010. The withholding tax was paid on May 27, 2010, though the dividends in the amount of $13.3 million were not paid until the second half of 2010. In the second half of 2010, we also paid the remainder of the dividends declared in 2009 in the amount of $0.9 million. These amounts reflect currency fluctuation gains and losses between dividend declaration in Czech koruna and payments in U.S. dollars, Euros and Czech korunas.

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Contractual commitments and contingencies

        Our significant contractual obligations and commitments as of December 31, 2010 are summarized in the following table:

 
  Payments Due by Period  
 
  Total   Less than 1
year
  1 - 3 years   3 - 5 years   More than 5
years
 
 
  (in thousands)
 

Operating lease commitments(1)

  $ 2,273   $ 665   $ 1,266   $ 342      

Finance lease commitments(2)

    1,955     401     703     592     259  
                       

Total

  $ 4,228   $ 1,066   $ 1,969   $ 934   $ 259  
                       

(1)
Consists of future lease payments for rented office facilities.

(2)
Consists of future license fee payments to our founders, Messrs. Eduard Kucera and Pavel Baudis, in respect of licensed software and other intangible assets previously developed by Alwil Software, an unincorporated partnership through which Messrs. Kucera and Baudis conducted all of our antivirus software development activities prior to December 31, 2006. See "Certain Relationships and Related Party Transactions—License agreement with Eduard Kucera and Pavel Baudis."

Off-balance sheet items

        We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purposes entities and other structured finance entities.

        We have concluded a guarantee agreement which allows us to draw bank guarantees up to an aggregate amount of CZK 7.0 million ($0.4 million). As of December 31, 2010, we had drawn a bank guarantee in the amount of EUR 0.25 million ($0.3 million), which was a requirement of the lease for new office premises in May 2009.

Critical accounting policies and estimates

        Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements included elsewhere in this prospectus. The preparation of our financial statements requires management to make judgments, estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes, and related disclosure of contingent assets and liabilities. We base our estimates upon various factors, including past experience, where applicable, external sources and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and could have a material adverse effect on our reported results.

        In many cases, the accounting treatment of a particular transaction, event or activity is specifically dictated by accounting principles and does not require management's judgment in its application, while in other cases, management's judgment is required in the selection of the most appropriate alternative among the available accounting principles, that allow different accounting treatment for similar transactions.

        We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance as these policies relate to the more

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significant areas involving management's estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.

Revenue recognition

        We derive revenues primarily from sales of our security software and related solutions. License agreements with users contain a pre-defined period of protection of one, two or three years in length, during which the users receive the solutions necessary for day-to-day protection of their devices, including updates and software upgrades. Under IFRS the full amount of our licensing revenue is deferred and recognized ratably on a monthly basis over the length of the license period, to the extent that it is probable that the economic benefits will flow to us, revenues can be reliably measured and collection is probable. We recognize revenues net of discounts and commissions to our eCommerce service providers or resellers, VAT and other sales taxes.

        We make substantially all of our sales through eCommerce service providers that perform administrative functions for us, such as collecting payment and remitting any required sales tax. We consider revenue recognition criteria to be satisfied, and begin to recognize revenue ratably, beginning with the month that the user has entered into a license agreement with us, which is when we are obligated to start providing updates and services to that user. We consider it probable that the economic benefits will flow to us, and that collection is probable, at that time since the value-added reseller collects payment by means of an approved credit card transaction or funds transfer and is obligated to transfer payments to us on a monthly basis.

        We also have distribution arrangements with third parties, such as Google, pursuant to which we receive fees for the cross-sold items and have no other involvement with the sale or support thereafter. We recognize revenues upon sale when collection of the sale price is probable.

Research and development costs

        All research and development costs are currently expensed as incurred due to the rapid release of new versions of our products and their estimated economic life of one year. In the past, the development expenditures for version 5.0 products, which represent the core technology in our products and resulted from a multi-year project, were capitalized and are being amortized over a three-year period beginning upon its launch in January 2010. The costs capitalized were $0.5 million, $0.8 million, $1.3 million and $0.1 million in the years 2007, 2008, 2009 and 2010, respectively. The development expenditures for new versions of our antivirus products no longer meet the IFRS criteria for capitalization, thus all research and development after January 2010 is expensed.

Trademarks and domains

        Our estimate of depreciation incorporates assumptions regarding the useful economic lives and residual values of our assets. As circumstances warrant, depreciation estimates are reviewed to determine if any changes are needed. Such changes could involve an increase or decrease in estimated useful lives or salvage values which would affect future depreciation expense. Trademarks and domains are assessed as having indefinite useful lives and, as a result, are not amortized, but tested for impairment annually. The assessment of indefinite life is reviewed annually to determine whether the indefinite life assumption continues to be appropriate. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal

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proceeds and the carrying amount of the asset and are recognized in the income statement when the asset is derecognized.

Impairment of intangible assets

        An intangible asset that is not subject to amortization is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our intangible assets with finite lives are subject to amortization and consist primarily of leased software and capitalized development expenditures incurred on the Avast 5.0 project. Intangible assets with finite lives are tested for impairment if events or changes in circumstances indicate that the asset might be impaired.

        Impairment testing consists of estimating the asset's recoverable amount, which is the higher of the asset's or cash-generating unit's fair value less costs to sell and the asset's value in use, and is determined for an individual asset unless the asset does not generate cash flows that are largely independent of those from other assets or groups of assets. In assessing value in use, 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 to sell, recent market transactions are taken into account, if available. If no such transactions can be identified an appropriate valuation model is used.

        Our management performs impairment assessment on intangible assets with indefinite lives on December 31 of each year or when events or changes in circumstances indicate that the asset might be impaired. As intangible assets with indefinite lives are inherently linked to the sales of all of our products, total operations of the group were considered to be a single cash generating unit. In order to allocate the cash inflows to our intangible assets with indefinite lives, we used a methodology that considered the amount that a licensee would pay for the right to use the invention if protected by a patent. In determining the value in use, we used parameters defined in our financial statements included elsewhere in this prospectus. During the years ended December 31, 2008, 2009 and 2010, we did not recognize any impairment losses on our intangible assets with indefinite lives.

        Estimates are used in deriving cash flows and the discount rate for fair value determinations of intangible assets with indefinite lives. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the intangible and tangible fixed asset accounting policies affect the amounts reported in our financial statements. In particular, if different estimates of projected future cash flows or a different selection of an appropriate discount rate or long-term growth rate were made, these changes could materially alter the projected value of the cash flows of the asset and, as a consequence, materially different amounts would be reported in the financial statements.

Functional and reporting currency

        Our reporting currency and the functional currency of our Czech operating subsidiary, AVAST Software a.s., is the U.S. dollar. Avast Software B.V. and each of its subsidiaries determines its own functional currency. Items included in the financial statements of each such entity are measured using that functional currency. The functional currency of an entity is the currency of the primary economic environment in which that entity operates. The functional currency of our Czech operating subsidiary, AVAST Software a.s., is the U.S. dollar. Through December 31, 2011, the functional currency of Avast Software B.V., our Dutch parent, will be the Euro solely because Avast Software B.V. had limited operations and incurred expenses solely in Euros. The balance sheet of Avast Software B.V. has been translated into U.S. dollars using the exchange rate at the balance sheet date. The statement of comprehensive income has been translated using the average

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exchange rate for the fiscal period. Translation gains and losses are reported as a component of stockholders' equity. We expect that the functional currency of Avast Software B.V. will be the U.S. dollar in future periods. Any change to the functional currency of AVAST Software a.s., in particular, could materially impact the presentation of our results of operations. The functional currency of our recently-acquired German and Austrian subsidiaries is expected to be the Euro.

Finance leases

        Finance leases represent licenses for trademarks, internet domains, software and other assets. In November 2008, AVAST Software a.s., now Avast Software B.V.'s Czech operating subsidiary, entered into an exclusive license agreement with Messrs. Eduard Kucera and Pavel Baudis, our founders and its sole stockholders at the time. Pursuant to the license agreement, Messrs. Kucera and Baudis granted AVAST Software a.s. an exclusive, unrestricted, perpetual, worldwide, sublicensable license to use all then existing versions of antivirus software; all virus and user databases, development and administration software tools and computer programs related to updating, supporting and distributing antivirus software; all know-how related to the development and distribution of our antivirus software; two Czech trademarks and one U.S. trademark for "AVAST" and the domain names "avast.com" and "avast.cz." See "Certain Relationships and Related Party Transactions—License agreement with Eduard Kucera and Pavel Baudis." The license has been classified as a finance lease. Based on the assessment of useful economic life, the licensed software was depreciated for three years and the remaining assets are to be depreciated for a period of 10 years. The trademarks and domains have been assessed to have indefinite useful economic lives and are not depreciated. In December 2010, the trademarks and domains were purchased by us and are no longer classified as leased assets but owned assets.

Stock-based compensation

2010 grant to our Chief Executive Officer

        On August 18, 2010, we issued 9,000 shares of our common stock, then representing 5% of our outstanding shares to our Chief Executive Officer pursuant to a share purchase agreement among us, our Chief Executive Officer, and our founders, Messrs. Kucera and Baudis. Under this agreement, Messrs. Kucera and Baudis transferred the shares to our Chief Executive Officer who then sold shares representing 1.2% of our share capital to Summit and the remaining 3.8% were held by a trust foundation for the benefit of our Chief Executive Officer. Of the shares, 3,600 were granted without performance conditions and 2,700 were subject to surrender in each of 2010 and 2011 if certain bookings targets were not met in each of those years. In addition to the performance conditions, if the Chief Executive Officer left our employment the shares were returnable to the founders, with 225 shares to be surrendered for each month starting in August of 2010 and continuing through 2011 at the end of which the Chief Executive Officer was not our employee.

        Prior to the conversion of our financial statements to IFRS in preparation for this offering, we had not needed to determine the fair market value of the shares of common stock granted to our Chief Executive Officer because expensing of equity-based compensation is not required under Czech GAAP and, furthermore, the grant was considered a third-party transaction under Czech GAAP since it involved a transfer of shares from our founders. In connection with the conversion of our financial statements to IFRS, we were required to determine the fair market value of the shares granted to our Chief Executive Officer as of August 18, 2010.

        On August 20, 2010, we issued to Summit (1) Series A preferred stock at a price per share of $2,777.78 representing 20% of our voting power on an as-converted basis, and (2) an option to purchase common stock from our founders at a price per share of $2,777.78 representing a 5%

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ownership interest. The total consideration paid by Summit, an unaffiliated third party, was $100 million, which represented an enterprise valuation of $261.9 million.

        We engaged Financial Strategies Consulting Group, LLC ("FSCG") in order to allocate this enterprise value as of August 20, 2010 between our preferred stock and our common stock. FSCG used the option pricing method ("OPM"). The OPM is generally appropriate to use when the range of possible future outcomes for a company is so difficult to predict that forecasts would be highly speculative. We believe this was the case as of August 20, 2010. The OPM treats common stock and preferred stock as call options on an enterprise value, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled as a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option pricing model to price the call option.

        For the purpose of the OPM, FSCG used the following assumptions: (1) a time to liquidity of two years corresponding to the expected timing of a liquidity event, (2) a risk-free rate of 0.49% based on the two-year time horizon to liquidity, and (3) volatility of 0.65 which was calculated using the daily respective stock prices of guideline companies over a two-year period. The resulting total value of our common stock was $161.9 million equating to a price per share of $1,124.17. We did not reduce this value on account of the vesting conditions because we determined that it was probable as of August 18, 2010 that the targets would be met.

        While the shares referenced above were issued to our Chief Executive Officer, and the related performance conditions formalized and communicated, on August 18, 2010, the employment agreement pursuant to which the grant of an equity award was contemplated was entered into on May 4, 2009. Accordingly, although the fair value of the common stock was determined as of August 18, 2010, the fair value has been recognized as a service expense commencing on May 4, 2009 and continuing through the end of the vesting period on December 31, 2011.

        We believe that the methodologies, approaches and assumptions used in connection with the fair value determinations above are reasonable and consistent with the AICPA Practice Aid to determine the fair value of our common stock. Nevertheless, determining the fair value of our common stock requires making complex and subjective judgments. The approach to valuation uses estimations that are consistent with the plans and estimates that we use to manage our business. There is inherent uncertainty in making these estimates. Although it is reasonable to expect that the completion of this offering will add value to our common stock because they will have increased liquidity and marketability, the amount of additional value cannot be measured with absolute precision or certainty.

Quantitative and qualitative disclosure about market risk

Foreign currency risk

        Our results of operations and cash flows are affected by fluctuations due to changes in foreign currency exchange rates. In 2010, 59.8% of our revenues were denominated in U.S. dollars and 38.5% were denominated in Euros. Conversely, in 2010, 68.0% of our expenses (excluding foreign currency translation losses and movement in deferred tax) were denominated in Czech korunas, 26.1% in U.S. dollars and 5.6% in Euros. Our expenses in Czech korunas result from the fact that the majority of our research and development, sales and administrative activities are conducted at our Czech facilities. As a result, a devaluation of the U.S. dollar or Euro relative to the Czech koruna could reduce our profitability significantly. At this time we do not enter into any foreign currency hedging programs or instruments that would hedge or help offset such foreign currency exchange rate risk, but may do so in the future.

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        Since revenues represent sales of software licenses, they are recognized over the duration of the license even though payment is received at the start of the license period. Given that the release of deferred revenues ratably over the term of the license is based on the exchange rates valid at the start of the license term, such revenues are not subject to the risk of exchange rate fluctuation.

        Until the third quarter of 2011, Digital River, our primary eCommerce service provider converted its payments to us on a monthly basis into either U.S. dollars or Euros, at our direction. We generally elected to receive a higher proportion of our revenues in U.S. dollars. Commencing in the third quarter of 2011, we chose to begin receiving monthly payments in the currency of sale for transactions in the following currencies: U.S. dollars, Euros, Czech korunas and British pounds. With respect to sales denominated in currencies other than U.S. dollars, Euros, Czech korunas and British pounds, which we expect to constitute a small percentage of sales, we have the ability to select the currency in which we receive the payment from Digital River. We currently expect to receive the proceeds from these sales in U.S. dollars after Digital River converts them from the currencies of sale. As a result of this new arrangement, we will receive a higher portion of our revenues in the same currencies in which we incur the majority of our operating expenses—namely Euros and Czech korunas. Consequently, we anticipate a decrease in our need to convert U.S. dollars to Euros and Czech korunas—and a subsequent reduction our exposure to fluctuations in these currencies. While we may still elect to receive payment in other currencies, we expect to receive payments in the currencies of sale for the four major currencies—which account for substantially all sales. As a result, we expect that the proportion of revenues denominated in U.S. dollars will decrease in the future as compared to the past as a larger proportion of revenues will be denominated in Euros and Czech korunas.

        The following table presents information about the changes in the exchange rates of the principal currencies that impact our results of operations:

Changes in Average Exchange Rates During Period
  U.S. Dollar Against
Czech Koruna
  Euro Against
Czech Koruna
 

2008

    (16.1 )%   (10.2 )%

2009

    11.9 %   6.0 %

2010

    0.3 %   (4.4 )%

2011 (through June 30, 2011)

    (9.1 )%   (3.7 )%

        The figures above represent the change in the average exchange rate in the given year compared to the average exchange rate in the immediately preceding year. Negative figures represent depreciation of the U.S. dollar compared to the Czech koruna and depreciation of the Euro against the Czech koruna, respectively.

        Assuming a 10% decrease in the U.S. dollar relative to the Czech koruna and assuming no other change, our operating income would have decreased by $1.1 million in 2010 and by $0.7 million in the six months ended June 30, 2011.

        Our results of operations are also impacted by currency translation gains and losses on monetary assets and liabilities, primarily cash deposits, denominated in currencies other than the U.S. dollar. Such gains or losses only impact the dollar value of our non-dollar denominated cash deposits and result from changes in reported values due to exchange rate fluctuations between the beginning and the end of reporting periods. In 2008 and 2010, due to the size of our Euro and Czech koruna-denominated cash deposits, the amount of finance expenses recorded was relatively significant as a result of significant fluctuations between the Euro, Czech koruna and the U.S. dollar. Our most significant exposure relates to a potential change in the exchange rates between the U.S. dollar, on the one hand, and the Euro or Czech koruna on the other. The following table below presents the impact on our finance income and expenses, net and, therefore our profit before

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income tax, of a 10% increase in the value of the Euro, the Czech koruna and British pounds sterling relative to the U.S. dollar assuming that other variables remain constant.

 
  Profit    
 
 
  Year Ended
December 31, 2010
   
 
 
  (in thousands)
   
 

EUR

  $ 2,726        

CZK

    1,270        

GBP

    94        

        A decrease in the value of such currencies against the U.S. dollar would have an impact of an equal and opposite magnitude of that set forth in the table above.

        The functional currency of our Czech operating subsidiary, AVAST Software a.s., is the U.S. dollar. Through the end of December 31, 2010, the functional currency of Avast Software B.V., our Dutch parent, was determined to be the Euro solely because Avast Software B.V. had limited operations and incurred expenses solely in Euros. We expect that the functional currency of Avast Software B.V. will be the U.S. dollar in future periods. The results of Avast Software B.V. have been translated into U.S. dollars using the method of conversion used to translate our financial statements, the current rate method. Translation gains and losses are reported as a component of stockholders' equity. The impact of these translation gains and losses is immaterial due to the limited operations of Avast Software B.V. See "—Critical accounting policies and estimates—Functional currency."

Interest rate risk

        To date, our excess cash has been held in bank accounts and we have not invested such cash in interest-bearing investments. As a result, we have not to date been exposed to interest rate risk.

Inflation risk

        Our monetary assets, consisting solely of cash held in bank accounts, have historically not been affected significantly by inflation because we have distributed a significant portion of our distributable profits as dividends. We believe the impact of inflation on replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. The rate of inflation, however, affects our cost of revenues and expenses, such as those for employee compensation, which may not be readily recoverable in the price of products and solutions offered by us.

Recent authoritative accounting guidance

        There are a number of pending standards and interpretations issued but not yet effective under IFRS. We believe that the only standard that is likely to have an impact on our financial statements when it becomes effective is listed below.

        IFRS 9, Financial instruments.    IFRS 9 is the first part of a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement (referred to below as IAS 39) and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets. In accordance with IFRS 9, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity's business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with IFRS 9, an investment in a debt instrument will be measured at amortized cost if the objective of the entity's business model is to hold assets

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in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest. All other financial assets are measured at fair value through profit or loss. Furthermore, embedded derivatives are no longer separated from hybrid contracts that have a financial asset host. Instead, the entire hybrid contract is assessed for classification using the principles above. In addition, investments in equity instruments are measured at fair value with changes in fair value being recognized in profit or loss. Nevertheless, IFRS 9 allows an entity on the initial recognition of an equity instrument not held for trading to elect irrevocably to present fair value changes in the equity instrument in other comprehensive income where no amount so recognized is ever classified to profit or loss at a later date. Dividends on equity instruments measured through other comprehensive income are recognized in profit or loss unless they clearly constitute a return on an initial investment. IFRS 9 removes financial liabilities from its scope.

        IFRS 9 is effective for annual periods beginning on or after January 1, 2013 but may be applied earlier, subject to providing disclosure and at the same time adopting other IFRS amendments as specified in IFRS 9. IFRS 9 is to be applied retrospectively other than in a number of exceptions as indicated in the transitional provisions included in IFRS 9. In particular, if an entity adopts IFRS 9 for reporting periods beginning before January 1, 2012 it is not required to restate prior periods. We are evaluating the effect of implementing IFRS 9 on our consolidated financial statements.

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Business

        We are a leading global provider of security software delivered through a freemium model. Our software is currently the world's most widely-used consumer security software, with over 142 million actively protected devices as of October 31, 2011 in almost every country in the world. We also have a growing presence in the small and medium business, or SMB, market. Our success has been driven by our community-focused and online-based freemium business model, through which we provide our users with a high-quality security product for free. We then offer them the opportunity to either purchase or upgrade to our premium paid products that provide advanced functionalities. We also seek to provide additional value-added solutions to our users over time. Our business model and our high quality security products have enabled us to build a strong brand and loyal user community, which in turn has driven highly-efficient "viral" marketing for our products. Based on a recent user survey, nearly 60% of our new users came to us through personal recommendations.

        We have designed our flagship free product, avast! Free Antivirus, from the perspective that comprehensive protection against malicious software, or "malware," such as viruses, worms and spyware should be made available to everyone. We provide full malware protection in our free product, as well as additional advanced security functions in our premium paid product, such as antispam and enhanced safeguards for online commerce and banking activities. Our products consistently rank among the highest-rated anti-malware solutions by both users and editors on leading download sites and popular media around the world. We believe that the easy-to-use nature, high quality and performance of our free product have been key factors in the growth and loyalty of our user community.

        Our user community is one of our most valuable assets. In addition to driving "viral" marketing and brand recognition, a majority of our users opt into our CommunityIQ platform, which acts as a source of continuously updated threat data. We believe that the scale of this critical, real-time threat intelligence is unparalleled in the industry, and directly enhances the level of protection provided by our products. Committed members of our user community also contribute with technical support postings on our online support forum. In 2010, we logged over 57 million page views in our technical support forum where substantially all responses are provided by users. Our users also helped translate our products into 27 of the 38 languages our products are available in, allowing us to protect more users than would otherwise be possible. As a result, our user community has been instrumental in helping to minimize costs associated with supporting additional users and has helped drive our rapid growth. We intend to stay true to our "community first" philosophy by continuing to provide a high quality, comprehensive security product for free and are committed to continuing to build long-term relationships with our users. Through this strategy, we believe that we will continue to grow our user community and identify opportunities to generate increased revenues from these relationships over the long-term.

        Our user community is highly diversified geographically. As of October 31, 2011, 28 countries had more than one million actively protected devices and countries where the primary language is not English accounted for approximately 80% of actively protected devices. The countries with the most actively protected devices were Brazil, France, the United States and Russia, with 13%, 10%, 8% and 6% of total number of actively protected devices as of October 31, 2011, respectively.

        It is a key element of our business model that the substantial majority of our marketing and distribution is free and online-based. This allows us to minimize the costs traditionally associated with these activities and maintain full ownership and control of user relationships, while providing our business model with a high degree of scalability. Our online distribution model also enables us to seamlessly generate revenues through both offering premium paid products and solutions and

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cross-selling and cross-distribution arrangements, such as our agreement with Google to distribute their Chrome web browser.

        We have grown our business rapidly in recent years while maintaining strong levels of profitability and cash flow generation. Our revenues grew from $25.3 million in 2009 to $48.5 million in 2010, an increase of 91.6%, and from $20.2 million to $37.9 million for the six months ended June 30, 2010 and 2011, an increase of 87.1%. Our adjusted comprehensive income was $12.4 million, $23.9 million and $20.7 million in 2009, 2010 and the six months ended June 30, 2011, respectively, representing 48.9%, 49.4% and 54.6% as a percent of revenues. Our free cash flow was $21.1 million, $37.1 million and $30.2 million in 2009, 2010 and the six months ended June 30, 2011, respectively. See "Selected Consolidated Financial and Other Data—Supplemental information" for how we define and calculate adjusted comprehensive income and free cash flow, and a discussion about the limitations of these non-IFRS financial measures.

Industry background

        The consumer security software market is large and well-established, but also experiencing strong growth and rapid change. A number of industry trends, including a challenging threat environment and the rapid adoption of mobile devices, are driving continued demand for security software. At the same time, the steady shift of consumer buying patterns to online purchases and the emergence of the freemium business model are causing significant market disruption and changes.

Challenging threat environment drives increased demand for security software

        The security threat environment has increased significantly in recent years for both consumers and businesses as professional criminals motivated by a significant and growing opportunity for profit through the theft of valuable information have become the driving force in the market. According to the 2011 Data Breach Investigations Report published by Verizon in April 2011, individuals affiliated with organized crime perpetrated more than half the data breaches involving external agents. Identity theft and account compromise have emerged as primary and highly profitable goals for these professional hackers.

        An underground economy has developed to support the data theft industry, enabling hackers to purchase attack kits that simplify and automate the data theft process and to easily sell stolen data such as credit card numbers. Largely as a result of this underground economy, the number and sophistication of attacks has increased significantly, with hundreds of millions of unique variants of malware detected in 2010 alone. An increasing number of threats are web-based attacks that can either infect visitors to legitimate websites that have become infected or lure users to malicious sites through spam, phishing or other means. Once a machine is infected, modern malware is typically designed to avoid detection, so it can continuously collect the user's data or credentials such as passwords and also control the machine to launch subsequent attacks. Social networking exacerbates the threat further by arming hackers with personal information that can be used to create highly-credible targeted attacks. With a more determined and resourceful adversary, protecting users now requires far more than scanning email and files for viruses and spyware.

        As a result of this increasingly challenging threat environment, the demand for security software continues to increase. According to an IDC report released in November 2011, the total endpoint security market is expected to grow from $7.2 billion in 2010 to $10.6 billion in 2015, while the consumer endpoint security market is expected to grow from $4.2 billion in 2010 to $6.1 billion in 2015.

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Rapid adoption of mobile devices expands market opportunity

        The rapid adoption of smartphones and tablets is driving an emerging market opportunity for mobile security software. As mobile devices such as smart phones and tablets have become increasingly powerful and are frequently used to store or access sensitive information or to conduct online banking and other transactions, they have increasingly become the target of malware and other security threats. The widespread use of applications ("apps") on these devices is also increasing the threat of mobile malware, as many of these apps contain security vulnerabilities. Since mobile devices are lost or stolen more frequently than traditional desktops or laptops, there has been increasing demand from consumers for anti-theft capabilities, as well. As users become aware of the risks they are exposed to through their mobile devices, we expect they will increasingly adopt mobile security solutions. Over time, we believe users will need to protect every device that stores or accesses sensitive information or conducts online transactions. According to an IDC report released in March 2011, the mobile security market is projected to grow from $0.4 billion in 2010 to $1.9 billion in 2015, representing a CAGR of 35%.

Consumer buying patterns continue to shift from traditional channels to online purchases

        Traditionally, consumers typically purchased their security software either as packaged software through retail stores, as pre-installed software on new computers from PC manufacturers or as a value-added service from Internet service providers. With growing online and eCommerce activities and the proliferation of online app stores, these traditional go-to-market channels have become increasingly expensive and have struggled to provide vendors with a direct, ongoing customer relationship. Consumers are steadily shifting their buying patterns and are increasingly likely to use online downloads as the source of their security software. According to an August 2011 Forrester Research report, Consumer Security Market, 2011 And Beyond: Evolving Buyer Behaviors Breed Market Volatility, online downloads account for 40% of security software installations in the United States and represent the majority of installations in many other established and emerging markets such as Western Europe, Brazil and India.

The freemium model is disrupting the consumer security market

        The freemium or free-to-premium business model has experienced rapid growth across a number of markets in recent years. A number of software and Internet companies such as LinkedIn, LogMeIn, Skype and Zynga have successfully employed freemium models to attract large user bases and develop their businesses. While different freemium vendors have different approaches to the business model, virtually all of the vendors have used the free versions of their solutions to attract large user bases, typically through viral marketing and brand awareness, then aim to profit from these users in a range of different ways.

        The freemium model has become a disruptive force in the consumer security market and traditional market leaders have struggled to compete without undermining their existing businesses. There has been rapid user adoption of freemium security products as freemium vendors are capturing a growing share of the installed base in the consumer security market. According to an August 2011 Forrester Research, Inc. report, Consumer Security Market, 2011 And Beyond: Evolving Buyer Behaviors Breed Market Volatility, between 300 million and 350 million PCs run freeware antivirus, a significant increase from the estimated 250 million freeware users cited in a December 2009 Forrester Research, Inc. report, Consumer Security Market Trends, 2009 To 2010: The Freeware Threat.

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