Avast: Making Tons of Money From Free Software

In 1988, researcher Pavel Baudi� wrote a program to kill a computer virus. Realizing it could be the foundation for a set of technologies, he teamed up with Eduard Kucera to create the ALWIL cooperative. But it wasn’t until a year later — after the Velvet Revolution in Czechoslovakia — that they could create a new company, Avast, that would be able to seek profits.

Since then, Avast has turned into one of the world�s top antivirus software operators. And yes, it wants to go public. The underwriters include UBS Investment Bank (NYSE:UBS) and Deutsche Bank Securities (NYSE:DB).

Avast�s business is based on the “freemium” model. That is, the company has a free version of its core software. Avast then generates revenues by cross-selling premium products.

Actually, Avast has the world�s most widely used consumer security software, with 142 million actively protected devices. The product is fairly comprehensive, helping with malicious threats like spyware, worms and malware. Avast gets 60% of new users through personal recommendations.

To remain competitive, Avast has been innovative in leveraging its user base. For example, a majority of its users opt into the CommunityIQ platform, which allows for the continuous updating of real-time threat data. The community also helps with technical support questions and even provides translations for new products.

During the first half of 2011, revenues have surged by 87.1% to $37.9 million, and free cash flow came to $30.2 million. No doubt, Avast has a juicy high-margin business.

The growth is likely to continue as viruses continue to be a problem. In fact, hackers are now starting to target social networks, smartphones and tablets.

So with its powerful freemium model and strong growth rate, Avast looks positioned for a successful IPO. But it may not be pubic for long. Avast would not be a surprise if a larger player — like Intel�s (NASDAQ:INTC) McAfee, Symantec (NASDAQ:SYMC), Trend Micro or Microsoft (NASDAQ:MSFT) — might decide to buy it.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of �All About Short Selling� and �All About Commodities.� Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.