AIOCF: Fernandes doesn't get it

In a market that’s growing as fast as digital video security, the market leader should be able to grow earnings together with revenue. I’ve been concerned about Fernandes’ focus on the top line for 3 quarters now. I decided to give him a chance to prove that he would double spending in 2014 to grab market share and then cut back in 2015. Well, just as I thought he might, his desire to be a $500M revenue company by 2016 is preventing earnings growth. Other companies can grow both revenue and earnings. I want to be in those companies. Somehow Saul has done it yet again. Nice job on exiting this one before the stock price tanked. I’m really starting to believe that you have a sixth sense about when stocks are going to drop sharply! Here’s some text from the earnings press release:

"Outlook

Avigilon plans to continue executing on its successful strategy of delivering strong annual year-over-year revenue growth while maintaining growth in profit. The Company believes market share consolidation across the industry will continue. The Company remains on track towards an annual revenue run rate goal of $500 million by the end of 2016. To achieve this growth, Avigilon plans to invest globally in all departments of the Company, and expects operating expenses as a percentage of revenue to increase modestly in 2015, as they did in 2014."

Well, there you have it. Translation: profits don’t matter. That’s all I need to know to sell. The only reason to hold on, in my view would be that next quarter the company will likely show phenomenal YoY Adj EPS growth because Q2 2014 was so low.

Chris

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Chris,
Well yeah - that’s one way to look at it. Another perspective might be that no fundamental change of business has taken place. This sudden and drastic stock price drop might constitute a rare opportunity to pick up a piece of the company while it’s on sale. Current PE is under 17.

I haven’t made up my mind which way to go on this. I get it, revenue expansion at the expense of reduced earnings is not a good strategy and most definitely it is not a sustainable strategy.

I’ve not read the conference call transcript yet, and I don’t know all that much about Fernandes. I would appreciate any input from others who are more informed than I.

I’ve not read the conference call transcript yet, and I don’t know all that much about Fernandes. I would appreciate any input from others who are more informed than I.

See post 3084 on this board.

I have lost complete confidence in Fernandes. Sure, this company could do great and it would be cheap IF earnings grow rapidly in the future. But why place a bet on someone who didn’t stick to what he said. My feeling is that Fernandes will always be first and foremost concerned with revenue goals. Don’t know if it’s an ego thing with him but I don’t want to hope that someday he will care about profits. And revenue was only up 35% YoY while OpEx were up 69%! Look at Brad Jacobs; that guy knows how to build and run a business. He’s demonstrated it successfully multiple times. My money goes on that horse!

There are companies like CRTO that are growing revenue and earnings simultaneously. Just look at the CapEx spending for CRTO…it’s not rising nearly as fast as revenue! Why not invest in companies that can growth their earnings?

Chris

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I closed my position in Avigilon earlier this year for the same reason. I just didn’t feel comfortable with a company that didn’t pay much attention to earnings. I think there are situations where that’s fine: where a strong moat is being built that will lead to much greater earnings later, or where the earnings are recurring and so will add up over time, etc. But I didn’t see either of those things with Avigilon.

I also closed my position in Synaptics at the same time, and for the same reason: all I ever heard from management was revenues, revenues, revenues – and then they’d trumpet this massive growth in revenues that was due primarily to acquisition (in other words, they basically bought those revenues).

None of this is to say that those companies won’t be excellent investments. But I want management that cares about earnings growth. Revenue growth is very easy to achieve, and I think makes for a terrible management goal; growing revenues and earnings together is a sign of a healthy business. If earnings do need to temporarily take a back seat because of where a company is at in its lifecycle (and that happens), I want to understand how that investment is going to translate into better earnings in the future.

As Saul says, it doesn’t matter what I’m not invested in, as long as I’m happy with what I am invested in. I’m okay with passing on these companies, and I hope they do well for everyone who is in them.

Just my 2 cents.

Neil

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