Avigilon was a small company Saul had for a short time when I first found this board, and a couple others here besides myself may still have some AIOCF stock in their portfolio. I think it’s a timely buy again as they’ve hit their stated revenue run rate goal (I think 2 quarters ago) and have now turned to stressing profitability, and lowering expenses, instead of growing revenue (although it’s still growing, that’s not their focus now), and it’s starting to show. They like to state that since they hit their revenue goal, “we changed our focus from growth with profit to profit with growth.”
For those that don’t know, Avigilon Corporation designs, develops, and manufactures video analytics, network video management software and hardware, surveillance cameras, and access control solutions, basically advanced commercial (not residential) security systems, and the world is in more and more need of those (IMO). Avigilon is a Canadian company headquartered in Vancouver and trades as AVO.TO on the Toronto exchange trading in CAD, or as AIOCF on the OTC exchange trading in USD. They were growing revenue and earnings very fast a few years ago, but then set a revenue run rate goal of $500M (CAD) to grab market share. When they did this, staffing up sales teams, their expenses grew and their earnings stagnated (but always remained positive).
Here is the transcript from the most recent 2Q17 conference call, a lot of good info about the market and their business, more than I can summarize, read it if you’re interested:
They released their earnings a week ago and recorded their 38th consecutive quarter of YOY revenue growth and reported record CFFO. A sign of increasing profits in the future is how their expenses as a % of revenue are decreasing. They had this to say on the conference call:
Sales and marketing expenses decreased from 24% in Q2 2016 to 20% in Q2 2017; G&A expenses decreased from 16% in Q2 2016 to 11% in Q2 2017; and operating expenses decreased from 51% in Q2 2016 to 42% in Q2 2017. Management expects the company’s operating expenses as a percentage of revenue will continue decreasing year-over-year as we focus on profitability and benefit from previous investments and further economies of scale.
To demonstrate their earnings and margin improvements, they had this to say:
The second quarter’s adjusted EBITDA and adjusted EBITDA margin increased to $17.8 million and 18%, respectively, compared with $8.0 million and 9% in the same period last year. Adjusted earnings and diluted adjusted EPS for Q2 2017 were $9.3 million and $0.21, respectively, compared to $2.6 million and $0.06 for Q2 2016. The increases are primarily due to increased revenue, gross profit and the gains in operating leverage…
They also stated that the 2nd half of the year is typically their strongest seasonally and don’t expect this year to be any different. Although they don’t give quarterly guidance, I expect their next 2 earnings releases to show very strong growth.
So what did their numbers look like?
Revs (Millions) Q1 Q2 Q3 Q4 2013 $32 $39 $51 $56 2014 $56 $60 $65 $70 2015 $61 $73 $73 $81 2016 $70 $86 $96 $102 2017 $80 $99 Non-GAAP EPS Q1 Q2 Q3 Q4 2013 0.07 0.08 0.21 0.16 2014 0.19 0.11 0.22 0.22 2015 0.13 0.12 0.20 0.21 2016 0.09 0.06 0.21 0.26 2017 0.07 0.21
Their TTM PE is (current price of AIOCF) 12.86 / .75 = 17
So pretty reasonably valued for what the growth should be the next 2 quarters.
Speaking of that, Q2 of '17 was the second quarter that they’ve “focused” on profit, and their YOY earnings growth rate was 250% (from $0.06 to $0.21). Now that $0.06 in Q2 of 16 could have been a fluke caused by extra high expenses while the company was trying to grow revenue, but using any of the previous Q2 numbers, the growth rate was nearly triple digits or higher. Now I’m not saying the growth rate will be that high in Q3 and Q4, but I think it will be up significantly as revenues are still growing and expenses are coming down.
Since they don’t give quarterly guidance, and since analysts don’t seem to do much of their own work the next 2 quarters of estimates are pegged at $0.21 and $0.26 for Q3 and Q4, respectively. Amazingly, those are the same numbers they posted for 2016 in Q3 and Q4. So it doesn’t seem to me like they are taking into account the fact that Avigilon is now focusing on PROFITS, revenues are still increasing, expenses as a % of revenues are going down, increasing leverage, and the next 2 quarters are their best 2 quarters, which all should point to some great growth in earnings for Q3 and Q4 that are not being accounted for by analysts.
So what has the stock price done over the the last few years? Nothing good until about the last 9 months. I’m referencing AIOCF (USD) numbers here, not the AVO.TO (CAD) numbers. I first got invested with a small starter position around $20, this was when they were still growing earnings, but soon they started focusing on revenues and the stock started to drop. It went down and hung out at $15 for a while (I bought some more there, bad decision), but this was before I’d learned to drop a stock when there is a change in the company’s strategy (I should have followed Saul when he got out, but it was a small position, so I thought I’d hold). It continued down and hung around $10 for a while, then after a particularly bad quarter a year ago (remember that $0.06 from above?), it fell all the way under $6. I wanted to buy some so badly then, because they where almost to their revenue goal and I figured the stock would start back up once they hit that. But without knowing if they would actually change course and focus on profit once they hit their revenue goal, or potentially set a new revenue goal, I decided to wait and see. The next release they stated on their call that they would hit their goal in the current quarter and start to focus on profit. The stock popped up to $8, and the day after the release I purchased my largest batch by far, at $8+. It climbed up to $10 during that quarter and after the next release, ran up to $11, I bought more there. The next release didn’t show the earnings increase, but I think it was because they had just started to “pull the levers” to become more profitable. After this most recent release, the stock jumped up to the high $12 range and I’ve bought more here, planning on some good results for the next few quarters or even years.
That’s the long version, I of course could be wrong, but I think there is a large upside and little downside at this point in time, for at least the next few quarters. I don’t think it has the long term potential of a SHOP investment, but I could see this one doubling pretty quickly if they can string good earnings releases together for the next 3-4 quarters.