Avigilon Q115 report (All numbers in Canadian Dollars)
OverView of Quarter:
Run rate of over $300 Million , on target to achieve $500 million run rate by the end of 2016. They are now building out a manufacturing plant in Plano Texas that will give them the ability to grow revenues to 1 billion dollars. The video surveillance and electronic access control market is estimated at over $18 billion U.S. dollars in 2014 and growing to over $28 billion annually by the end of 2018. Sales Growth in Q1 was broadly based across their major geographic regions.
For the Quarter:
Three months ended March 31, 2015 2014 % Change United States 41,611 28,363 47% EMEA 17,510 13,143 33% Canada 4,686 4,111 14% United Kingdom 4,348 4,704 -8% Asia Pacific 4,023 3,224 25% Latin America 3,243 2,205 47% Total revenues 75,421 55,750 35%
Avigilon believes there are three significant trends that are transforming the video surveillance and access control industry, which are:
(1) the continuing shift to HD and IP-based systems; (2) the convergence of video surveillance and access control; and (3) the increasing deployment of intelligence-delivering analytics.
Globally and regionally, both the video surveillance and electronic access control markets are very fragmented, with no single dominant player. In 2013, it is estimated that the top 5 companies in the global video surveillance space comprised only 30% of the total market, the top 10 less than 42%, and the vast majority held less than 1% market share (Source: IHS Inc. 2014). For the electronic access control market, in 2013 it is estimated that the top 5 companies held 36% market share, while 57% of the market space was occupied by companies with market shares of less than 3% (Source: IHS Inc., 2014).
They introduced the world’s first and only single sensor 7K security camera, They also introduced a highly versatile multi-sensor HD camera featuring up to four individually configurable sensors to address our growing need in the market for multidirectional cameras. Their security solutions are backed by 261 U.S. and international patents issued and 269 patents pending.
At the end of Q1, They had 775 employees, up from 696 at the end of 2014. They are investing in people in all areas of the company .
Net Income Statement:
Revenue was up from 55,750 to 75,421 = 35%
Cost of Sales was up from 23,953 to 30,682. Cost of Sales has been coming down as a percentage of Revenue due to economy of scales. When the company first started out it was at 47% but is now down towards the low 40’s.
Gross Margins was up from 31,797 to 44,739 Gross Margins are going up, when they first started out it was in the low 50’s and it has gradually been improving where this quarter it is at 59%. Some of that is due to currency but also it has to do with product mix, economies of scale, purchasing power, and manufacturing efficiencies.
Sales and Marketing was up 72% YoY and up 6% as a percentage of revenue sequentially. It was at 28% of revenue and at the highest it has ever been. Although it has reached a level of 27% of revenue two times previously. It reached 28% of Revenue this quarter due to an increase in global sales and marketing teams. Management believes this will drive higher Revenues. The second quarter, next quarter, tends to be the highest due to trade shows.
General and Administrative was up 5% , sequentially, this quarter and has been increasing since they became public from 8% to now 18%. This has been increasing due to the additional personnel and related expense for growth of the company. They expect this to come down as a percentage of Revenue going forward.
Net Income has been mostly in the mid Teens since they have come public. Their adjusted Ebitda, a Non-Gaap measure, came down 7% to 15% from the previous quarter. Most of the decrease in Ebitda was due to foreign exchange gain which was backed out. Also their Amortization and Depreciation has been climbing.
EPS diluted on a Gaap basis came in at $.23 up 35% from $.17 but on an adjusted basis it came in at $ .17 down 11% from $.19. The difference was mainly from Foreign currency adjustment.
So the big concern this quarter was their operating expenses. As you can see they are putting a lot of money into Sales and Marketing and General and Administrative. Both of these were mostly due to the hiring of additional people.
Their Balance sheet has deteriorated this quarter. Their cash and cash equivalents went down 46% from $73.1 million dollars to $50.1 million dollars. Their Inventory is up slightly 4%. They are still debt free.
Cash Flow Statement
Avigilon was Free Cash Flow negative this quarter. They had a negative 6.08 million in FCF. That was up YoY from a negative 11.06 million of FCF. The big negative Items this quarter were the unrealized foreign exchange, inventories which were actually down from a year ago, and the trade and other payables, which I see as a positive, which has gone up 179% from the previous year to $6.7 million dollars.
Avigilon’s First and Third quarter are generally their weakest quarters, and it showed this quarter with Revenue only climbing 35%. This is the weakest quarter they have had yet although by only a few percentage points. They are well on their way to a 500 million run rate that they set as a goal when they first became public. They set the goal for the end of 2016 and they claim they will hit it. They were asked what the next goal would be and they stated they would have to wait and see. They are building another plant down in Plano Texas that will allow them another $500 million in run rate giving them the ability to have $1 billion in run rate at that time. They are building out the company with sales and support staff also to help the company grow faster. At this time they only have 2% of the market. In 2014 the total market sat at $18 billion, by 2018 the market will be $30 billion. The market is highly fragmented and nobody in the market has a 10% market share. Avigilon is aggressively going after growth and pushing for their 500 million run rate. This is a goal that they have pushing for all along and they have not changed that plan. While I think this was a disappointing quarter because of the Revenue growth, Avigilon has always stated that the first and third quarters were always there weakest. The next quarter should be an easy comp to beat since Q214 was actually weak on the Earning per share side. Also they are looking into licensing some of their patents. This should help their margins. I see the growth in this field because everyone wants to have digital security cameras. I think Avigilon is excited about their company and Alexander Fernandes, the CEO is very intent on making the company a winner. He is building out the infrastructure for huge growth. Will the sales team that he is building bring huge revenue growth in the future? They are producing solid growth while staying profitable but the question is can they break out to the next level and get great Revenue growth along with high profitability? I am not sure yet but I want to give them a chance and see.
AIOCF----.17/.19= -11% EPS .78/.68 15% Price 14.40 P/E 22.86 1YPEG 1.52