Avigilon Q215 report (All numbers in Canadian Dollars)
I want to thank Seekingalpha.com for the use of their transcripts and Sec.gov for the financials.
OverView of Quarter:
Revenue increased 38% YoY for the quarter. Net Income was down 19% and adjusted earnings were up 26%. They now have an annual Revenue run rate of over $350,000 along their path to $500,000. Their FCF was negative this quarter but they had more Cash on their balance sheet. They also had more debt on their balance sheet.
For the Quarter:
Three months ended June 30th, 2015 2014 % Change
United States 54,123 35,038 54%
EMEA 19,342 14,783 31%
Canada 4,219 4,244 -1%
United Kingdom 4,328 4,514 -4%
Asia Pacific 5,544 4,777 16%
Latin America 2,238 1,825 23%
Total revenues 89,794 65,181 38%
When asked about the weakness in the U.K, Fernandes claimed they were coming off a really big base and that this was nothing to worry about. I am not sure if this is an adequate explanation.
New Innovations:
This quarter Avigilon introduced Centers of Excellence to strengthen Research and Development. Vancouver will serve as their Video and Enterprise security center of excellence, Boston will serve as the Analytics and Data Sciences center of excellence and Dallas will serve as Customer Experience and Ecosystem center of excellence. Avigilon also announced the addition of the Avigilon Control Center (ACC) Edge Solution (ES) High Definition (HD) Recorder to its innovative product portfolio. The ACC ES HD Recorder delivers complete support for HD cameras up to 7K (30 MP) resolution, full performance of the Avigilon Control Center (ACC) software and powerful remote access capabilities in a compact design. Their security solutions are backed by 273 U.S. and international patents issued and 279 patents pending.
Employees:
At the end of Q2, They had 886 employees, up from 775 at the end of Q1 2015. They are investing in people in all areas of the company.
Net Income Statement:
• Revenue for the quarter were at $89.8 million up 38% from $65.2 million YoY.
• Cost of Sales were up 30% but down 3% as a percentage of Revenue.
• Gross Margins were 58% up 3% YoY
• Sales and Marketing were 24% down 2% as a percentage of Revenue YoY
• R&D were 13% down 2% as a percentage of Revenue YoY
• G&A were 17% up 7% as a percentage of Revenue YoY
Avigilon is growing Revenue, but this growth is coming down. You could say this is because of the Law of large numbers but their Market Cap is only a little bit above $500 million. I am a little surprised because of the size of this market. While all of the costs, except for G&A , are basically staying in the same range, G&A is really ramping up due to the increase in staffing.
Balance Sheet
Their Balance sheet is a mixed bag this quarter. Their cash is now at $94.9 million dollars up 30% from YoY. They now have debt on the Balance sheet of $19.3 million dollars. Their inventory is essentially flat QoQ.
Cash Flow Statement
Avigilon was Free Cash Flow negative again this quarter. They are spending on their Plano Texas plant and their headquarters. When this finally gets up and running it will only impact Gross margins by 2 to 3 basis points over the next 3 to 4 quarters.
Conference Call:
Alexander Fernandes CEO:
Security Solutions are a growing global market at is estimated to grow from U.S.$18 Billion dollars in 2014 to U.S.$28 billion dollars by 2018. No Single customer was larger than 3% of revenue for the quarter. Large enterprise deals of over $250,000, represented 20% of revenue. Headcount increased 111 employees, 48 of these employees were in manufacturing at the Plano, Texas plant. Introduced the new Avigilon Control Center Edge Solution Hd Recorder which is targeted at organizations with a large number of remote sites. It supports our entire camera range up to 7K resolution, and is ideal for remote applications. They have the only 7k camera in the global security industry. They are rolling out a new licensing program which should see traction in 24 to 48 months. The big changes is the ongoing commoditization of hardware. Which doesn’t negatively impact their business. They are still not facing price pressure. They are the only company in the world to feature 4k and 5k camera technology with video management software, capable of video analytics. That’s of particular interest in doing real-time perimeter protection. As competitors try to roll out video analytics, it gives them a greater licensing opportunity, which is very high margin recurring revenue.
Ric Leong CFO:
Capital Expenditures in Q2 were $10.9 million and year to date $14.6 million. For 2015 they expect CapEx to be in the range of $20 million to $25 million, excluding the $45 million to $50 million related to purchase and improvement of their global headquarters in Vancouver, British Columbia. They repurchased approximately $2.1 million common shares at an average price of $18.39 per share. The closed a US$200 million credit facility and drew down US$80 million. Still continuing to add to infrastructure both in G&A, sales and marketing and R&D. Growth will be modest for the remainder of the year.
Conclusion:
You can see what Avigilon is doing. They are investing now to grow in the future. It’s interesting to see them ramping up but I want to see more on the Revenue side at this time. By next year I expect to see more money falling to the bottom line. I was surprised that they started the Centers of Excellence. Two red flags for me are the Centers of Excellence and how much they are spending on their global headquarters. They have a Market Cap of $549.3 million and they are spending up to $50 million on their headquarters. I like the size of this market though. An $18 billion dollar market that is growing to $28 billion by 2018 is pretty exciting. Since the market is highly fragmented, Avigilon has a good chance of capturing a good piece of this market. I also like the move from Analog to Digital cameras. The first and third quarters are always weaker quarters but I think by 2016 we should see this company start to take off again.
AIOCF----EPS QoQ .12/.15= 25% EPS YoY .81/.70 16% Price 15.93 P/E 19.67 1YPEG 1.23
Andy