Avigilon (Aiocf) 3Q 2016
I want to thank SeekingAlpha.com for the use of their transcripts.
Avigilon is a Canadian company that sells security cameras and appliances. While security cameras are a commodity product, their special sauce is the software that they provide. They have software that allows face recognition, license plate reading, and their system is completely digital which allows less cameras that can zoom in and out. The software will allow you to set parameters that the cameras can key on and provide an alert to the security personnel. For instance, if the cameras are in a stadium and a fight is about to break out the cameras will key in on the situation and send an alert to the security personnel monitoring the system. Their system can also be integrated with older analog systems and grown with their digital products. They recently started a patent licensing program and they are licensing over 700 patents. They currently have over 20 companies participating in the patent program that started in February 2016 . Two of their largest customers are Bosch and Sony.
Conclusion: What a long strange trip it has been. I stuck with this company through thick and thin. I thought that when they finally met their $500 million run rate CAD that they would put the pedal to the metal on earnings. I think we can all learn from our investments and here are a few posts from Q1 2015 from Saul’s board.
I respect both of these posters, Neil and Chris. They were completely correct short term. It’s been almost 2 years since those posts and they were right. Avigilon has only gone down since then and languished. At times I thought that I might have made a bad decision to hold. I still might have. But it looks like things are starting to look up.
But one thing I have learned from this. When a company says they are going to start spending money to fuel growth in the future. Believe them and expect your money to be dead for the next two years.
Now I want to state why I am excited about this company. The Ceo Alexander Fernandes stated in the last conference call With the majority of these investments complete, plan to continue growing with a stronger focus on increasing profitability. Ric will now provide a detailed review of our Q3 financial results. So now that the CEO has hit his run rate of 500 million CAD he is now going to focus on earnings.
This is great news because what has changed since the first quarter of 2015? What have we gotten for our money? Well we now have approximately 400 more patents. We are now leasing our patents out to other companies. We have a new factory with that can produce another 500 million dollars of revenue. We also have a trained bigger sales crew and our corporate headquarters has been remodeled. Oh and the corporate headquarter that they bought in November of 2015 for 42 million. They are looking to sell it for 100 million plus and lease it back.
Now I expect this company to finally start growing their bottom line. They have a patent portfolio now that they will get recurring revenue on and that is only going to grow. They have new products that they launched (H4 Product line) and now I expect the investments to finally shine. In five years they have gone from a 60 million revenue run rate to a 500 million run rate giving them a Cagr of 70%. With all of this infrastructure in place and revenues growing they should see expenses dropping materially as a percentage of revenue. If they can get back to 16% profit growth it would give them a lift of 12% in profit. I think this is exactly what is going to happen. I want to make it clear that both the CEO and the CFO stated that they were going to focus on profitability. Also Ric Leong (CFO) stated on the conference call that next year Cap Ex would be going down significantly because they had enough infrastructure built out for the next five years.
January 1st of 2016 the company changed their reporting currency from CAD to USD. All numbers now represent USD. I have also converted all numbers to USD.
**Revenue** In Thousands Q1 Q2 Q3 Q4 14 $59,840 $65,115 $69,759 15 $60,573 $72,972 $72,577 $81,439 16 $69,932 $85,682 $95,817
Revenue climbed this quarter by 32%. Avigilon’s best quarter are supposed to be their second and fourth quarter but last quarter their revenue only grew 17%. Their stock price went up over 40% on this report but it had more to do with the conference call and not the results of this quarter. I will explain all of this in my conclusion.
Avigilon’s Gross Margins
2014 2015 2016 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 % of revenue 55% 57% 58% 59% 58% 57% 56% 57% 50% 51%
Their Gross margin is toward the low end of their range. They had a price adjustment on some of their lower end cameras reducing the margins. They expect the margins to increase as their patent licensing program grows, this is pure profits, and as economy of scales grow with all of the recent infrastructure they have built out.
Net Income in Thousands
Q1 Q2 Q3 Q4 14 $2,591 $10,622 $11,329 15 $ 8,948 $1,837 $ 7,039 $ 4,207 16 $ 1,355 ($1,965) $ 3,432
2014 2015 2016 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Net income 2,591 10,622 11,329 8,948 1,837 7,039 4,207 1,355 (1,965) 3,432 % of revenue 4% 16% 16% 15% 3% 10% 5% 2% -2% 4%
**Earning Per Share** adjusted (Non-Gaap) Q1 Q2 Q3 Q4 14 $.11 $.22 $.22 15 $.13 $.12 $.20 $.21 16 $.09 $.06 $.21
Net income and earnings per share were impacted by non-operational items including Forex loss. and increase in share based payments and in non-recurring costs.
**Free Cash Flow** Cash From Operating Activities – Cap ex. Q1 Q2 Q3 Q4 14 $ 3,325 $10,429 ($ 3,616) 15 ($4,952) ($ 1,041) $ 1,527 ($50,380) 16 ($8,876) $10,117 $11,936
Finally Free cash flow is coming back and they have been positive the last 2 quarters. I believe this will continue in the years ahead.
Cash and Debt
Q1 Q2 Q3 Q4 14 $142,483/$0 $151,805/$0 $ 66,492/$0 15 $14,538/$57,575 $74,153/$15,573 $63,330/$16,590 $20,170/$17,591 16 $11,932/$79,366 $21,980/$85,113 $34,888/$91,172
While their cash has been growing so has their debt. They finally have built out their manufacturing and have the sales teams in place.
Finally, The security camera market grew by 6% last quarter and Avigilon grew by 32%. Clearly outpacing the market and taking share. This is a very fragmented market and Avigilon expects many of the smaller players to go bankrupt. With Avigilon now stating their goal is on improved profitability I think now might be the time for everyone to look at this company again.