One thing I am having a problem with is getting out because the company is putting money into their growth. Like AIOCF. Saul got out of it because earnings are coming down. But I see the company growing and spending for more growth.
Andy, what is the advantage to them for growing? There are some industries where it’s winner-take-all, or there are huge scale advantages, or large up-front costs but that will be made up for with a ton of recurring revenue over the lifetime of the customer. But I didn’t see any that with Avigilon: they’re essentially in a commodity industry (security cameras), and I didn’t understand what meaningful advantages would come from growth at the expense of profits. Furthermore, they’re riding a huge tailwind as people convert from analog to HD, but that’s a one-time thing: IMHO, every sale they make at the expense of profits is a wasted sale.
Maybe I’m just terribly misunderstanding the company. How will revenue growth today drive even more profit tomorrow?
Neil
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Andy, what is the advantage to them for growing? There are some industries where it’s winner-take-all, or there are huge scale advantages, or large up-front costs but that will be made up for with a ton of recurring revenue over the lifetime of the customer. But I didn’t see any that with Avigilon: they’re essentially in a commodity industry (security cameras), and I didn’t understand what meaningful advantages would come from growth at the expense of profits. Furthermore, they’re riding a huge tailwind as people convert from analog to HD, but that’s a one-time thing: IMHO, every sale they make at the expense of profits is a wasted sale.
That is a very good point Neil. I never thought of it that way. The way I was thinking of it is. They are building another manufacturing plant in Texas so that they can bring more capacity on line. With this plant they will be able to grow revenues to another 500 million. Allowing them the capacity to produce 1 billion in product a year. Now correct me if I am wrong but you are saying that the plant really isn’t needed? I think that might be a valid way of looking at it but if they are able to sell 500 million dollars of product and they have customer waiting to receive their product that could be a problem. So I think you are right Neil they do have a strong tailwind behind them from the change to digital from analog and this should go on for quite awhile. As far as them selling one time and that is it, I think that is basically true but there are a lot of people to sell to.
There Revenues have been coming down but they are still increasing at 35%. They should be hitting their Target of 500 million run rate by the end of 2016. I like how the CEO is focused on this because every since he IPO’d he has stated that this was his goal. They also have been putting alot of money into their sales teams in order to increase sales. I would think we should start seeing a big increase in sales by the end of the year. (Hopefully) The big reason I am still invested Neil is that they only have 2% of the market right now. By 2018 the market will be a 30 billion market. No one in the market has a 10% share and most of the companies in this market do not have a total end to end solution like Avigilon has.
As far as the commodity issue goes you are completely correct on that and the CEO Fernandes has addressed that. He claims they are not a security camera company but a solutions company. What he is referring to is their camera’s, software, and recording solutions. They provide it all in one package. He claims that cameras will always get cheaper and cheaper but that the total package should claim higher margins. (At least that is the way I understood it)
So, Neil, The reason I am still invested in this company is because the CEO seems to be totally engaged and the market seems to be big.
Thanks for your thoughts though Neil, you bring up some really good points that I need to think about. Maybe he didn’t need to build the plant down in Texas and that could be a drag on earnings.
Andy
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Hi Andy,
I don’t know what Avigilon’s future will be, of course. I was just laying out why I sold. But it wasn’t about the plant, specifically.
The problem, IMHO, of chasing revenues without worrying about profits is that it’s very, very easy to do. Success in growing revenues when profit isn’t an issue tells you nothing about the business’ ability to grow profitably in the future (or even maintain current business once profitably becomes an issue, especially if it means raising prices).
If they can’t do it today, why will they be able to do it tomorrow? What will be different?
I couldn’t see any reasons why tomorrow would be different, so I sold.
Besides that, my choice isn’t just between owning Avigilon or sitting in cash: I have a whole universe of companies out there I can invest in. So IMHO, Avigilon needs to be one of the best places for my money – not just a company that might, someday, be able to turn a meaningful profit if the CEO finally decides to care about that.
Again, though, just my opinion, and quite possibly a misinformed one!
Neil
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Neil and Andy,
I too still have my Avigilon (AIOCF or AVO.TO) shares, and have actually added more shares after the recent drop. From memory, there were few reasons for the US plant:
- To close more US deals – faster. They are a Canadian company
- To create more manufacturing capacity well beyond the $500M
- To consolidate distribution and logistics. They were using a third party to do this that will be going away.
Their moat is really providing a full end-to-end solution in a fragmented industry with extensive use of video analytics (lot of patents here). This is the part I am very excited about. Also, the ability to train the camera to only send alerts when it senses a qualified risk - this is huge.
Yes, I don’t like the recent drop in earnings, but they are growing the business and they are doing all of this debt free. Like Andy, I am willing to keep a medium position for few more quarters to see how this plays out.
LegoAbs
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I don’t know what Avigilon’s future will be, of course. I was just laying out why I sold. But it wasn’t about the plant, specifically.
The problem, IMHO, of chasing revenues without worrying about profits is that it’s very, very easy to do. Success in growing revenues when profit isn’t an issue tells you nothing about the business’ ability to grow profitably in the future (or even maintain current business once profitably becomes an issue, especially if it means raising prices).
If they can’t do it today, why will they be able to do it tomorrow? What will be different? I couldn’t see any reasons why tomorrow would be different, so I sold.
Besides that, my choice isn’t just between owning Avigilon or sitting in cash: I have a whole universe of companies out there I can invest in. So IMHO, Avigilon needs to be one of the best places for my money – not just a company that might, someday, be able to turn a meaningful profit if the CEO finally decides to care about that.
Again, though, just my opinion, and quite possibly a misinformed one!
Hi Andy, I agree with all of what Neil just wrote. There are plenty of companies that are growing revenue fast AND earnings fast too. Often faster.
Saul
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Andy,
So I saw it just like you - for a while. I was holding my Avigilion because I thought that at some future point they would show tremendous earnings growth.
But then I thought, well maybe, but in the meantime I’m sitting on an investment going nowhere. I sold at a loss and put the money to work with SKX, SWKS, and AMBA. If AVGLON wakes up, it won’t be too late to sell something I’m a bit heavy in and redeploy it. But why sit on an idle investment when you could be making money elsewhere? Exactly what is the logic about waiting for company X to perform tomorrow when you could have your money invested in company Y that is performing today?
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