Avigilon Growth Cools - Q2 2012

While still fast for the surveillance market, Avigilon's growth cooled notably in Q2 2012 while marketing expenditures skyrocketed. In this note, we break down Avigilon's quarterly financial report [link no longer available] and commentary from management's investor call.

Overview

While Avigilon has been nearly doubling each year, including a robust 77% increase in the first quarter of 2012, Q2 2012 revenue was 'only' up 52% over Q2 2011. Avigilon included a debatable claim that revenue would be up 80%, excluding a $2.3 million sale from Q2 2011. However, excluding prior sales is questionable at best as high growth companies like Avigilon are expected to be turning in such multi million dollar deals every quarter.

Slowing?

Even if Avigilon is slowing, this may not be a cause for concern. It's nearly impossible for a $100+ million surveillance company to grow 75% year over year. And the good thing is that Avigilon is still on pace for a $100 million 2012 - a remarkable achievement for a surveillance company so young. The big question is whether revenue will continue to decelerate - if Avigilon levels off at 30 to 40% growth, it will still be impressive but it will not have the same overall market impact if they can come close to the 75% historical mark.

Market Expenditures Skyrocketed

Marketing expenses exploded ~600% this quarter from a half million to 3 million CAD - an annual rate of over $10 million and more than 10% of revenue. And this quarter is no aberration with Avigilon noting, that they "expect these expenses to continue to increase, as a percentage of revenue." Indeed, Avigilon is spending almost as much on marketing as they are on sales. By pretty much any metric, this is an extreme amount.

Beyond the common use in trade shows and magazines, Avigilon is funding direct mail campaigns to end users as well as "advertising in business publications, such as Forbes, Bloomberg and the Economist, to increase our brand awareness at the decision-maker level." It will be very interesting to see if this pays off as it is an rare bet in this market.

R&D Up Yet Still Low Comparatively

Year over year, R&D expenditures increased ~80% to $1.5 Million though as a percentage of revenue was only 6%. Avigilon noted that this was a lower precentage than previous quarters but indicated that they expected R&D to return to historical levels of 8% of revenue.

However, whether at 6% or 8%, R&D remains comparatively low relative to top surveillance companies. For instance, Axis spends ~15% of revenue on R&D, essentially double the percentage of Avigilon. While Avigilon is on track to spend $6 Million on R&D in 2012, Axis is on track for ~$90 Million on R&D.

Avigilon's recent product releases in the last year have been fairly ordinary with an incremental increase in their professional camera range, incremental enhancement to their base fixed cameras and an introduction of PTZs which is a catch up / me too release. While all of this is solid, it is not exceptional and it allows competitors an opportunity to catch up.

Integrator Growth

Avigilon noted that they have over 1000 integrators globally, a fairly large number though not unrealistic given the revenue levels they are reaching. Avigilon also noted that they 'never ever sell direct' and that they drop dealers that do not meet certain targets.

One of Avigilon's key strengths is how they block products from being sold online or direct to end users. It will be interesting to see how they can control and manage this as they get bigger since they will need more integrators to accomplish this and may feel more pressure to sell to more channels to meet such aggressive growth targets.

Other Notes from the Call / Report

A few other items of note:

• European revenue growth was strong with EMEA ~45% and UK ~60%. While these areas are still relatively small compared to their Americas business (Americas are ~2.5x larger than EMEA/UK), that they had growth was impressive, given how poorly most surveillance companies are doing in those markets.
• Avigilon says they are 'just shy of 200 employees' with 30 sales people in the US and 9 in the UK. That's a lot of sales people, even relative to their revenue.
• Sales and marketing was 25% of revenue compared to 19% for Axis, reflecting Avigilon's bullish growth efforts.
• Avigilon noted that they 'end up being the price leader' in most deals. We believe this is accurate as their camera and encoder pricing tend to be notably lower than their major competitors (Axis, Sony, Panasonic and close to the 'cheap' offerings of Arecont, Vivotek, etc.)