Axis's Weak Q1 2012 Financial Results

After strong expansion the past few years, Axis's sales growth continues to decelerate for the third consecutive quarter. At the end of 2011, growth slowed substantially. Now, in the beginning of 2012, that slow down continues. Indeed, the deceleration was even sharper this quarter. In this note, we examine the financial details and the causes behind this weakness.

Background

A few key financial details from Axis's report:

• Revenue growth was only 6% in local currency terms (year over year). By contrast, in Q4 2011, the same metric was 22%. Earlier in 2011, 30-40% growth was achieved.
• Europe is the biggest problem. EMEA sales declined slightly (with invoices falling from 332.2 to 331.8 SEK). Axis cited two notable weak areas: "Demand in Southern Europe continued to remain at a low but stable level. In addition, demand was lower in the project-driven emerging markets in the region." Since, EMEA includes Middle East and Africa, which are likely still growing, we suspect that European revenue was down notably.
• The Americas were weak, only growing 9% in local currency terms. Recently, the Americas had been driving the company's overall growth.
• Asia did the best, growing 16% in local currency terms, but is the smallest market for Axis, representing only 13% of revenue.
• Axis was surprised by the poor growth, admitting, "Cash flow was adversely affected during the quarter by increased inventory levels due to the somewhat sluggish sales trend, relative to production forecasts." In other words, they did not expect such weak results.
• Thailand 'Normalized': Axis said that the situation was 'normalized' in the first quarter, following last year's floods. Given that inventory increased, Thailand was likely not a major factor.
• Guidance remains bullish: Axis cited 'higher activity in all regions' at the end of Q1 2012, emphasized the long term trend of 25-30% growth, noting its focus on expanding into small camera count systems.
• Investment remains strong: Axis hired 83 employees in the past 3 months, increasing total headcount by 7.3% in that time frame to 1205 total employees. Moreover, while sales and marketing expenditures declined slightly, R&D spending continued to increase (see the powerpoint presentation for charts).

Analysis

Overall, we see this as a bad sign for the video surveillance market as a whole:

• Clearly, Europe continues to be a problem - these results are consistent with recent weakness displayed by Mobotix and Arecont as well.
• No obvious product weaknesses are causing Axis's problems. The company's products are well positioned and they have many new attractive offerings, including the impressive Q LightFinder cameras.
• While IP growth will naturally converge to the slower overall industry growth rate as analog fades out, such a sharp short term drop in Axis's revenues cannot be explained by such natural forces.

Given the sharp decline and Axis's guidance about 'higher activity', Q2 2012 results will be very interesting to see; Anything but a rebound will be a red flag.