Avigilon to be $500 Million Company in 2016?

Avigilon will be a $500 million company in 2016. So says their CEO. Can they do it? Can a company on pace for ~$100 million revenue this year, increase 500% in just 4 years?

Not only that but can the company become "the world's largest video surveillance provider" as the CEO declared? (Even Milestone's CEO is chuckling at that.)

In this note, we examine their most recent funding round, engineering challenges, recent marketing splurge, channel scaling and their projected growth rates.

What Do You Think?

How? The Wrong Case

Bloomberg makes a terrible case for how Avigilon will do it based on a financial analyst who evidently knows nothing about surveillance:

"The security market is still relatively fragmented because there are few companies that sell both the hardware and software for video-security systems, said a technology analyst at National Bank Financial in Toronto."

Of course, it is the exact opposite - most big companies sell both - from Bosch to Pelco to Tyco to UTC, etc. almost all the biggest players in the space sell hardware and software.

He went on to emphasize that Avigilon's "gear is open and adaptable to different systems gives it a competitive advantage" which, of course, is also untrue as all nearly all the old school providers have opened up as well in the last few years.

The analyst then declared "Avigilon is the leading innovator in this space" (Sorry Axis).

How? The Real Case

Avigilon's model is fairly common and cannot be the primary source of its success. Outside of betting early on megapixel, the channel model and the end to end product approach is typical.

We see Avigilon's key competitive ability is strong execution and profit sacrificing. Take IndigoVision for example, a company with a similar model (channels, products, etc.). Avigilon succeeded where IndigoVision did not primarily because of willingness to accept much lower prices and an ability to execute without disruptions.

The bad news is that there is nothing terribly unique nor structurally defensible about Avigilon's positioning. The good news is that the company has proven that it can execute at a level that is far beyond almost all companies in the market. The question then is how well it can continue that.

New Funding

In September 2012, Avigilon raised ~$26 Million CAD, following the $17.9 million CAD they raised last year during the IPO. Combined with the ~$12 Million in cash they had mid way through 2012, the company now has a fairly sizeable war chest to fund their continued growth.

Moreover, given their stock price has roughly doubled in the past year, they have considerable 'buzz' and momentum currently. On the other hand, they are trading now at more than 3x 2012 revenue, which is quite substantial for the surveillance industry.

Now on the Radar

A few years ago none of the major manufacturers took Avigilon seriously. Now, they certainly all do. What rivals can or will do remains a major question but they will no longer be ignored. While we do not see this as a major negative force, it will certainly make things at least moderately harder as rivals seek to minimize Avigilon's incursions.

Engineering Challenges

The biggest risk we see is Avigilon being able to release large numbers of innovative products. Over the past 2 years, Avigilon's product releases have been decent, though relatively modest in number, especially compared to the top tier companies they aim to surpass. Moreover, the company has been recently emphasizing spending on marketing more than engineering.

Now, Avigilon has announced their COO [link no longer available], who has been with the company for 7 years and manages engineering, is resigning at the end of 2012. The COO role is being split into two with a new executive for engineering. While Avigilon emphasized the current COO will stay on as an advisor for an additional 6 months to help the transition, such changes can create disruptions and delays, especially in the short term (i.e., 2013).

[Update January 2013: A VP of Engineering was hired who has extensive engineering expertise but no surveillance experience.]

To get near the $500 million mark will require substantial camera development. Most fundamentally they need to significantly expand the breadth of their camera line. Axis is a good template here with dozens of different niche models to address broad ranges of applications. Equally important, Avigilon has focused its camera development on high quality imaging without any edge storage nor on-board analytics. As these two key trends evolve, it will be interesting to see if and how Avigilon responds. Equally important, it will be harder for Avigilon to differentiate on megapixel as more and more rivals have mature, lower cost, HD options. While Avigilon can continue pushing higher resolution, and we think that race will continue, it becomes less important overall and applicable to the broader market.

Channel Scaling

Integrators love that Avigilon has a tightly controlled channel and does not allow online sales (nearly impossible to find any). Combined with strong products at excellent prices, this has helped Avigilon win over dealers from their established rivals.

The challenge is scaling channel sales to $200, $300 million and more. Essentially no manufacturer at those levels rely on such a tightly controlled channel. The closest are Verint and NICE who surveillance sales have barely grown in years. And Axis, the biggest company in the space, is famous for being resold by practically everyone.

Now, given Avigilon's strengths it should not be easy for them to surpass Verint and NICE (in the $100 to $150 million range for surveillance sales) but how big can they get without being constrained by only selling through dealers?

Marketing Splurge

This year, Avigilon has become extremely aggressive at marketing, raising expenditures to an annual rate of $10 million and over 10% of revenue. While they are getting solid press coverage (including mass market tech blogs such as Gizmodo and the Verge, rare for surveillance), we do not think extreme levels of marketing (nor sales) expenditure will drive the hypergrowth levels they expect, without a robust number of quality new product releases.

Hitting $500 Million

To reach $500 Million annual revenue in 2016, Avigilon will need to grow at a CAGR of ~50%. While that is lower than their historical growth, it is double or more the overall IP video market growth rate. Worse, growth rates of companies naturally decline as they get bigger.

For Avigilon to hit the $500 Million target, they need to significantly improve their new product releases, avoid any channel scaling issues and not have any major management setbacks. We think this is highly unlikely though we still think the company could reach $250 - $300 Million at a CAGR of 25-30% which would still be very impressive and continue the company's transition into one of the most powerful companies in the market.

All that said, Avigilon has little structural advantages and must continue to execute at its extraordinary level to come close to its ambitions.