Axis Q3 2009 Financial Results Examined

Axis challenges continued in Q3 2009 with the company admitting for the first time the impact of "tougher competition."

While Axis emphasized higher sales quarter over quarter (e.g., Q3 vs Q2), the year over year trend (Q3 2009 vs. Q3 2008) shows more negative conditions (growth -11% in local currency for Q3 2009 compared to Q3 2008).

This analysis draws metrics from Axis Q3 2009 powerpoint presentation and Axis Q3 2009 overview report.

In local currency terms, Q3 2009 sales compared to Q3 2008 were down in all 3 regions: -11% in Americas, -12% in EMEA and -5% in Asia.

Gross margins were also down in Q3 2009 to 52.3% from 54.8% in Q3 2008 (Axis historic gross margins have been about 55%). Axis acknowledged that tougher competition impacted their gross margins.

Operating margins were higher relative to recent quarters (16.7% in Q3 2009, compared to under 10% in Q1 and Q2 2009) though historically Axis operating margins have been at or over 20%. However, Axis achieved this by significantly reducing costs across the board - R&D, sales and marketing and administration.

These challenges are especially noteworthy given that Axis has aggressively expanded their product offerings in 2009 with many major new launches including next generation box, dome and PTZ cameras. While the quality and innovation in these product offerings are clear, sales are weak and market share is certainly being lost to lower cost, lower quality product alternatives.

Throughout 2009, top line revenue growth has benefited from the depreciation of the Swedish Kroner (SEK) relative to many currencies (most significantly the US dollar where Axis does 50% of sales). For example, see SEK-USD comparison charts for 2008 and 2009. On the other hand, over the last 6 months, the SEK has been appreciating against many currencies, reducing the exchange rate benefit. Indeed, unless the SEK starts depreciating soon, Axis top line revenue growth (measured in SEK) will be negatively impacted in 2010 by this "swing back".

While short term currency exchange variances have a minor impact on overall competitiveness, they can distort financial metrics. Below is the slide that shows the positive impact currency effects have had this year:

Despite that, sales for 2009 are clearly trending down and would be worse if not for the positive impact of currency effects.