Avigilon Q3 2012 Up 69%

By John Honovich, Published Nov 06, 2012, 07:00pm EST

After turning in a 'weak' quarter of 'only' 52% growth in Q2, Avigilon's growth jumped back up to 69% for Q3 2012. Plus, profitability soared, fueled by marketing investments and limited R&D expenditures. Now, Avigilon has the mega integrator Tyco on board, offering great promise to them yet a threat for their existing partners. Inside this note, we dig into the financials and future outlook.

Improved Profitability

Gross and net margins both improved significantly.

  • Gross margins jumped from 45% to 51% driven by changes in the sales mix but, more importantly, economies of scale. Avigilon reiterated that its target gross margins is actually lower (50% or less) and that it would maintain this target (i.e., keep prices lower) to maximize market share and top line expansion.
  • Net margins leaped to 8.5%, their highest level ever for Avigilon. While it is still modestly lower than the 13-18% of mature competitors, this is far better than the typical <4% net margins Avigilon historically has.

For details, review the 29 page Q3 financial report.

Marketing Expenditures

While Avigilon reduced marketing expenditures quarter over quarter, due to it being the Summer, they were still up nearly 100% over the same time last year. Additionally, Avigilon anticipates its biggest ever marketing expenditure next quarter, larger than the massive $3 million in Q2 2012.

R&D Expenses

R&D grew but at a slower rate than nearly every other Avigilon metric, increasing year over by just under 50% from $1.13 to $1.69 million CAD. We remain concerned by the continued modest new product releases and relative low R&D investment.

New / Upcoming Products

When asked about upcoming products, Avigilon was vague but did mention, "steady stream of new cameras, lower cost cameras, lower cost software, etc." It would seem low cost is an emphasis for the future.

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Avigilon de-emphasized the role and value of video analytics, saying that it was a few years into the future and still held back by processing cost. Avigilon does not support any video analytics, beyond basic motion detection, on their cameras.

Tyco Signed On

Avigilon was quite excited about officially signing up Tyco (formerly ADT security integration). Before this, they were only selling through branch offices but are now approved corporate wide for Tyco. Avigilon estimated that Tyco is the "single biggest video surveillance reseller", moving "$800 million year of surveillance equipment" annually, concluding that they "don't expect to get 100% but over time [they] will get a significant part." With the agreement, Avigilon will be on Tyco's official price catalog, will have better inducements and an easier purchasing process.

While this may be good news for Avigilon, it is a yellow flag for their existing dealers. Given Tyco's broad reach, this increases the risk that traditional loyal Avigilon dealers will have to deal with their most disliked national competitor.

Enterprise Accounts

Avigilon emphasized the growth in their business development team to target enterprise / large accounts. They recently hired away a Verint salesperson to be their VP BD.

Distribution

While Avigilon said they have no plans to change or expand distribution, they noted that they do use distributors in certain markets such as Latin America, Asia and the UK (Mayflex).

Revenue Geographically

  • Best areas - Asia: ~300% growth to $1.7 million CAD for the quarter; then Canada and Latin America both roughly doubled
  • Worst area - UK - roughly flat year over year, cited a big project last year as the reason
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