Avigilon Accounting Issues Alert

By: John Honovich, Published on Aug 05, 2014

An independent investment research firm which specializes in forensic accounting has issued an Accounting Alert for Avigilon, calling out specific risks factors.

In this note, we examine them and explain the potential impact of these risks.

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Channel ********

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********, ** ** ********** has **** *********, ** focused ** ******. *** channel ******** ************ ****** rates.

** ************ ** *** surveillance ******** *** **** a ***** *** **** controlled ******* ** ******** so **** ********* **** the ********** ** ** ** if **** ******* **. *** with ***** ********** *********** expansion, **** *****, ** they ******, **** ******* to *********** **** ** not *********** ****** *** sale ** *** *****.

**** ****, ******* ***** people **** ******* **** some **** ** ******* stuffing ** ***** ******* by **** *************, ********** at *** *** ** quarters ** **** / beat *******.

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******* ** *** ******** channel ******, ******* *** products *** ************* ****** and **** ********* (** shown ** *** ***** and ********** ******* ** favorite ********). **** ** in ******** ** *** rate ** ******.

**** ******* *** ********* ** the *******. ** ******* stuffing *** ***********, **** could **** *** **** growth **** *** ******* *****. Correspondingly, **** ***** ****** also **** *** ******* are ***** (******* ** would ***** ***** ***** ** the **** **** *****).

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Trust *** *******?

*** **** **** *** Avigilon *** **** ** focus ** *** ****** the ****** ******* ***, ignoring **********'* ******* *** internal ********.

*** ******* ******, ****** from * ********* *********** firm ************ ** ******** accounting, ***** * *** and ******* ******* ** Avigilon's *********, ***** *** numbers, ***** ****-**-**** **** strength, *** ****** ***** increasing ********.

Comments (28)

Undisclosed

08/05/14 05:43pm

Can you say VAPOR SALES, boys and girls?

Undisclosed Integrator #1

In reply to Undisclosed | 08/05/14 07:25pm

And heeerrre come the Enron jokes.

Undisclosed Manufacturer #2

08/06/14 02:28am

Did the report mention revenue recognition from sales of support programs?

The reason I ask is that they can only recognize revenue of support programs on a monthly basis. For example, if they booked $12 million in support programs last month, they have to bank it seperately and recognize $1 million per month. If they booked it and recognized all $12 million they are in hot water. If they bundle it together on the front end and then seperate it out on the back-end, Avigilon might be making "adjustments" to the value/formulas it assigns to support, another red flag for a forensic team to look into. This is one way a CFO can become ill btw...

John Honovich

IPVM | In reply to Undisclosed Manufacturer #2 | 08/06/14 02:45am

I do not believe support programs were mentioned. However, for Avigilon, support / maintenance revenue is very minor.

The big revenue driver, obviously, is hardware. Here's how they recognize hardware now, which changed from when they first went public:

In Avigilon's context, customer means integrator, which is part of the risk claimed for channel stuffing.

This was mentioned in the Veritas report.

Undisclosed Integrator #3

08/07/14 01:01pm

So am I reading this correctly? Channel Stuffing would be forcing product to the Integrators? Would this be in the form of "Here are 100 cameras, go sell them now?" Because I have never known a Mnaufacturer to drop off 100 cameras to an Integrator without a PO or payment. And if they received payment, would that not be revenue?

I can tell you, Avigilon has not been shippng me product for no reason...

John Honovich

IPVM | In reply to Undisclosed Integrator #3 | 08/07/14 01:42pm

Even in channel stuffing, there are typically POs and payments.

But a difference exists between selling things to re-sellers vs end users.

Let's use AweseomeCam as an example. Hypothetically, they sell $10 million in cameras to Anixter. Anixter signs the PO, agrees to payment terms. Pays. Party time. Awesome. But let's say Anixter will need 6 months or a year to sell off those cameras. That's the issue for investors.

If AwseomeCam shows that that $10 million in the current quarter (because it did sell them to Anixter), it makes that quarter look really good, despite in reality that the products were not sold to end users until much later quarters. In essence, it skews revenue and growth numbers up.

An aggressive channel stuffer can repeat the above example, with different dealers, in different regions, over many quarters, etc.

If dealers are holding a lot in inventory, that means a manufacturer's growth numbers are inflated.

That's the general risk / concern of channel stuffing.

Undisclosed Integrator #3

In reply to John Honovich | 08/07/14 02:07pm

Since Avigilon does not sell through distribution, I am having trouble believing there is a group of integrators with hundreds of thoushands of dollars of cameras on a shelf hoping they can find a buyer some day. Even the largest of firms would not do that, and the firms creditors would not allow it either.

Undisclosed Integrator #1

In reply to Undisclosed Integrator #3 | 08/07/14 02:23pm

Maybe a company can create a "virtual" channel, whereby every integrator or group of integrator's or region is assigned a make believe virtual channel, with each channel assigned a quantity of inventory. So there is a number of virtual channels with promised sales and inventory not really paid for yet that doesn't leave the manufacturer's warehouse until the product is actually installed...?

I'm not saying this is what is being done, but I think I've heard of other companies doing something similar.

I'm curious too to know how the channel stuffing is working that Veritas cites.

John Honovich

IPVM | In reply to Undisclosed Integrator #3 | 08/07/14 02:31pm

Avigilon sells through distribution in different parts of the world, e.g., Mayflex is their UK distributor.

Even in areas, like the US, where there is no distributor, there are lots of dealers. As of July 1, 2014, Avigilon reports over 2000 integrators (see p.10 investor presentation).

What occurs across all those thousands of integrators is not something Veritas knows or probably anyone else outside of Avigilon senior management.

Undisclosed Integrator #3

In reply to John Honovich | 08/07/14 02:43pm

Well I can't say what other integrators may do but we sell over $10 million a year in CCTV and you would be hard pressed to find more than 20 cameras on the shelf that are not assigned to a specific project. I just can't buy the fact that other integrators are much different.

John Honovich

IPVM | In reply to Undisclosed Integrator #3 | 08/07/14 02:48pm

It's pretty common for manufacturers to try to 'stuff'. And even if most integrators are unreceptive, sales teams can often find a handful who are open to taking a significant sized order, especially if the right incentives are provided.

Again, as I said above, it's hard to know how prevalent it is at any manufacturer, including Avigilon, but it's certainly something that can be done.

Alex K

In reply to Undisclosed Integrator #3 | 08/07/14 05:52pm

Not to mention warranty starts when product ships.

No reason to stock camera

Never once has Avigilon asked to order cameras for no reason

No dealers I know ever heard about this.

John Honovich

IPVM | In reply to Alex K | 08/07/14 07:37pm

Alex, Veritas actually mentioned to me that they are looking to talk with Avigilon dealers. Here's their contact info.

Undisclosed Manufacturer #4

08/07/14 01:41pm

You have just been Schmodied! After all this time, not one of Brain Schnode's minions have ever moved up to a coporate postion? Why? Because he has trainined his minions to stuff the channel... Mr. Schmode has built his success on playing the pawn game?

We have all seen what happens if you question his authority and/or style? Yup, out you go with the countless others who have received the boot... The covers are coming off.... The truth will be exposed eventually!

Undisclosed Integrator #5

08/07/14 03:07pm

I agree with many of the posters here from the integration side that it is just not good business to add inventory to the shelves that is not directly tied to run rate replacements/adds or to a specific project. Cash flow is always, or should be, top of mind and that certainly doesn't point to sustainable business practices.

Having led manufacturring businesses (although I am not a CFO) my undertanding is that aggressive revenue recognition would show up in the returns reserve and an unusually high DSO (days sales outstanding) in the company's accounts payable. In other words, if they are allowing integrators unusally liberal return rights and providing extended terms past 90 days, then they would have to reflect that (or should) in their returns reserve and there would be an increased amount held back from revenue.

I would suspect that in Avigilon's case if there is channel stuffing, then it is most likely with their international distributors where international trade and tariff laws may make it more advantageous to ship larger quantity of product and irrevocable transfer of ownership. It would be interesting to see if the international gross margin is trending lower which may suggest post-sale adjustments to the non-moving inventory in the form of credits.

John Honovich

IPVM | In reply to Undisclosed Integrator #5 | 08/07/14 04:45pm

"It would be interesting to see if the international gross margin is trending lower which may suggest post-sale adjustments to the non-moving inventory in the form of credits."

I do not recall a breakdown of gross margins by territory.

Revenue is segmented but not margins, e.g.:

Undisclosed Manufacturer #6

08/07/14 03:16pm

* disclaimer - this is generalized information only and not specific to any company

One of the ways channel stuffing could occur is based on sales levels to their dealers. In this scenario a dealer who is at a "Silver level" may want to move to the Gold Discount level but does not have a specific project to order the cams for. His RSM may offer to ship him ___ # of cams to achieve that level and include extended payment terms (net 6 months for example)

The best way to identify this would be to look at the order backlog of the manufacturer and compare that to previous quarters and years.

If there is a significant decline in backlog vs previous years it means the orders are not there

Another thing that should be looked at is inventory levels vs previous years. If inventory % is significantly higher than the growth years vs. sales it could also signal that things are slowing down

John Honovich

IPVM | In reply to Undisclosed Manufacturer #6 | 08/07/14 04:42pm

"If there is a significant decline in backlog vs previous years it means the orders are not there"

But this can be masked if you are adding more dealers in more territories. For example, last year, you had Lou in LA do this. Now, this year, you get Dan in Detroit and Paul in the Phillipines, etc. You just need to keep on expanding the 'stuff'.

Of course, eventually you hit a point where it cannot be sustained, but you can let this run for some time.

Undisclosed End User #7

08/07/14 04:05pm

Could this be caused by customers like me that have placed a large order almost a year in advance? We are in a building project and they offered large discounts to lock in the sale before the end of the year. Plus, things were getting cut from the project so I ordered my stuff as quickly as possible. If they placed the order on their books last year and aren't shipping product till now, I could see how that could be construed as stuffing while it really isn't because the product is already sold, just not delivered.

Rukmini Wilson

In reply to Undisclosed End User #7 | 08/07/14 08:44pm

Not quite, since you were ordering based upon an actual sale that you yourself will likely profit from.

But if your building project deal was still being negotiated, and Avigilon was offering great discounts, but only if you take delivery at once, you might be tempted to take the shipment without the deal being 'done', thinking that you need the low cost to win. Then you have been 'stuffed'. And your competitor may have reasoned just the same, so Avigilon books two sales when there is only really one...

Undisclosed Integrator #3

08/07/14 09:15pm

Then you deserve to be "stuffed" and will likely be out of business in short order with bad decisions like that.

Undisclosed End User #7

In reply to Undisclosed Integrator #3 | 08/07/14 09:32pm

Lol, I don't think we are going out of business anytime soon. Let's see I signed a deal at a large discount for VS/AC, getting it under budget and meeting our needs and don't have to pay a dime till the product is shipped. You're right, that was a terrible business decision.

BTW, I'm a customer not an integrator and if you could read you would have seen that.

Undisclosed Integrator #3

In reply to Undisclosed End User #7 | 08/08/14 04:02pm

Actually I am very good at reading, just not so good at replying to the proper comment. My comment was meant as a reply to Rukmini Wilsons comment above, I clicked the wrong reply button. Thanks for the sublte correction.

Alex K

08/08/14 03:01pm

The Avigilon report is no longer on the list

Could one of their clients be trying to short Avigilon's stock?

Is IPVM one of Verita's clients? hum....

John Honovich

IPVM | In reply to Alex K | 08/08/14 03:10pm

No, Veritas is not a client and I can find no record of any Veritas employee even being an IPVM member.

However, many, many Avigilon employees are IPVM members. Also, some of Avigilon's most loyal dealers too ;)

Undisclosed End User #8

08/08/14 06:37pm

Has Avigilon responded to IPVM?

John Honovich

IPVM | In reply to Undisclosed End User #8 | 08/08/14 06:41pm

Responded to us? It's not our report, it's Veritas.

However, they did comment on the issues raised in the Veritas report on their management call yesterday:

"Many of our integrators if not most don’t stock Avigilon product. And that’s one of our competitive advantages, so that they don’t have the outlay of cash and so the answer is there is not need to track that because there effectively is no stocking of Avigilon inventory in the channel, essentially we get order as they need to be filled. We typically fill ordered within 72-hours and we typically ship overnight and then product gets installed typically within days of delivery."

Undisclosed #9

08/13/14 02:52am

"Many of our integrators if not most don’t stock Avigilon product."

That sure sounds like a denial - but is it?

Disregarding the clunky sentence structure in the narrative, if Avigilon has 2000 dealers, but only 900 of them stock product get stuffed, then this statement is still true.

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