Avigilon Bad Financial Results Q3 2015

By: John Honovich, Published on Nov 04, 2015

Growth hit a record low, with sales expenses continuing to surge yet minimal increases in R&D.

The first financials after the death of the Schmode era and 3 executive departures (including the SVP of sales and VP of marketing) shows declining financial performance. On the plus side, this was largely expected to be bad and now the hope is for a rebound.

In this note, we examine the financials and review Avigilon's new competitive positioning.

Financials Examined

****** *** * ****** low, **** ***** ******** continuing ** ***** *** minimal ********* ** *&*.

*** ***** ********** ***** the***** ** *** ******* era*** * ********* ********** (including ****** ** ********** ** *********) ***** ********* ********* performance. ** *** **** side, **** *** ******* expected ** ** *** and *** *** **** is *** * *******.

** **** ****, ** examine *** ********** *** review ********'* *** *********** positioning.

********** ********

[***************]

******** ******** ****** **** quarter *** **% **** over ****, ******** ** 26% *** *** ***** quarter (** ****) *** *** **** 50% ** *** ********* of **** ****. **** Axis, ******** ******* ******* is ***** ******* ************* by ******** **** ************. Avigilon's ******* ****** ** likely ** *** **-**% range ** **** ******** some *** ******* **** the****** ************** *** *** ** last **** / ********* of **** ***.

***** *** ********* ******** surged **% ******** ** gross *&* ******** ******** of **** **%. **** is ********** **** ********'* overall ********, *** **** growth ***** ********** ** fall, *** ********** / profitable ***** ***** ********* are ** ************. ******* important, ******** ******** *** worst *** ******* ******* this ****** ******* **** a***** *** ****** ******* offering.

******** *************

**** ****** **** *** expenses **, **** **** exchange **** ********, ********'* profitability ********* ** ******. Net ****** *** ******** down **%, **** ***** 'adjusted ********' **** **** up *%

*******

*** ******* ******* ****** for ******** ** ******, with **** ** **% and *** ****** ******* up *%. **** ** not ** ******** ********, so **** ****** ** likely ** ** **** or ***** ** ** here.

Enterprise ******

********** ******** ($***,***+) **** very ******. **** *******, they *********** **% ** all *****, ******** ** a **** ***, ***** they *********** **** **%. This ***** ********'* ********** business *** ***** ************ (somewhere ** *** **-***% growth *****).

SMB ****

*******, *** *** **** weak. ******* *** ***** in ********** ********, ******* growth ********* ** *******. One ***** ******* ** that *** *** ****** (everything ***** $***,***) ** hardly ******* ** ***, and ******* ****.

Impact ********** ** ***

** *** **** ****, we ******* ******** *** continue ** ** *********** and ********* ****, *******, Milestone, ***., *** ***** scale ********. ** *** negative ****, **** **** absolutely **** **, ******* the *** **** ** being *********** / ******* to *** ******* ******* providers (**** ******* ********* but **** ***** **** ramping ** ** ********'* most ********* ****** (***** America).

***** ********, ****, ***. have ****** ******* '*********' than ********* *** *****, the ******* ***** ********** and *** '**** ******' quality ** ***** ********* will **** ** **** hard *** *** ** the ******* ********* ** compete, ********** ** **, in ***.

******* ** ****, *** Enterprise ****** **** ******** to **** *******, ** large ********* **** ********, Axis, *******, ********* / VI, ***** / **** focus **** ** ***** sales ******* ** ******* there. ******, ******* *******'* $** *******************'* ******** ********** *************, *** ***** ******** is ************ *****.

1000 *********

******** ** *** **** shy ** **** *********. Avigilon *****, **** **** have ********* "****-**** ********* worldwide ** *** *********** from *** ** ** December **, **** ** 990 ** ** ********* 30, ****." **** ** an ****** ******** **** of **%+.

Expectations ****

******** ** ******** / analyst ************, ***** ******* during *** **** ****, these ******* *** ******** good, ** ***** **** it ***** ** ***** revenue *** ******** *** share, ***** ******** ***** beat. *******, *** *** long-term ****** ** *** company, * ********* ****** rate *** *** ****** increases ** ******* *** definitely * *******.

Outlook *** ********

*** ***** ******** ** faced **** *** ****** problems: (*) *** ********** of *** ** ****** market *** (*) *** rise ** *** *******. The *** ******** *** massive ******** ******** ** everyone, **** ******** ** solution ********, ******* ***** machine ** ***.

*** **** ** **% constant ******** ****** *** gone *** ********. **** quarters **** **% ******** currency ****** ***** ** extremely ****. ***** ******* 16% ** * **** signal ** ***** ********* long-term *******.

***, **** *** '************' management, *** *******-**** ******** has ******* ************ *** freedom ** ** **** is ***** ** ***** a *********** **** **** business.

CEO ********

*** ******* ********** ******** CEO's ** *** ********* rapid ************ ** ******. His ******** *** **** they *** ***** ******* faster **** ******** ******* and **** *** *** of ***** ******* *** catching **. **** ** which *** ****. ** the ***** ****, **** does *** ****** *** fact **** ******** ** rapidly ********** ** ******** average.

**** ********** ** ********* turnover, ********'* *** ********** the **** ***********, ****-****** environment ** ******** *** that ** *** * "great *********** *** ** and ******."

**** ***** ***** *** growing ****** ** *** to *** ********* (*.*., Tyco / *****, ********* / **, ***** / Axis / *********), ********'* CEO ********** **** ******** differed ** ***** ********* end ** ***, *** simply **** ******** (** not ** *** **** with ***** / **** / *********).

*********:******** ** **** ********* Report, ******** ** ******** Call ********** [**** ** longer *********]

Comments (33)

I am trying to be sensitive to all those involved, but how much of a risk are layoffs among the rank-file employees?

Is that just being too negative? With the tepid degree of growth, is a headcount of nearly 1000 employees reasonable, especially when the original plan was sharp growth?

Presumably, they will slow hiring at some point soon. Also, as Avigilon's CEO reiterated in the call, their cultural / structure encourages poor fits / B players etc. to leave.

The more interesting thing is how much they can continue to increase sales spending (54%) far faster than revenue growth (16%). You can buy growth like that for a while, but not indefinitely and not without sacrificing profit.

Look at Axis for the same quarter. Growth quite similar (Axis 30% revenue / 12% constant currency vs Avigilon 34% revenue / 16% constant currency). But Axis only increased sales and marketing spend 8% while Avigilon increased 54%. Axis growth is far more efficient and sustainable than Avigilon's.

What's the over/under on the 500 million run-rate prediction at this point?

I would guess that if they don't chenge the license or reduce prices the 500M mark will stay un reachable.

They have already tacitly admitted failing to get to the original one, which was $500 million for a whole year. Up until the beginning of 2013, it was "strive towards our goal of $500 million in revenue by 2016." More recently, it has been "achieve a $500 million revenue run-rate by the end of 2016."

So, the question is can they do $125m CAD Q4 2016?

Their guidance for revenue for Q4 2015 is ~$104 million CAD (guidance of $358 million and $368 million for the year minus the 75 + 89 + 95 of the first 3 quarters).

Let's say they hit their guidance. That would mean they need to grow 20% from Q4 2015 to 2016. It's possible but they will need FX to at least be neutral if not positive next year.

They would not even be anywhere close to their target without the huge swing between the CAD and USD since they IPO'd shown here:

At some point that will stop and/or turn.

Net / net, they might get $125m CAD for Q4 2015, especially since that is the company's main focus, but they are getting there with a lot of luck (the positive FX swing), a lot of punishment in how they did business and with a market that has become far more competitive / commoditized than when they went public.

That said, since the stock price is still off some 55% since last year's high, the stock price may rise for these results if investors are convinced that they are not as terrible as they feared.

Good job Avigilon on the self-inflicted wound! It's only going to get worse...

Patent lawsuits and the threat of being sued is driving Video Surveillance business to the Chinese who are immune to such lawsuits. If you don't believe the patent threat to end-users, integrators, and manufacturers is real then your head is in the sand. Axis even acknowledged it as a factor in selling to Canon. (Min 3:00)

If Avigilon opens it's patents to the industry it would improve conditions for everyone...

Stock down 11.89% to $12.74 in the first day after results were released. So despite beating analyst's expectations, the 'market' is not overall happy with the results.

We believe this reflects the broader market's increase acceptance that Avigilon is at best an above average company in an increasing competitive, lower growth market, not the disruptive rocketship believed at the beginning of last year.

AVO's market cap is now ~$570 million CAD which is slightly over 2x last year's revenue. 2x is typical for solid video surveillance manufacturers so it surely is dramatically worse than last year but not irrational comparatively. Of course, Axis was acquired for ~4x of their revenue, so Avigilon can still reasonably hold out hope for something like that.

They disagree entirely:

http://ir.avigilon.com/Investor-Relations/Press-Releases/Press-Releases-Details/2015/Avigilon-Corporation-Reports-Record-Third-Quarter-2015-Results/default.aspx?hootPostID=aa1758a5904bdce9063e269f07b462f2

I got a call earlier this week about a job at Avigilon so it seems the reduction in headcount mentioned above isn't happening right now

"They disagree entirely"

Well the market disagrees with them...

To be clear, the reduction in headcount was a question, not an assertion.

"I got a call earlier this week about a job at Avigilon so it seems the reduction in headcount mentioned above isn't happening right now"

A company can be laying off people while still hiring. They may feel top heavy in one area but still need to fill critical positions in others. Hence the term "right sizing".

Again, no one is claiming that there is any layoffs or reduction of headcount at Avigilon. The original question simply asked "how much of a risk" regarding layoffs.

Finally, given Avigilon's sales turnover, I am sure they are almost always hiring new salespeople.

"is at best an above average company"

:-)

The problem is that Avigilon has represented itself and the market (previously) largely accepted that Avigilon was a revolutionary company.

I do think there is hope in the post Schmode era. I've also heard that since his 'retirement', recruiters have had more success getting sales people to consider Avigilon.

I have learned that your headlines are quite dramatic, and usually over the top compared to the actual content of the articles. The sky is not falling at Avigilon.

We continue to win projects and grow our business with Avigilon because they have a very good product, excellent tech support, excellent inside sales support and the hardest working regional sales person we have ever seen.

Until that mixture of quality, service and sales effort is diluted, we expect to continue to grow our business with Avigilon.

"The sky is not falling at Avigilon."

Agreed. Related, that was not our headline.

What is 'falling' for Avigilon is their ability to dominate / disrupt / transform the industry, which is what Avigilon hopes/hoped to do and many of their competitors feared.

"We continue to win projects and grow our business with Avigilon."

I totally believe that.

I believe you'll be able to win projects and grow your business with Avigilon, just like your rivals will do so with their partners.

As long as Avigilon can solve their internal management / culture issues, they will likely become another really good company (like Axis, Genetec, Exacq, etc.) in an increasingly mature and competitive market.

These are all interesting comments, and as an early adopter of Avigilon in 2009, I would embrace Avigilon making the product widely available. Especially since Avigilon has invested to make this one of the only MADE is the USA products, with 24x7 Free technical support. What more do you want from a VMS provider?

I'm sure fans of other platforms will find niche features, and that cuts both ways, but having supported IT(IP) systems since 1985, and all IP based VMS platforms are just another server, I believe ACC is the easiest enterprise VMS to install and support. Regardless of how big or small our installations might be, the majority of our sales net and RMR comes from services.

The old Alka Seltzer commercial in the early 70's, "Try it - You'll like it." should be their motto to recruit integrators.

Especially since Avigilon has invested to make this one of the only MADE is the USA products, with 24x7 Free technical support. What more do you want from a VMS provider?

I did not know that the VMS was made in the USA. Do the Canadians make their own as well?

Having raised four grown adults, we learned that kids will parse words to their benefit, and some continue into adulthood.

Don't wave the Flag in my face if you can't plant it in the ground.

More examples of my previous point.

Andrew, in all seriousness, if you didn't mean to imply that the VMS was MADE in the USA, what exactly were you trying to say here?

Especially since Avigilon has invested to make this one of the only MADE is the USA products, with 24x7 Free technical support. What more do you want from a VMS provider?

The floor is yours, I won't reply again.

Avigilon now manufacturers all camera products in a state of the art facility in Plano Texas. They could have long ago moved that overseas. They are doing it right. 24 x 7 tech support to END USERS too.... 3 Year Hardware Warranties.

I just tried to find the AXIS tech support number and couldn't locate one. (nice self help portal - anything to avoid actually talking to someone) Genetec lists M-F 8 to 8, don't know about Exacq.

My point is, put all the bias and suedo financial analyst stuff aside, and they are doing all that everyone wants. SUPPORT - GOOD PRODUCTS, giving you an opportunity to grow your business, and now Made is the USA, and yes, you do get what you pay for.

Ask your next client if Country of Origin matters?

I am 100% for Avigilon making it easier to get licenses and/or equipment more widely available..

Avigilon support has went out of their way to support us and our customer numerous times. More so than any other manufacturer I have worked with in over 16 years. If anything other manufacturers could learn from Avigilon on how to support customers.

What makes things worse is when we are used to this level of support and then you have to deal with other manufactures that put you on hold for hours and don't have any interest in helping or calling you back when they say they would.

Sue, sue, sue-dio....

Quite the artful dodge. Let's not parse words - where in the USA are Avigilon products manufactured?

Everybody, please stop on this.

Avigilon's VMS is not 'made in the USA', but Avigilon has just finished a new manufacturing plant in the US for their hardware.

Are you putting Axis, Genetec, and Exacq as example companies that Avigilon should strive to be like?

I guess I missed, or need to go back and read all the glowing non-biased articles about these companies.

True, Avigilon did disrupt and set the standard for HD CCTV in 2009, and the market has matured.

No, I am not saying any company should be like any other. I am saying these are all companies with good products that are now mature and trying hard just to match or beat the industry average. Avigilon is now clearly moving into this territory (so long as they can repair / right the internal issues).

Yahoo Finance says Avigilon is kicking butt. What am I missing?

https://finance.yahoo.com/news/avigilon-corporation-reports-record-third-210500348.html

That is a direct copy of Avigilon's press release, ergo the 'kicking butt' tone.

Hal, that's not Yahoo Finance saying that. If you look just below the headline, it is actually sourced from CNW Group. If you look at CNW Group's website, it seems to be a marketing/promotion engine.

Yahoo, Google and other sites just pull in other sites content without any effort to make the distinction between real news journalism from marketing and promotion.

And this is why I like mutual funds, I'm just not educated on this stuff.

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