Avigilon Growth Down, Expenses Up, Stock Slammed (Q1 2015)

By John Honovich, Published May 04, 2015, 08:00pm EDT

Avigilon growth rate continues to slow down sharply yet the company's aggressive spending continues.

Because of that, the stock market is punishing Avigilon yet.

In this note, we break down Avigilon's financial results, look at the causes of Avigilon's challenges and the future for the former high flier.

Growth Rate Down

Just a year and a half ago, Avigilon doubled its revenue. Even a year ago, Avigilon's revenue grew 74%.

Now, for the just concluded Q1 2015 quarter, revenue growth was 35%. Equally importantly, true organic / local currency growth was likely in the 25% range, as Avigilon benefited from positive foreign currency effects and an undisclosed contribution from Object Video patent licensing (Avigilon said it was 'immaterial' but they did not clarify if that meant $0 or $1 million, etc., OV averaged $2.5 million revenue per quarter in 2014).

Equally important for the stock price, Avigilon's revenue levels came in below the lowest analyst forecast (reported $75.4, lowest forecast $76.7, consensus forecast $78.2).

Comparative Industry Growth

The 'good' news for Avigilon is that most of the market (certainly established Western brands) are struggling as well, most notably signaled by Axis' only 2% growth in local currencies for the same quarter.

On the other hand, Avigilon's main Westen competitors have been operating at far lower growth rates for the past few years. A year ago, when Avigilon was still at 74%, Axis was at 15% growth. A year and a half ago, when Avigilon doubled revenue, Axis was at 27% growth, etc. Because of this, Avigilon's growth advantage / premium is declining overall.

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The new big growth area is clearly the "$100 MP camera market". Whether it is low-cost IP or the newer really low-cost HD analog, this is where the big growth is within video surveillance right now and it is primarily going to Chinese companies (like Dahua and Hikvision) and their OEMs. Most Western brands are not participating in this at all. Both Axis and Avigilon, in particular, have so far refused to respond here.

Avigilon Financial Strength and Weaknesses

Avigilon did comparatively best in the Americas and in enterprise deals; worst internationally and in the SMB.

In particular, enterprise deals now account for 21% of total revenue, a portion that continues to rise. However, this means that SMB / non-enterprise market is growing much slower, likely in the mid teens.

We believe that this pattern is best explained by Avigilon's continued strong competitive position in the higher end, premium market but that Avigilon is struggling with the increased number of much lower cost, 'good enough' alternatives arising in the low end of the market.

Despite this Avigilon's CEO said again in the conference call that they are 'not feeling price pressure' but provided no rationale why their growth rate continued to decline so sharply and faster than any analyst predicted.

Expenses Up

Operating expenses were up sharply, by 69%, significantly higher than revenue. Related, Avigilon hired more than 79 people in Q1 and now has 775 total employees.

In particular, sales and marketing expenses were up 72% and G&A expenses were up 80%. R&D expenses lagged relatively speaking but was also up 47%. R&D expenditure is now 10% of revenue, which is up significantly from a few years ago when Avigilon spent only 5% of revenue on R&D.

Avigilon believes that the continued investment will help future growth and expansion.

Stock Slammed

Avigilon's stock is down ~25% at the start of trading this morning. Avigilon was at $20.74 before the results were released, and now down to $15.50.

Avigilon's stock price has been extremely volatile, with repeated sharp drops since peaking ~$34 in early 2014, including after the CFO 'resignation' fallout and poor results later in 2014.

Avigilon Explanation?

Avigilon's main counter to the poor results was a new position that one should not look at year over year results, they should look at trailing twelve months. Either way, though, looking at the last two years, the growth pattern is clearly sharply down.

Previously, Avigilon focused on that 95% of the market was analog, and that they just had a tiny portion of the market, so massive growth was easy. Now, they have shifted to the position that they are growing much faster than industry average. The issue, though, is that the gap between Avigilon's growth rate and the industry average has narrowed down substantially.

On the positive side, Avigilon is clearly doing well with their analytics, which the CEO characterized as doing 'phenomenal' and 'fantastic' though with no numbers behind it. The challenge is just how broad analytics can be sold. We believe that in the higher end market, analytics are quite valuable but a $500 analytic camera vs a $100 normal MP camera is a tough for most of the lower end market, where the big overall growth is now.

Background Report

Background: Avigilon Q1 2015 Report and Avigilon Q1 2015 call transcript [link no longer available]

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