Avigilon Q3 2014 Growth Rate Down Sharply

By: John Honovich, Published on Nov 04, 2014

The past 6 months have been extremely tough for Avigilon.

The company has suffered their CFO exit, surrounding controversy, an earnings miss the next quarter, and a stock price down more than 50% from its peak.

Now, their Q3 2014 financial results are out.

The bad news is that their growth rate is down sharply, the good news is that the rate was modestly above analyst's diminished expectations.

In this note, we dig into the financial details and the future of Avigilon.

*** **** * ****** have **** ********* ***** for ********.

*** ******* *** ******** their*** ****,*********** ***********, ********** ******* **** *******, *** a***** ***** **** **** than **%**** *** ****.

***, ***** ** **** financial ******* *** ***.

*** *** **** ** that ***** ****** **** is **** *******, *** good **** ** **** the **** *** ******** above *******'* ********** ************.

** **** ****, ** dig **** *** ********* details *** *** ****** of ********.

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

Growth ********

******** ******* ** ** 2014**** **% **** **** year, ********* ******* ******** gains *** ******* **** the ******* ***********. ** contrast, **'* ****** **** was **% *** ** 2014's **** *** **%. 2013 ****** **** *** ~78%.

**% ****** ** ********* in ** ************ ** 2014. ** ********,****' ********* **** **** * third ** **** ******** did. ******** ****** ********* are *** **** ** 20% ** ****.

*** *** ********* / question *** ******** ** whether **** *******'* ********* growth ** * *****. In ***** *****, *** risk, *** *** ** the ********* ** *** stock, ** *** ******* that *** ***** ***** be ******* **** ** industry ******* ******.

*******

******* ******** ***** ** *************. Rightly ** *******, **** Avigilon ********* ** *** want ** ********* ***** term ************* *** ********* longer **** *****.

*** ****** **** *** was ******. "*** ****** for ** **** ********* 35% ****-****-**** ** $**.* million." *******, **** *** "positively ******** ** * foreign ******** **** ** $4.1 *******"

***** ******* **** ** notably, ****** **** **% to **%. **% ** a ****** ****** *** the ******** ****** ** not ***** ***** ******* drove ** *** ****. Avigilon *****, "*** ********** impact ** ******* ******** gains ** **** ** the ******* ******* ** greater ********** *****, ********* of *****, ******* ***, and ******** ************* ************."

Operating ******** *** **

******* ********* ******** **** up **%.

** *** ******** ****, gross *&* ******** ****** doubled ** $*.* ******* for *** *******. **** of *&* ******** *** a ********** *********.

*&* ******** **** ** 139%, **** $*.** ******* to $*.** *******. ******** cited '********** *********' ** the ****** *** ******* any ***** ********** *****.

***** *** ********* *********** growth *** ** **%. "The ******** ******** ******* growth ******** ** ****** the *******'* ****** ***** and ********* ****, ***** management ******** **** ***** continued ******* ******."

Asia, ***** *******, ****** ****

***** *** **, ** and **** *** **** ~50%, ******** ********* ** their **** ****** *** emerging *******.

** ******, ******* ******** declined *%, ****** **** is *** * *** concern, ** ****** ** a ***** ****** *** likely ***** ****** *** them.

**** / ******* *** up **% *** ***** America **** *%. ***** the **************** ****** ** ***** territories, ******** ******* *** critical. ** **** *** raise *** ******* **** Avigilon ** ****** ********** competing ** **** ***** sensitive *******.

Foreign ******** ***** ***

******** *** * *** of **** ($*** ******* currently), *** ** ****** fund ******* (*.*., ******** ****** $*** *******).

**** **** ** ** US *******, *** *** to ******** **** ************ have *********** *** ***********, non ******** *****, ** shown ** **** *******:

Inventories ** **%

********* ****** **** ** 76% ** $**.* ******* from $19.4 ******* **** **** year. ********* ****** **** up ****** ****** *** ******* rate.

Enterprise ***** **%

******** *** **** ********* more ********** *****. **** cited **% ** ***** revenue **** ********** *****, which *** ******** ** $250,000+. **** ** * high ***** *** * good **** *** ********** adoption.

********'* *** **** ***** margins *** ********** ***** are ** **** **** non ********** ****, ***** is *** *******.

No ***** ********

"*** *********** ** *** sales" *** "*** ******* price ********".

No ****** ********** ***** *********

***** ** *******, ******** declined * ******** *********, saying '**** **** ***' but ******* **** ******* at **** *** ***********.

**********, **** *** ******** exact *********. **** *******, Avigilon ******** *** *********.

******** ****, ******** ********** projected * '***** ******** of *********' *** ** appears *** **** **** be ******* ***** ** that.

No *** ***

******** ** ***** ************ CFO ********** **** ** timeline ******* *** *** CFO *** ****** * months ***.

Growth *** *******, **'* ***********

********'* *** ******** ** an *******'* **************** ** growth *******, *********** **** total ********* ******* ** dollars *** **** ******** and **** ****** *** now ****** **** * much ****** ****.

Stock ***** ******

*** ******** *** ************, Avigilon's ***** ** ** ~30%, ** ~$**.**, * big ****. ** ** likely ********* *** ******** that ****** **** *** worse, ** **** ******.

*** ***** ** ***** far *** *** **** high ** $**.

Comments (10)

Avigilon dealer here. Undisclosed for what will soon be obvious reasons.

Avigilon has spent the last year or so treating people badly...as in: the people that work there, people that bought their NVR before they decided they were top dog, and their dealers. All are becoming really aware of where they stand. I don't know how they think they're going to survive in such a small, familiar industry for any amount of time while making so many enemies.

It seems they want to be a high-volume version of Genetec...this generation's version of AD + C-CURE...but they're burning too hot and too bright, burning out RSMs, dealers and customers along the way. People will need a break. They will soon start wondering whether they should just ignore the last few years of Avigilon excitement as a fad.

Their products are good, but their treatment of people has been bad for a while.

Disclaimer : I'm not employed by anyone related to them but do own Avigilon shares and therefore analyse the company extensively.

"The big challenge / question for Avigilon is whether this quarter's declining growth is a trend. In other words, the risk, and one of the pressures on the stock, is the concern that the stock could be heading down to industry average growth."

Regarding your comment about trend and average, I think it's crucial to look at context and widen the time horizon. Q3 2013 was an exceptionaly and surprisingly strong quarter, leading to a very fast and arguably irrational doubling of the trading stock price just as the company was added to the index of largest Canadian companies. Comparing this Q3 to the previous Q3 leads to an impression of slowing growth, whereas to extract patterns and averages you must look at multiple quarters to reduce measurement volatility. YTD, 2014 grew 57% over 2013, not what I would consider "down sharply" yet.

The weak markets you pointed out also grew much faster than the Q3 snapshot leads to believe. Asia Pacific grew 78% year over year versus 18% last Q3. Latin America grew 30% year over year versus 5% last Q3. Those new markets are also very volatile if you look at revenue on a contiguous quarter basis. For instance, last Q2 was exceptionally strong in Asia Pacific, $4.8M vs $3.0M this quarter. Should we extrapolate that the Asia Pacific market is shrinking, or simply that deals don't always line up the same way each year? As an investor and analyst, I believe looking at larger time horizons paint the truer picture.

Avigilon grew their revenues by 78% a year ago and by 57% so far this year (9 months ended in September). Looking at it from the CEO comment's perspective, they're expanding their annual run rate by $92.7M as of this Q3, compared to a rate of $34.2M as of Q3 last year. The revenue growth is slowing in percentage terms, but they've nearly tripled their revenue expansion rate in absolute dollars. If they hit $100M expansion rate and a $75M Q4 ($300M run rate), they'll be less than 24 months away from their $500M annual goal.

"Asia Pacific grew 78% year over year versus 18% last Q3."

That's confusingly phrased. Asia / Pacific's revenues for the first 9 months of 2014 were up 78% compared to the first 9 months of 2013. For Q3 2014, Asia / Pacific revenue was up just 18% over Q3 2013.

Ultimately, the bigger issue is whether this quarter is an aberration. Let's see what happens next quarter. If it's back over 50% then, this becomes insignificant.

"Looking at it from the CEO comment's perspective, they're expanding their annual run rate"

The financial community cares about percentage of growth, not dollar figure growth. Avigilon's CEO can try to redefine this, but I doubt he will get far.

"If they get .... a $75M Q4 ($300M run rate), they'll be less than 24 months away from their $500M annual goal."

They will, so long as they keep the growth rate up, in percentage terms :)

Let's say $75 million next quarter and 2 years to get to a $125 million quarter. To do that, they need to maintain 29% growth rate over the next 2 years.

And that raises the question of where the growth rate is trending. If the growth rate is 50% next quarter, that's a bullish sign. If it's 30%, not so strong, because it points to decelerating growth.

We will see. Ultimately, I think the bigger issue is management / sales term internal stability. There's a lot of pressure there. Can they hold it together? Can they keep on growing it? I don't know the answer, but that is a key challenge / concern.

Thanks for rephrasing that. I agree with your points.

"Ultimately, the bigger issue is whether this quarter is an aberration. Let's see what happens next quarter. If it's back over 50% then, this becomes insignificant."

A yearly rolling average lets us smooth out and ignore aberrations. It seems that can happen even more going forward depending on where large enterprise sales land on the calendar. Previous seasonality patterns may break or become volatile, especially as the south hemisphere business grows.

I also thought the CEO's comment on growth mathematics was kind of funny, but I see what he means. Planning for an additional $34M in production one year then an additional $93M the one after can feel like exponential and relentless growth, since he's adding so much more capacity each year. Of course, he must delegate well to avoid feeling the growing pains. :)

No idea about the management and sales team stability, it's hard to get access to reliable data on staff turnover versus other similar businesses and judge whether it's normal or abnormal. Is that something you can shed some light on? I'm hoping that's just a byproduct of the aforementioned growing pains and that the CFO replacement was part of the spring cleanup that led to a profitability recovery this quarter.

"A yearly rolling average lets us smooth out and ignore aberrations."

That is if it is an aberration, rather than a slowdown.

Imagine a runner who runs 5 minutes for the first mile, 6 minutes for the second, 10 minutes for the third. Perhaps the third mile is an aberration, perhaps the runner is tiring.

In Avigilon's case, there's little doubt that the growth rate percentage is decelerating. The bigger question is how much and how steeply.

As for management and sales team turnover, for this industry, their turnover is abnormally high. What this means is the key debate. There's been two general theories to this:

  • "A Players Only": Avigilon kicks out people who cannot cut it in their elite environment.
  • "Pressure cooker": Avigilon is a punishing work environment where fear and intimidation reigns.

There seems to be some truth in both of these theories. I don't know how exactly this will play out.

That was my point with trying to guess whether a quarterly snapshot formed a trend or an aberration. A rolling average over multiple quarters is more helpful than the volatily of "down sharply", cooling or jumping growth.

Avigilon growth cools in Q2 2012 : http://ipvm.com/updates/1614

Q3 2012 revenue was up 69% : http://ipvm.com/updates/1784

Q3 2013 revenue was up 101% : not covered

Q3 2014 revenue was up 39% : this update

Is the aberration 2013 or 2014? :)

We did cover Q3 2013: Avigilon Doubles Revenue, Breaks Billion Valuation.

The most recent quarter always gets more weight, rightfully so, than past quarters.

Take two trendlines over 4 quarters:

  • A: 40%, 60%, 80%, 100%
  • B: 100%, 74%, 66%, 39%

No serious person would challenge the growth pattern of A. The worst quarter was the farthest away. Clearly, a strong positive pattern.

However, B is far more questionable.

Can't wait till Cannon buys them and closes them down to narrow the market. Their products are good, but no where good enough to deal with the abuse they subject their dealers to. I left the sinking Avigilon ship when it was clear they had some major camera problems and failed to resolve them. The 5MP JPEG2000 domes were an engineering failure, in my opinion. Avigilon's solution...buy the h.264 domes when they come out in 6 months....and that was a new install designed by them. How as a company can you spec a product, have it only be 70%, tell the integrator the solution is to buy their upgrade, and expect to ever sell your product again? You can't and as the 3000 camera jobs end your 30 camera x 20 installs a year dealers won't be there. I know I'm not and never will be again.

This does not surprise me. it has been two months and 10 days since requesting someone contact me for our new company and still nothing. i have emailed back twice stating i have not heard anything and they tell me someone will be contacting me shortly. they have good product but the sales followup sucks.

Jeffrey, I forwarded this to Avigilon, requesting someone in sales to followup.

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