Avigilon Q3 2014 Growth Rate Down Sharply

By John Honovich, Published Nov 04, 2014, 12:00am EST

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.

Growth Overview

Avigilon revenue in Q3 2014 grew 39% year over year, including foreign exchange gains and revenue from the VideoIQ acquisition. By contrast, Q2's growth rate was 66% and Q1 2014's rate was 74%. 2013 growth rate was ~78%.

39% growth is fantastic in IP surveillance in 2014. By contrast, Axis' growth was less than a third of what Avigilon did. Industry growth estimates are now down at 20% or less.

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.

Profits

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Another investor issue is profitability. Rightly or wrongly, many Avigilon investors do not want to sacrifice short term profitability for potential longer term gains.

Net income rose but was skewed. "Net income for Q3 2014 increased 35% year-over-year to $11.6 million." However, that was "positively impacted by a foreign exchange gain of $4.1 million"

Gross margins were up notably, rising from 53% to 57%. 57% is a strong number for the industry though is not clear which factors drove it the most. Avigilon cited, "the favourable impact of foreign exchange gains as well as the ongoing effects of greater purchasing power, economies of scale, product mix, and improved manufacturing efficiencies."

Operating Expenses Way Up

Overall operating expenses were up 76%.

On the positive side, gross R&D expenses nearly doubled to $6.5 million for the quarter. Lack of R&D spending was a historical criticism.

G&A expenses were up 139%, from $3.75 million to $8.99 million. Avigilon cited 'additional personnel' in the report but without any other meaningful color.

Sales and marketing expenditure growth was up 48%. "The increase reflects planned growth spending to expand the Company's global sales and marketing team, which management believes will drive continued revenue growth."

Asia, Latin America, Canada Weak

While the US, UK and EMEA all grew ~50%, Avigilon struggled in their home market and emerging markets.

In Canada, revenue actually declined 1%, though that is not a big concern, as Canada is a small market and likely quite mature for them.

Asia / Pacific was up 18% and Latin America just 5%. Given the disproportionate growth in these territories, stronger numbers are critical. It does the raise the concern that Avigilon is having challenges competing in more price sensitive regions.

Foreign Exchange Gains Big

Avigilon has a lot of cash ($167 million currently), due to recent fund raising (e.g., Avigilon Raises $100 Million).

They hold it in US dollars, and due to exchange rate fluctuations have significant non operational, non realized gains, as shown in this excerpt:

Inventories Up 76%

Inventory levels were up 76% to $34.2 million from $19.4 million year over year. Inventory levels were up nearly double the revenue rate.

Enterprise Sales 18%

Avigilon has been targeting more enterprise sales. They cited 18% of total revenue from enterprise sales, which are projects of $250,000+. This is a high level and a good sign for enterprise adoption.

Avigilon's CEO says gross margins for enterprise sales are in line with non enterprise ones, which is not typical.

No Price Pressure

"Not discounting to win sales" and "not feeling price pressure".

No Longer Disclosing Exact Headcount

Asked by analyst, Avigilon declined a specific headcount, saying 'well over 600' but arguing that looking at that was distracting.

Previously, they did disclose exact headcount. Last quarter, Avigilon reported 586 employees.

Entering 2014, Avigilon management projected a 'rough doubling of employees' but it appears now they will be nowhere close to that.

No New CFO

Avigilon is still interviewing CFO candidates with no timeline offered for the CFO who exited 6 months ago.

Growth Not Slowing, It's Mathematics

Avigilon's CEO objected to an analyst's characterization of growth slowing, emphasizing that total increased revenue in dollars was more relevant and that growth was now coming from a much larger base.

Stock Price Spiked

The dayafter the announcement, Avigilon's stock is up ~30%, to ~$19.60, a big jump. It is likely investors are relieved that things were not worse, as many feared.

The stock is still far off its 2014 high of $34.

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