Avigilon Stock Plunges On Bad Financials (Q2 2016)

Author: John Honovich, Published on Aug 16, 2016

Avigilon's stock went down 25% the day after it announced earnings.

The stock had already been down by more than 60% from its peak.

The market is very unhappy with Avigilon's performance, and it has to do squarely with Avigilon's quiet slashing of camera pricing 30-50% that we reported exclusively.

In this note, we break down what happened, why the market is so concerned and what to look for next.

********'* ***** **** **** **% *** *** ***** ** ********* earnings.

*** ***** *** ******* **** **** ** **** **** **% from *** ****.

*** ****** ** **** ******* **** ********'* ***********, *** ** has ** ** ******** **** ********'* ***** ******** ** ****** ******* **-**% **** ** ******** ***********.

** **** ****, ** ***** **** **** ********, *** *** market ** ** ********* *** **** ** **** *** ****.

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

Revenue ****** ***** ****

********'* ******* ******, ** ******, *** ****. ******** ** ******* was ** **% **** **** ****, ******** ** **% *** Q1 **** *** **% *** ** ****. *** ** ********'* CEO ******* ***:

** * ******** ******** ***** *** ******* *** *** ****** quarter **** **%, ***** ** ***** ***** *** ****** ********* annual ****** **** ** *%.

*** ****** ********** ** **** ************* ***** *** ** **** underscore *********** ****** ****** *** *********.

Problem *******

*** *** ******* **** *** ******* ****** *** *** **** got *****, ** * ***** ******* ** *******. ***** ******* ******* from **% **** ** **%, ***** ** * **** ***** drop *** ***** *******.

*******, ******** ******** * ****** $* ******* *** **** ******** to * ****** $* ******* *** ****** *** **** ****'* Q2. **** ****** **** *** ***** ***** ****** ******* ********* flat (******* **** ***** *** *** ******** ****** ** ****** the ***** ***** ****) ***** *********** ***** ******** ** *****.

Cuts ******* ******* **** *******

*** ******** ****** ********'* ************ ****** **** **** ****** *** '***** **********', ***** *** primarily *****-**% ***** **** ** ** *******. *** ******* **** * *** ** ******** ******* ****** those *******, ***** ** ** **** ******, ***** *** ****** *********** (though ** *** **** ***** ********* ***** ******* *** ******** is * **** **** **** ** *** **** ***** *** analytics). 

** ***** ******** ********** ****** ***** **** ******** ** *** Hikvision ****** **** ** *** ****** ** ********* ********.

**** ** ****** ** *** ****** *** ****. **** ****** purpose ***** ***** **** ******* ** **** *** ***** *****. The ** **** **** **** *********** ******* *** **** ****** BOM ***** **** ***** ******* ****.

Low **** *** ******** ******

*** **** ********* ******* ****** ****** *** ******** *** ******* "***** ** the ***** ***** ** *** ****** ... **** ** ***-**** with ****** ******."

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******:********'* *** "***-****" ***** ** ~$***, ******* ***** ** ******* *** **** *** ** ******** entry ***** ********.

Scare - ******** ***********

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*** ** *** ****** ** *** ******* ********** ** **** volume *** ***** ****** ** * ********** ** ********, *** Company's ****** **** **** ****** ******** ****** ****** *** ******** Earnings *** *****may ** ********** *****, and the effective income tax rate may be materially different, than *** *******'* ******** for fiscal year 2016 initially disclosed on ***** *, ****.

*** ** *** ****, *** *** ****:

***guidance ******** *********. But what we have done is we've put in our press release and our MD&A a *********** *** ****** ******* *** ** *** *** ****** **** our ********. *** ** ** *** **** *** ******** ** an ****** ********. 

*** **** ** **** **** **** *** ******** *** **** suspended, ********'* *** ***** *** ** ***** ***********. *** ******** is '*********' *** **** ************* *** ******* **** *** ******* *** be ***** **** *** '********'. **** ** ** ******* *****: ******** '************ **********' / '*************' *** 

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

******* ******** ***** ** ******** ******** ******* ** ********** ***** breakdown. ********'* *** ******** **** "** ******* **** ******* ***** ** ****** ******* ** ******" justifying **** ** ** ***** ** **** ** *** **** 80/20 (*** / **********) *****.

**** ** **** ** **********. ** ** ** ***** ** stay ** *** **** *****, **** ****** **. *** **** is **** **** ********** ****** ********** *** ** **** ** track ******** ** ********'* *** / '*** ****' ********, ***** is ***** ******, **** ***** ***** ******* ************ ** ********* and *****.

Obsession **** ******* ******

********'* *** ******** ******* *** ****:

*** ******* ***** ********* ** ** ** ******* ******* ** gaining ****** *****.

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

Hikvision ******** ******** ****** **** ******** ******* *********

*** ******* ** **** ********* ** ******** ******** ******* ****** than ******** *** **** ******** *******. **** * ****** ***, Avigilon's ************ ********:

"******* ** **** ** ******** ** **** ** [*****] ********"

***** ******** **** **** ******** ********* *** *** ********, ***** value ** ****** *** ****** ** ****** *** ****** ********* is ******* **** ******** *******. ******* *******, ** ***** ** fundamental ***** *******, **********, *** *****, ***, ***. ** ***** *********** for ********** *****, *** ** *** ***** ******.

******** ** ******* * ********* **** ****** ** **** ** with *** ****** ***** ******** ** ********** *******************.

Upside *** ********

******** ****** *** ****** **** ******* **** *** *****, *** **** *******. Because ** ****, ***** ******* *** ** ** ********** ********. Those ******** **** *** ******** ** ******* ******, ****** ******* the ******* **** ** ***** **** **** **** **** ***, but *** ****** ***** **** ** ***** *** ******** ***** to **** *********** *** $*** *******, ***** ** **** *** today.

Sell *** **** **** ******

******** ******* ****** ** **** **** ****** ***. *** ********* stock ******** *** ************* ********* ******* ** ******* ******** **** impetus ** ****. ***, ** * ****** *** ***** *****, Avigilon's ********* ** ******** ****** **********.

** *****'* ~$** *** *****, *** ******* ** ******* ** $350 ******* ***, ***** ****** ** ****** ** **** *******, * **** inexpensive ***** *** * ************ (**** **** *** ** ******* but **** **** ***** ****** ***** ******* ** *** ***** ****).

Comments (25)

May I add, if Hikvision really want to pummel the whole NA market, buy Avigilon now.

Canon vastly overpaid for Axis, now Hikvision can get Avigilon on the cheap.

Or Dahua, if they wanted to really put the scare into Hikvision.

Wow, that would be a truly shrewd move.

No one ever saw the "d" before anyway, so its perfect!

Interlogix/UTC should buy them - give them (Interlogix) some rejuvenation on the surveillance side.

Very interesting read. I know Hik has been causing the market to plumet due to its incredible pricing however I had no idea industry leaders like Avigilon have been affected so immensely.

I know in the past Hik has tried to aquire other large cctv providers such as Milestone and failed however with markets just absolutely plumiting it would not surprise me if they where to absord the companies that are slowly dwindling in profits.

I had no idea industry leaders like Avigilon have been affected so immensely.

Everybody that sells cameras has been impacted.

To the extent that Axis is growing now is because it has switched to a 'solution' model where they are generating more revenue per sale by selling VMS / appliances.

One thing that makes more sense now is the late June Appearance Search announcement. We noted the strange timing, especially since it is still not scheduled to ship for months.

It might help sales people distract some prospects and partners but obviously investors don't care about that as much as the steep margin drop.

Man is someone gonna get Avigilion on the cheap

Avigilon stock ended the day under $10, down more than 25%.

Brutal.

To put it in perspective the stock price is now down to November 2012 levels despite revenue being ~4x higher. 2012 Avigilon annual revenue was ~$100 million CAD. 2016 annual revenue is on pace for $400+ million CAD. Same valuation.

On the other hand, profitability is the problem. Avigilon's 2012 net income was ~$7 million, so far in 2016, net income is negative. Especially as companies mature, there is a greater expectation for generating profits but between overly aggressive investments and the entire video surveillance markets profits down, Avigilon is in a tough position.

Based mainly reporting from IPVM, our company has resisted Hikvision and Dahua. We have competitors that are all in on the Hikvision line. Avigilon has been our lead for 2 years, and they have been/are great partners. It is uncomfortable, to say the least, to think of them being sold to either of the Chinese giants. Time for hedging bets is on us. We still like Milestone and Axis, and wish they would be married.

What about Samsung. Pretty good performance and low price.

We still like Milestone and Axis, and wish they would be married.

Right now they're more like "friends, with benefits".

I remember switching from Pelco to Avigilon after Schneider Electric bought them. Before Schnieder good customer service and decent quality kept us a Pelco customer for many years. When the Sarix line was introduced bought 20 and had 8 bad cameras right out of the box plus connectivity issues with Endura. Then tested Avigilon and the security operators caught on ACC with little training. Been using Avigilon for several years now and for the most part been pleased with customer service, quality and their video management system. Now only matter of time that Avigilon will be taken over. Looks like IP cameras will be nearly disposable, just plug in the next one and see if that works.

I think the only reason Hik would buy Avigilion is to tie themselves more with a North American company, but IMO thats not a good enough reason to buy them.

If hik wanted to make products like or better than Avigilon, then they can easily do that. Which IMO, product wise, they are kind of there already. Software wise, probably not.

IMO, I dont think a purchase of Avigilon is good for Hikvision, they are market dominators and I see no need for this. For Dahua though, it would be perfect.

There are a few issues no one is discussing:

1) They have invested more than $150 million in Analytics with NO visible return on the investment. Their assumed strategy of using the analytics in the cameras to offset price competition from China was flawed from the start as only a small percentage of users actually need the analytics.

2) Their opening of a duplicate manufacturing facility was a terrible move as they stated earlier that the existing facility could support their projected sales volume until the end of 2017. The results are duplicate inventory ( now up to $54 Million as opposed to $32 at the start of 2015), duplicate personnel, facilities, etc.. All expenses that were not needed.

3) Their financial position has changed dramatically from $105 Million Cash at the start of 2014 and no debt to one of minimal cash and long term debt of $85 Million ( a swing of more than $150 million). Their receivables are $73 Million vs. $32 Million at the start of 2015 ( being loose with credit drives some sales).

"They have invested more than $150 million in Analytics with NO visible return on the investment."

There is ~$100 million just on the patents and I do agree that they need to show a return sooner rather than later on that as they have claimed so far that patent licensing has been immaterial.

Their opening of a duplicate manufacturing facility was a terrible move

That is an interesting point I had not considered. I do not know enough to assess that claim but one element in your favor is that the second facility was to help get to $1 billion in revenue, which is looking more and more unnecessary given their growth rates.

Their receivables are $73 Million vs. $32 Million at the start of 2015 ( being loose with credit drives some sales).

I believe it was $42 at the start of 2015, see:

I do agree that receivables increased significantly from the end of Q1 to Q2 2016 but I do not know how loose they have been with credit.

One other element is how many favors / discounts / pleading etc. did Avigilon deliver at the end of Q2 to get the number to what it was. They must have known the numbers were weak before the end of the quarter, so did they just let it be or did they pull in as much as they could, which could put more pressure on Q3, etc.

They must have known the numbers were weak before the end of the quarter, so did they just let it be...

Similar in motive to a Big Bath strategy?

Sorry about the $32 vs. $42 million, typo.

I have no factual basis on the increased receivables but for sure it is either looser credit or worse - stuffing the channel.

On the manufacturing; they could have expanded their Canada facility before the end of 2017 if they met sales goals. Much less costly than duplicate facilities. The other unexplainable move was doing the facility in the USA. If they wanted a second facility they should have just done it in China and had the benefit of the costs there vs. the Texas costs.

"If they wanted a second facility they should have just done it in China and had the benefit of the costs there vs. the Texas costs."

But when Hikvision / Dahua buys them, they can legitimately say they are made in the USA, kidding, sort of ;)

Don't forget Hanwha :)

Avigilon selling itself is even more likely now. The continued stock pounding and corresponding emotional beating it imparts provides more impetus to sell.

I agree.

Ironically, they may still achieve their run rate despite all...

Achieving their run rate at the sacrifice of profitability does nothing for the stock price nor their ability to sell the company at a price they would like.

The financial community looks for bottom line profit. They will give a startup time to get there but Avigilon is far past the stage of sales in lieu of profit.

Something like 1 1/2 to 2 years ago on an investor call Fernandez made the classic company head bo-bo. He told the analysts that Avigilon was sacrificing short term profit to drive sales and that the profit would come in the future. They rebelled at this concept ( correctly so).

Achieving their run rate at the sacrifice of profitability does nothing for the stock price...

Agreed. Though if they were to miss it, IMHO, it could start a small sell off, as it may be the last prediction the die hard longs have left.

Then again, hope springs eternal.

In the ~3 weeks since the financials were released, price is down another 12.5% steadily from ~$10 to $8.72. Hard to say something positive about this except that an acquisition becomes especially attractive, with a market cap of now under $300 million USD, under 1x this year's revenue.

You are correct about nothing positive. I would think with their management style they will not use the lower market cap to an advantage to get acquired. They will for sure take the direction that any offer based on the low stock price in beneath them and their thinking process will be that once they meet their sales goal and bring profits up there will be a much better offer. Unfortunately they are in a down spiral that will continue and the future offers will be lower.

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