Axis Financials From Bad To Worse (Q2 2015)

Things keep getting worse for Axis and now sales are actually shrinking.

In this note, we break down:

• How revenue and profits are sinking
• Which regions and areas hurt the most
• What the bright spot for Axis is
• How Axis is in denial on degrading outlook
• Why Canon overpaid by a billion dollars

Canon / Axis Ownership

Though Axis is now a subsidiary of Canon, with Canon owning over 80% of Axis, Axis continues to release financials because a hedge fund has blocked Canon from delisting Axis.

Revenue and Profits Sinking

Axis sales were actually down 1% year over year, in local currency terms. In the 7 years we have tracked Axis, this has never happened before. However, this was coming. Last quarter (Q1 2015), sales were up just 2%; the quarter before that (Q4 2014), sales were up 7%; and before that, 7% as well. As such, this clearly not an aberration, just a continuation of a long-term declining trend.

Net profits were cut nearly in half as well, declining from 13.8% to 7.2%. Historically, Axis profits had been in the 10-20% range.

Regions and Areas Hurting the Most

Americas declined 5% and Asia declined 9% in local currency terms. Axis needs Americas to grow given that it is their largest region and more than half their revenue. Asia is supposed to be the great growth engine, despite the 9% decline. Axis itself continues to say that Asia has huge potential but they still cannot deliver on it.

We believe Axis challenges are primarily with price-sensitive buyers and smaller size applications, given the specific challenges in South America and Asia and the relative better results in North America and Western Europe. As the results show, this is a real problem, since it continues to pull Axis down.

Bright Spots for Axis

On the positive side, though not impacting current financials, Axis had an impressive new product release cycle, after a relatively down 2014. Their compression technology Zipstream does / will deliver real savings; Their 33MP multi-imager panoramic is promising; They have rectified problems and improved their decentralized VMS offering; Plus a whole slew of new niche uncommon products like the IP Horn.

All of this will help them on the mid to high end of the market; none of them, given Axis relative high prices will be significant where they struggle in the low end.

Axis Outlook in Denial

For the past few years, Axis financials have gotten worse and worse, but they continuously proclaim:

"The market activity and the inflow of new projects means that Axis’ view on the current market growth rate remains unchanged."

Up until the beginning of 2014, Axis cited market growth in the 20-25% range. Then in Q2 2014, they silently dropped that to 16-22%. Now, in the Q2 2015 release, they cite 10% annual market growth.

With IP having 'won' at the mid to high end, the growth rate of IP has converged / dropped to the traditional overall video surveillance market growth rate of ~10%. Axis, like all Western manufacturers, cannot win huge Chinese projects due to political reasons, so it blocks them from growth there. And since Axis has chosen not to compete on price or release products cost competitive with the Chinese, they struggle to be even considered in the low end.

Canon Overpaid Billion

However, credit is due to Axis executives for knowing exactly when to cash out.

Just 5 months ago, in February, Canon agreed to pay ~$2.8 billion USD for Axis, a ~$900 million premium over Axis then stock price. Since then, Axis growth has worsened and profits have plunged. With this further deterioration and current financial metrics, Canon paid easily a billion more than a reasonable price for such performance.

Canon says they will continue to let Axis run independently as is.

We hope Canon has a better plan.