Axis Bad Financial Results (Q1 2015)

In their first financials after Canon has agreed to purchase Axis at a massive premium, Axis delivers more bad results.

Inside this note, we break down the results, and what this shows about their future, challenges and the overall state of the video surveillance market.

Results Overview

The past few quarters have been bad for Axis, with growth in local currencies at 7% for both Q3 and Q4 2014.

Now, Axis hit just 2% growth in local currencies for Q1 2015, the closest to flat we can recall Axis being.

Despite this, Axis continues to say their "view on the current market growth rate remains unchanged," which in recent quarters they cited as 16 - 22%, a number they are obviously far from.

The big short-term benefit for Axis was very positive foreign currency effects, turning 2% growth in local currencies into 20% increase in net sales. Gross margins and net margins were decent, at 52.4% and 10.7% respectively, however, those were significantly helped by positive foreign currency swings.

Americas Especially Bad

Not surprisingly, 2% growth implies challenges across the board. Relatively speaking, the Americas was the worst with no growth at all. Axis explanation was that "Sales were affected by a weak development in South America and unfavorable currency impact in Mexico and Canada." Nonetheless, it appears that the US, Axis' largest individual country, did poorly.

Moreover, Axis just grew 5% in EMEA and in Asia. The low Asia growth is especially bad given Axis low volume level and the Asian market's higher growth.

Causes - Declines At the Low End

Axis cited a few factors - "turbulent macroeconomic situation in several of Axis’ markets", "low inventory levels at larger distributors", and "fire at the Thai production unit in November". Overall, though the macroeconomic environment globally is quite solid. The low inventory levels actually is less of an excuse than a red flag. 

We believe the main factor holding Axis back is that they are being displaced in the low end / price sensitive parts of the market (something that was clearly shown in Top Manufacturers Gaining and Losing Ground). While Axis talks a lot about "small and medium sized installations", on the product side their offerings (and new releases) are overwhelmingly targeted to the high end. On March 1st (2/3rds through the quarter), Axis cut prices on lower end models. While this will help modestly, the price gap at the low end (where novel features are not critical) is still too steep to stop market share losses. Worse, Samsung now joined in with their low cost line, putting further price pressure.

Axis Wave The White Flag At the Low End

From their actions, it is clear that Axis is choosing not to fight Hikvision / Dahua / Samsung / et al. for the $100 MP camera market. Right or wrong, Axis knows what is happening and has refused to add budget models at the new super low prices to compete there.

The problem is this is where growth is the highest, both from users who would not previously pay higher prices or those who are defecting down to the $100 level who find the quality good enough and the savings to be the key driving factor.

Axis Strengthening at the Enterprise

The good news for Axis is that they are releasing a lot of new products and many of them are innovative (the IP Horn, the suicide resistant dome, the 33MP panoramic camera, the video door phone / access control panel, etc.).

The problem for Axis is that for every IP horn they sell, there are some thousand $100 MP cameras sold. Given their size, it is hard to grow revenue $100 million per year (or 10-20%) selling IP horns and suicide resistant cameras.

One area that might make a more mainstream difference is Zipstream, which clearly delivers big storage savings. However, it is not clear how long it will take rivals to match.

From a product / technology standpoint, clearly Axis is not going away and will remain a, if not the, top choice for high-end cameras. The issue is simply how much of the small to mid-market they will continue to lose.

It's Canon's Call Now

The Canon acquisition 'offer' is little more than a formality now.

Axis did not even release a presentation or have a conference call, as they normally do, explaining to us:

"As the presentation was mainly for investors and analysts there was no real reason to host one this year as we have few investors left and analysts’ interest to cover Axis at this time is very low."

Soon enough Axis will be subsumed into Canon, and we will have to see what changes are made there. Canon has declared Axis and Milestone to remain independent but given the commodification of the camera market and the rise of 'solution' sales, we think it is only a manner of time before Axis / Milestone bundling begins.