Axis In Denial, Q3 2014 Financial Report BadBy John Honovich, Published Oct 16, 2014, 12:00am EDT
Axis Q3 2014 numbers are bad.
But their outlook is still rosy.
[Update: And Q4 2014 numbers are just as bad.]
The company has struggled to maintain not only their historical growth rate, but the market average growth rate they claim.
In this note, we examine their financial results and what we see is happening.
Axis only grew 7%, in local currency terms, in Q3 2014. That's quite bad, even for Axis declining performance over the last few years, where the low end had been in the 12% to 15% range. The last time Axis was this low was 2 years ago (8% in Q3 2012) when they were citing macroeconomic issues / political turmoil as the driving cause.
Now, Axis is offering no real explanation for just 7%.
And they repeat the same positive outlook: "The activity on the market and the inflow of new projects leaves Axis’ view on the market’s current growth rate unchanged." This is strange because they have missed again and again, this time even harder.
Europe Shrank, America and Asia Weak
All regions had issues.
EMEA was the worst, with revenue shrinking by 2% in local currencies. Axis only explicitly called out problems in Eastern Europe but presumably there are more issues than just there because Eastern Europe is not big enough to tank the entire Europe, Middle East and African market.
The Americas was the relative best, but still weakening at just 12% in local currency terms (down from 16% and then 13% in the previous 2 quarters). Axis cited its recent regional office plan as a core tactic to increase growth.
Asia only delivered 11% growth in local currency terms, which is especially bad given Axis low market share there and high overall growth rates.
Profits Good But...
Profits were good, both for gross margins (52.6%) and operating margins (19.5%).
The gross margin number signals that Axis is not cutting prices significantly. On the other hand, the poor growth rate means they are losing market share. The Mobotix 'strategy' of holding prices high and flatlining revenue is a path to irrelevance.
The operating margins were good though significantly helped by a sharp 16% quarter over quarter decline in R&D expenditure. Historically, R&D expending typically drops from Q2 to Q3 but this was more significant than previous cycles. See chart excerpt for R&D declines (green line):
Axis recent 'innovations' are often clever (think panoramic PTZ accessory, bells and whistles cameras) but they are so niche and so expensive that Axis is effectively abandoning most of the low to mid market.
Worse, Axis has done almost nothing to defend against low cost incursions and the rise of the high quality $100 HD cameras that are increasingly commonplace.
The market overall has slowed down as the migration to IP in the high end of the market has largely concluded. There is not much Axis can do about that but Axis has failed to build its product portfolio to hold the small to mid. We expect Axis to continue to struggle going forward. They may have individual quarters of 15 or 18% growth but we find it hard to imagine consistent growth in the 20% range that they claim is their expectation and market normal.
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