Axis Q1 2013 Financial Results

Axis's growth rate appears to have settled into a slower growth rate range, as shown by just released Q1 2013 and 2012 financial results. In this note, we examine what is holding Axis back and, in particular, Axis's performance in Asia. Plus, we dig into the financial call transcript for greater details and commentary.

Financial Report Overview

Key details from Axis' financials include:

• 16% revenue growth year over year in local currency terms; Previous quarter was 15% for the same metric. Key rationale for this lower number was 'macroeconomic uncertainty'.
• EMEA remained the weakest region at 10% growth in local currency terms, though interestingly Axis called out the UK as 'a positive trend' citing a 'technology shift' from analog to IP.
• America's growth was 19% in local currency terms, up from 14% for the same metric in the 4th quarter. This was particularly impressive since Americas is now 52% of Axis' total revenue.
• Asia growth was 23% in local currency terms, a marked drop from the 34% in the 4th quarter. Asia remains, by far, Axis' smallest market, at only 12% of their total revenue.
• Margins across the board were fairly stable.

Going Forward?

While Axis emphasized that the long term growth prospects were in the 20-25% range, they were more cautious about the rest of this year, saying that they were 'not saying return to 20-25%" growth for the rest of this year. Equally important, Axis acknowledged that Q2 2012 was strong, and while they would not comment on how this would impact next quarter's performance (Q2 2013), we would not be surprised if that number was equal or lower than this quarter's.

Performance in Asia

Axis acknowledged that 23% growth in Asia is below their expectations and that they were 'not happy' with it. Factors they cited for this included:

• Slower general economic development within Asia
• "Takes time for [their] investments [in Asia] to pay off"
• "Tougher from a competitive perspective" as they face off against the "biggest and growing Chinese competitors in their home market"

We are bearish on Axis' ability to compete in Asia. While their budget offerings are attractively priced for the more mature and richer Western markets, the price pressures are far more severe in emerging markets. Additionally, the political barriers to any Western company are significant for the mega projects driving Chinese companies.

Interestingly, Axis said that they did not expect gross margins to be reduced as their percentage of revenue within Asia grew. This is surprising to us, because we would expect Axis would have to cut prices within Asia (reducing gross margins) if they want to expand faster. This might signal that Axis is focusing more on profits than overall market share and be another sign why Asia sales should lag.