Axis Slow Growth Returns - Q4 2013

Author: John Honovich, Published on Jan 31, 2014

The seesaw continues and this time, it is going down.

Pace Q3 2013's robust 27% growth in local currencies, in Q4, Axis growth dropped more than half to a pedestrian 12%.

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Comments (30)

"For example, Axis, for the first time, added in an array of advanced analytics on a new high end 1080p PTZ"

Is it just me or does this make zero sense? Why would you put analytics like object removed, fence detector, object counter and enter/exit detection on a PTZ? These would be a lot more salable on fixed cams

Yes, fixed camera would make a lot more sense. Presumably, that's coming :)

"Despite the continued lackluster performance, Axis says their outlook is unchanged, citing 20 - 25 percent annual growth. On the other hand, Axis grew 17% for the year, which is not terrible. On the other hand, it is not clear to us what will enable them to grow at a faster rate in 2014."

Apparently, they feel the same way. In the news release issued about their Q4 results, they qualify their expectations for 2014 by saying:

"It is difficult to predict the trend for 2014. At present, we are maintaining our current view of the market trend. By continuing to develop solutions for new customer segments and markets, while strengthening our offering in existing markets, Axis is well-positioned to continue its global expansion and reinforce the company's market-leading position."

Their full year financial report shows a 12.7 percent growth rate in sales for 2013, rather than 17 16.9 percent, which is what they attained in 2012.

In order to attain the top of their 20-25 percent overall sales growth forecast for 2014, they would need to double the growth rates they attained across all of their regions for FY2013 while maintaining the same proportional sales by region.

For a company with their growth history, combined with the increased competition in the industry, that seems like a lofty target.

I believe Compaq in the 80's to 90's makes for a pretty good historical example for Axis' current situation.

In late 1980's the quality differential that had allowed for Compaq to charge a premium was reduced or eliminated entirely. Unfortunately management, composed primarily of the engineers who had founded the company and grown it so successfully, had not responded. They believed that Compaq could once again design its way out of the crisis, that by introducing new features and better technology than the competition, they would win back their corporate customers whose hesitance to pay the Compaq premium was temporary. Rather than reduce their overhead to meet their competitors' price, they would maintain their technological edge and continue to produce superior machines. Also the "do-it-ourselves" policy of vertical integration makes for a competitive disadvantage for Axis.

The business model:

About the Compaq business model and its sales channels thorough which the computers reached the ultimate users: Some go to large retailers. Some go to wholesale distributors who service system integrators and value-added resellers, people who combine service with delivery of machines. Dell and Gateway 2000 popularized the direct sales channel, bypassing all the intermediate steps between manufacturer and user. Their success bred emulation from Compaq, Apple, IBM, and most other major players, but they had to treat carefully for fear of undermining their existing channel partners. The indirect sales model of Compaq resulted in inventory and receivables build-up, which together with the inability to cut costs and accept the "innovator's dilemma" lead to its fall.

Henri, I do not think Axis will follow the path of Compaq.

On the product side, there still is very much a product differential but only on the higher end of the market - the enterprise / high / max security segment. And Axis is outstanding here, releasing product after product that is unlike almost anything their competitors produce. The R&D expense to deliver these products is something that very few will try to match.

While I think Axis faces a lot of risk in the middle of the market, where good enough, very low cost cameras are becoming quite strong, to me, their worst case scenario is slowing down into the Audi / Chanel / Prada of video surveillance.

As for the business model, if anything, Axis is more on the forefront of direct sales. While they do not sell direct, their channel structure makes it very easy for anyone to access their products at relatively high discounts. It's a company like Avigilon who is much more of a traditional indirect model.

Nice response John, I understand your point! Although the business model example was probably a misfit, I think I can come up with a more suitable example for the differentiation part. Maybe a similar situation from the auto industry about why differentiation does not eliminate the corosive impact of competition...

Cadillac (Lincoln in US), was probably one of the most successfully differentiated products in the world after WWII. Even after European (Mercedes, Jaguar, BMW in 70's) and Japanese (Acura, Lexus, Infiniti in 80's) competitors entered the market, Lincoln could continue selling for premium prices. This competition, because of lack of barriers to entry (which product differentiation is not), resulted that the sales and market share started to decline. Meanwhile the fixed costs of their differentiation strategy, i.e. product development, advertising, maintaining dealer and service networks - did not contract. Cadillac and Lincoln found themselves selling fewer cars with lower profit margins. Their profitability shrank even though their products were thoroughly differentiated. This process does not happen all at once though, but it will continue as long as "above normal earnings" attract additional entrants and the high fixed costs per unit eliminate any extraordinary profit, i.e. financial returns become ordinary. It is barriers to entry, not differentiation by itself, that create strategic opportunities for long-term success.

As for the business model, if anything, Axis is more on the forefront of direct sales. While they do not sell direct, their channel structure makes it very easy for anyone to access their products at relatively high discounts. It's a company like Avigilon who is much more of a traditional indirect model.

John - The problem with easy access to products and the ability to acquire them at deep discount is that it accelerates commoditization which ends up having a huge negative impact on margins, neither of which are good for a company that is trying to increase its top line. They might succeed, but in the long run, the bottom line won't follow unless they can manage a drastic reduction in cost, which would probably mean doing away with the big R&D budget. And there goes their product differentiation.

That's a contrarian viewpoint...

Axis might be commoditizing integrators by doing this, but they are not commoditizing themselves. If anything, they are maximizing their top line revenue and potential market.

The reason all the biggest surveillance manufacturers allow leaky to open access to their products is that once you get really big (hundreds of millions), you cannot continue to grow with constrained / super tight access.

I am very fascinated about what happens to Avigilon as they grow larger. For instance, in November they said they had 1600 dealers, just 2 months later it was 1800. I don't blame them. To grow your top line as a manufacturer you need more dealers/partners/re-sellers. But at some point, that means most everyone can access your product. Thoughts?

Not really. The more your integrators' margins get squeezed, the more likely they are to turn to alternative manufacturers that can offer them better margins, such as the cheapo Asian variety. The end result is the same.

Alain, that's only the case if integrators have dominant power in the channel AND they band together to block out manufacturers who 'go around them'. Neither of those things has happened.

Lots and lots of manufacturers continue to sell and promote Axis despite their less attractive channel structure. Why? Because customers continue to demand Axis products and Axis is able to continue to stimulate that demand marketing directly to end users.

In the past decade, Axis has gone from annual revenue of less than $100 million USD to over $700 million. That's some pretty strong top line growth...

According to Axis' own claims, they have over 55,000 partners (179 countries), including 70 distributors.

What amazes me is how Avigilon is able to deliver a $200M run rate with less than 2000 partners ($100K per partner) while Axis delivers about $700M (3.5x) in sales with such a larger - 27.5x larger - partner network ($12-13K per partner).

The overhead to manage 55,000 partners delivering such low average volumes must be an administrative nightmare. And some of those partners must be starving.

"I am very fascinated about what happens to Avigilon as they grow larger. For instance, in November they said they had 1600 dealers, just 2 months later it was 1800."

According to comments from CEO Alex Fernandes last month at a public event, its now closer to 2000 and he expects that their target to reach a $500M sales run rate by FY2016 may happen earlier, but that they are holding to that for now even though it could prove to be a conservative estimate.

I also don't think anyone is saying Avigilon can continue growing the way they are over the very long term without some kind of an impact to their margins. I'm certainly not saying that. But they've managed to do it for as long as they've been in business and I don't see that changing in the medium term, with growth in all of their metrics being stellar up to now, contrary to what Axis has been experiencing.

"Contrary to what Axis has been experiencing."

Alain, Axis is a $700+ million company, Avigilon is not yet at $200 million. In any given market, it's far harder to grow when you are much larger.

Agreed John, but let's just compare annual topline growth for both since Avigilon has been in business and its immediately obvious which has been performing better over that period:

Year Axis Avigilon
2008 18.20% 2500.00%
2009 16.50% 225.00%
2010 27.50% 91.10%
2011 22.00% 85.80%
2012 16.90% 67.00%
2013 12.70% 9 months 81%

Alain, that comparison is misleading and silly.

In 2007, Avigilon did just $200,000 in revenue. That same year Axis did $250 million in revenue.

A VC backed startup with essentially no revenue is going to grow at dramatically higher rates than an already large company.

Of course, keep in mind, despite those growth rates, since 2007, Avigilon has increased revenue less than $200 million while Axis has increased by nearly $500 million.

Listen, Avigilon is a huge success story, the best executed startup in surveillance maybe ever, but citing their growth rates as an early stage startup does not address the scale and saturation challenges that any company faces as they get large.

I have no debate with you about 2008 and 2009 growth rates - I figured you'd discount those but put them in there anyway. As you said, they had to start somewhere.

Looking at the difference in rate for the next 4 years, including the partial data for 2013, Avigilon still grew their sales 3.31x faster in 2010, 3.87x in 2011, 3.96x in 2012 and approximately 6.38x faster for what's available for 2013.

If you cut it that way, its even more obvious their execution has been superior to Axis'.

Alain, growing from a $100 million base is far easier than a $600 million base. If you don't agree, that's fine but you are most certainly going to be in a very small minority there.

I'm not going to argue on that either, but based on my last post, it should be pretty clear that Avigilon has great momentum going for it whereas Axis has been heading the opposite way.

And we are talking about a 4 year trend.

Alain, it's called mean reversion. Companies naturally revert to industry average growth rates, especially as they get larger. It's incredibly hard not to do so. Even Avigilon's growth rate will fall. The issue is will it be 50%, 40%, 30% by 2014, 2015, 2016, etc.

You are looking at a 4 year trend that started at just $32 million in revenue.

If you really want to argue a case for 50%+ growth over the next 4 years, you need to more carefully look at how they can grow revenue $100+ million or even $200+ million every year - a much harder feat

John - For argument's sake, if you believe the 20% CAGR forecast for the IP Video industry over the next several years by those analysts we discuss on an off - and I know you don't put a lot of faith in those estimates - Avigilon and Axis are actually moving away from the mean right now, but in opposite directions.

Alain, by your own unconventional logic, Avigilon's growth rate has plummeted from 225% to 80% over the last few years! :)

Listen, I speak to many analysts who cover Avigilon for large banks and none of them think are going to maintain 80%+ growth rates through 2014. That's not a knock against Avigilon, just the reality that even companies doing phenomenally revert back to the mean as they get bigger.

If you have any insights into future growth beyond simply highlighting their past record when they were much smaller, feel free to share.

Why are you putting more faith in these guys than in IHS and those other outfits?

It's possible they'll be right, but none or very few of them thought Avigilon was going to do as well as it has this past year and they all hightailed to revise their estimates upward by a wide margin right AFTER the Q3 data came out.

That just makes for a lot more people out there watching Avigilon and trying to guess where they're going next, because that's all these guys are really doing.

I studied economics for a few years and most short term predictions are about as reliable as what you get from the weather channel. They're both basically a coin flip.

One thing I do believe is that trends are usually pretty reliable and what this 4 year trend tells us, on balance, is that things have been much brighter for Avigilon than they have been for Axis. It's possible it will reverse and we'll see Axis increase their growth rate in the future and Avigilon's drop off, but it's also possible it won't and if I had money to invest today, I'd be much more likely to invest it with Avigilon than I would with Axis.

And I wouldn't be surprised if those bank analysts were to tell you the same thing

"This 4 year trend tells us, on balance, is that things have been much brighter for Avigilon over the past 4 years than they have been for Axis."

Alain, I give up. I doubt you understand economics or financial analysis if you are seriously comparing the 4 year period of a startup to one of the largest companies in the market.

Again, Avigilon has done great but it's absurd to compare growth rates of companies at wildly different stages of their development.

I stand corrected. Weather forecasts are twice as accurate as financial analysts' forecasts. ;)

That's one of the reasons I didn't pursue my economics studies. Theory and models are nice, but I needed something more practical.

If you would have pursued your economic studies longer, you would have learned that stock price forecasts are much different and far more difficult than company revenue forecasts (which is what I and the professional financial analysts are referring to).

You would also have learned an important point about market capitalization and pricing in future growth, pace your comment, "I'd be much more likely to invest it with Avigilon than I would with Axis."

Avigilon is trading at ~7.6 times their 2013 revenue while Axis is trading at a far lower ~3.1 times 2013 revenue.

Avigilon's stock may deliver a higher return than Axis' but Avigilon has a lot higher growth expectations to meet to get there.

Avigilon's stock may deliver a higher return than Axis' but Avigilon has a lot higher growth expectations to meet to get there.

And that's because of the part of the business lifecycle each of them are in, as you pointed out yourself.

Because of it's lower market share, let's say 1%, Avigilon has a lot more room to grow than Axis, at 7%, relatively speaking. In fact Avigilon has the potential to grow 7 times as much as Axis does right now.

So again, relatively speaking, Avigilon's times revenue figure is about right and Axis is overvalued.

"relatively speaking, Avigilon's times revenue figure is about right and Axis is overvalued."

Now you are making stock market predictions! LOL

The market consensus is that Avigilon growth will decelerate. Even Avigilon itself it not giving guidance that it's going to continue to grow at 80%.

That's why 'relatively speaking' the market valuations are what they are. Everyone but you understands that larger, more mature companies growth will decelerate over time.

It's not a criticism of Avigilon, it's a reflection of reality.

Please no more comments on this. If you want to start a new discussion on Avigilon's growth / stock price, etc. please do that.

Everyone but you understands that larger, more mature companies growth will decelerate over time.

Of course not. That's exactly what I said, if you consider that less room to grow is about equivalent to decelaration in growth over time.

The most Axis can grow relative to the size of the industry right now is roughly 14x. For Avigion its 100x. Not to say that either will get anywhere near that potential.

One other thing we need to consider when looking at this beast is that IP Video isn't a mature industry, and that there's A LOT of room for change over the next several years, unlike say the PC or the IT outsourcing industry, or even the analog video industry.

Axis has certainly been the leader of the industry and shown tremendous historical growth. But as long as there is excess profits in that high-end market, and no significant barriers to entry, there will be new entrants (closest I can think of, Samsung, but more will come) that will join the competition and begin eating away market share and margins. If operational efficiency and localization (in product space) is not a main focus and if they don't drop their dreams of growing 20-25% p.a. (by diversifying to small installations, access control, etc. new hot things), this can happen only in a couple of years.

Examples of similar type of strategic mistakes: GM, Zenith, A&P, Coors, Kmart, PanAm...

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