Infinova Acquires Swann

By John Honovich, Published on Oct 21, 2014

3 years ago, a Chinese / US surveillance manufacturer, Infinova, raised $300 million cash in a billion dollar plus IPO. Later that year, they bought March Networks.

Now, Infinova is dipping into its war chest to buy one of the biggest direct to end user surveillance manufacturers, Swann.

In this note, we examine the details of Infinova and Swann's financials, projecting the potential impact of the deal.

Deal Financials

[Note: details gathered from a 161 page Chinese financial filing [link no longer available] and may be subject to some translation errors by us.]

Infinova is paying ~$90 million USD for Swann, whose most recent annual revenue was ~$125 million USD.

For a real manufacturer, that is a terrible price, as the price to sales ratio is under 1. However, Swann, is an OEM, most notably of Hikvision, and low valuations are typically for such companies. For instance, FLIR acquired Lorex, a company doing ~$75 at that time, for $59 million, a similar price to sales ratio.

Swann Financials

Swann's key financials include:

  • ~$125 million USD annual revenue
  • Revenue growth 19.3% year over year
  • 30% gross margins (typical for OEMs but far lower than the 50%+ for real manufacturers)
  • 10% operating margins
  • negligible net margins
  • 106 employees (which is low considering their revenue but understandable considering they neither develop nor manufacturer products)
  • Top 5 customers accounted for 51% of revenue (likely to be companies like Costco, Sam's Club, Amazon, etc.)
  • 70% sales from North America, 15% Europe, 15% Australia (their home market)

For comparison, Q-See, one of Swann's main competitors, did $54.3 million in 2012 with 85 employees.

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Infinova Financials

For 2013, Infinova had $156 million USD revenues, a significant portion of which is from March Networks (who did ~$100 million before the acquisition). Net profits were meager at ~6%.

Infinova reports 60% of 2013 sales being outside of China and an even greater percentage (73%) for the first half of 2014.

Considering Hikvision and Dahua combined are doing ~$3 billion in revenue, primarily in China, this makes Infinova a very minor player in the overall Chinese market.

Also, Infinova has a very rich valuation, with a market capitalization of ~$1 billion, more than 6 times its sales. For example, Infinova's valuation is higher than Avigilon, both absolutely and relative to sales.

What to Do With Swann?

Infinova has allowed March Networks to operate largely independently. March continues to release new products (at a similar modest rate as prior to their acquisition) and has not suffered any implosions or mass exoduses as is common when acquisitions do occur.

If that is their template, we would expect a similar path for Swann, with the company allowed to advance its direct sales of lower end surveillance products.

A big potential advantage is that Swann depends on Chinese manufacturing for their products. It would seem obvious that Infinova would become that source, increasing revenue for Infinova's chinese manufacturing operations and lowering costs of buying from third parties.

Where Goes Infinova?

Infinova is one of the most puzzling companies in the market. They clearly have benefited from the Chinese market boom, even though they do not sell much in China and are essentially diversifying into the lower growth non Chinese markets.

On the other hand, investors gave them $300 million, so they need to make the best use of that. Both companies they have acquired have been at relatively reasonable valuations and are solid companies in their respective, unrelated markets.

Though we do not imagine Infinova can justify such a high valuation long term, if they can properly integrate these companies, they have a chance at developing a solid, though not spectacular, surveillance mini conglomerate.

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