Why is Avigilon's Stock Falling Like a Knife?

By: John Honovich, Published on Oct 08, 2014

A week ago, a prominent Avigilon investor admitted, "Nobody wants to hold [Avigilon stock]. Everybody wants to sell it." He then recommended buying it.

He evidently was right, at least partially.

In the past week, Avigilon's stock has dropped another 20% and is now down nearly 60% from its high earlier this year.

Avigilon's market valuation is down over $900 million since then.

[Update October 10th - Avigilon stock ended the week at a new low: $13.90 per share.]

From speaking to investors and analysts covering Avigilon, here are the main reasons they are offering for the fall:

Lack of confidence in CEO
Issues with management team
Problems in hiring / scaling
Low cost competition increasing
Competitor products catching up
Accounting irregularities
Growth rate sharp decline

Inside, we provide our analysis on how accurate we believe each reason is.

CEO **********

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*** ****** ******* ******* to ** * ******* cycle, ***** **** ***** price **** ** ******* validation **** *** *** is ***** * *** job. **** ** ****** because ********* ***** *** a **** *** **** the ***** ***** *** shooting *******.

******* ** ** **** or ***, ** ** certainly ******* * *********** role.

Management ****

*** *** '***********' *** one** **** ********** ***** in *** **** ****, including ***** ** *********, ***** ** **, ***** ** ************** ******* *********.

*******,******** ******** *********** * ******** ******** and ************** ** ********'* management ****.

******** ** ***** ********* for * *********** ***, which ** * ******* we *** ******* **** investors.

Hiring / *******

******** ********* *** ***, *** Avigilon's ********* *** ****** needs, ** ** ****. Avigilon **** ***** ** total *********, ** **** 5% *** *** ******* (586 ** ***).

*******, *** ******** ** new ******** ******** ****** listings ***** * **** over *** **** * months. *** **** ******* is ********* ****** ** ** *********, *** **** ***** across ***** *** ********** are *********.

****** ******** ***** ***** hiring '*' *******, *** new ********* ** **** seen are ********* ******** ********* ** junior ****** **** * few ***** ** *** level **********. ***** ** certainly ** ****** ** top **** ****** **** big ************ ************* **** Axis, ******* *** ********* to ********. *** **** the ***** ***** ******** this ****, **** ** an **** ****** ****** to **** ****.

Low **** ***********

******* **** ***** **, all *** ***** ************* are ***** ****** ** low **** *********** - companies **** ********* *** Dahua, ** ********** - with ********* ******* *** radically ***** *******. ******, manufacturers ******* ***** **** is***** #* *********.

*** ******** *******, ** see ********* ** *** most ****** ***********, ***** brought **** ******** ******* as * ***** **** alternative.

******** *** **** * low **** ****** ****** (before *** ******* ************ expansion) *** **** **** held ***** ****** **** while ****** **** ******* (see *** ** ****** ***** ********** and ****** ******).

Competitor ******** ******** **

**** ********* *** *** thinking / ********* / arguing **** *********** *** catching **.

*********, **** *** *** see *** ********** ***** wreck **** ******* ****.********* ******** * ***, **** *** ************ was **** *********, ***.

********** ********, ******** ** doing ***** ****, **** improving with ***************** ** ******** *******.

Accounting **************

**** ******, ** ***** ** ******** ********** Issues *** ********, ******** *** various ********* ********.

**** ** **** *** been ********* *** ********'* CEO ************ ****** ******* stuffing. *******, **** ********* are ****** *** ******** of '** ***** ** smoke, ***** **** ** fire'.

Growth **** ***** *******

******* ********* ****** **** for *** **** ********* Q3 **** ** ~**%. While **** ** ***** for ****** ***** ***** ************ manufacturer, **** ***** ** a **** ** **** for **** *********' ****** growth ***.

*******, **** ********** *** been *********** *** ***** for **** ****, ** it **** *** ******* why *** ***** ******* has **** ************ ** the **** *****. *** theory ** ****, ***** the ******* ***** **** week, *** ******* **** leaked *** **** **** are **** ***** **** the ******* *********.

Irrational *********

** *** ********* ** this ****, ********* **** irrationally **********. *** ********* was **** ******** *** going ** **** ** astronomic ***** *** ***** to ****.

***, ** ** ******** that ********* **** **** flipped *** ***** ***.

What's ****?

********'* ****** ********* ** ~$650 *******, **** ~$*** million **** ** *** bank. *** * ******* whose ******** ** ****** of ******* ** $*** million, ****'* ***** ***********, even ** *** ***** Avigilon ** **** ***** to ** ** ******** normal **-**% ****** **** company.

*** *** ***** *** further ********** **** ******** and ********** **************. ** either ** ***** **** up ** ** ****, the ***** ***** **** could ****** ** *********. However, ** ******** ** simply ************* ** * 'normal' ** ***** ************ manufacturer, ****** ******.

Industry ******

***** ***** ***** ******** can **** ***** *********** impacts. *** ******** **** brings ** ********** ** intense *** ********** ***** down ** *** ****** organization.

******** ***** *** ***** price ** ******* (** least **** ****) ** relieve **** ******** *** eventual ******** ***** *** new **********.

******** ***** *** * strong *********** *******, ***** channel *** ***** ** cash ** *** ****. However, ********'* ***** **** the **** *** ****** will ** ******** ** determining ** ** *** recover.

Comments (27)

Tim Campbell

10/09/14 09:08am

(As a measure of disclosure, I do own some Avigilon stock)

According to required public filings, half a dozen Avigilon insiders (including the CEO, interim CFO and other senior directors) have bought more Avigilon stock since the price dropped in May. These are additional purchases in the market, not options, which if included would bring to at least 10 the number of insiders buying Avigilon stock. Not one insider has sold any stock over this time.

This info is accessible online as insider buying/selling must be publicly reported.

Quotes like "Nobody wants to buy" from talking heads are a dime a dozen, and can easily be found on the numerous stock market forums. They are also less that worthless because they distract from the important discussion, ie: are there management/financial issues at the company? Is growth slowing significantly and why? etc... This is of real interest.

Also, the Veritas report may have questioned accounting practices at Avigilon, but it is an investor services company that makes money by selling its reports.

This site has a lot of great information about video security companies that is hard or impossible to find elsewhere, which makes it a valuable resource. But repeating the lines of potential stock market touts and short-sellers does the site a disservice. There is enough of that for free online.

John Honovich

IPVM | In reply to Tim Campbell | 10/09/14 10:09am

Tim, we analyzed each of the lines, including disagreeing / rebutting quite a number of them.

Tim Campbell

In reply to John Honovich | 10/09/14 12:42pm

John, I agree the points you covered were fair, and I am not suggesting (as others seem to have) that you are intentionally curb-stomping the company. The concerns you have raised about Avigilon are real and I share them. How they pan out remains to be seen. My only contention was dressing that up with quotes from guys who get paid (ultimately) through commissions on stock sales is not adding value to the site.

Industry views of management, low-cost competition, hiring practices, marketing, growth rates ... etc ... is your meat and potatoes (if I may say so) and something I can't find for free elsewhere, unlike generic stock market commentary.

Keep up the good work, though :)

John Honovich

IPVM | 10/11/14 02:32pm

Important Update:

One Avigilon analyst at CIBC is reporting that Avigilon will now focus on margin growth at the expense of revenue and that sales expansion is slowing. Full quote:

"Over the last three months, splitting of sales manager coverage regions has slowed to a near halt, while product and channel strategies will focus increasingly on EBITDA margin growth at the expense of revenue"

This is a very material point, if true. We asked CIBC where they got this information from and whether it was direct from Avigilon management. They did not respond.

Slowing down of splitting sales territories makes sense, simply because they are already have quite narrow / segmented / small regions such as:

How many more splits can they really do at this point?

However, the margin to revenue focus is change is much more questionable. We asked another prominent Avigilon analyst, who is well informed, and they said that they "Have heard no indication at all that the company is looking to slow down revenues in favor of margin."

On the other hand, changing focus from revenue to margin growth would be a critical strategic change. CIBC regularly talks to Avigilon so it is certainly possible that Avigilon told them that, but if they did, it is difficult to image that such selective disclosure is appropriate.

Undisclosed Manufacturer #1

10/12/14 05:10pm

It couldn't have happen to a nicer pair of jerks than Shmode and Alex. Truly appalling individuals.

John Honovich

IPVM | In reply to Undisclosed Manufacturer #1 | 10/12/14 05:13pm

They have already won, regardless of what happens now or what you think, right?

George Whittaker

In reply to John Honovich | 10/12/14 09:21pm

if they are level-headed and can fairly appraise the situation clearly, yes.

if they believe their own schtick, maybe not.

to you it seems easy, walk away while your ahead, who cares what people do, think, say? you'll be buying fiji. but many others have followed the knife.

EJ Nemec

10/12/14 09:30pm

Still overpriced in my opinion.

Undisclosed Integrator #2

10/13/14 01:23pm

we began selling Avigilon Cameras in 2010, and I was, and remain and early investor, and expressed my concerns to my channel managers when Avigilon dropped the Jp2K video support from its core camera lineup of 1,2,3, and 5MP cameras. Everyone can argue the merits of h264, but it's extremely difficult the argue against the benefits of wavelet compression. It is the Movie Industry standard for high resolution, and set's Avigilon apart from everyone.

I beleive the key to a rebound will be a move back to JP2K, and to go ultra low power, and low light.

Undisclosed Integrator #3

In reply to Undisclosed Integrator #2 | 10/13/14 01:27pm

Betamax was never given a fair chance.

Undisclosed Integrator #2

In reply to Undisclosed Integrator #3 | 10/13/14 01:32pm

Being from the midwest, I tell my kids "Fair is where you buy pigs", and I was only expressing my .02 on the subject, and I doubt anyone cares anyway. Had they stayed the course with JP2K in the H3 lineup, and embraced offshore manufacturing to drive costs down, as they have now with the new integrated NVR's, 8,16,24 port embedded POE. I suspect they will someday do through distribution too....

Undisclosed #4

In reply to Undisclosed Integrator #2 | 10/17/14 02:38pm

I have to disagree with this one. I also started selling Avigilon way back in the beginning. Sold a fair amount of the 16MP cameras too at 10k a pop (not counting the lens). But let's be real, those cameras were fantastic, so long as lighting conditions were good. They were absolute crap in even mid-low light. Even the Monochrome had so much noise it was a difficult sell. I would lose many shoot outs to Sony and others, not because I couldn't see the license plate, but because the picture quality in a parking garage was so bad.

And this doesn't even count the massive amount of storage space they take up or the fact that that those cameras were completely proprietary. Something that Every other company like Genetec, Milestone, ExacQ, Onssi and others would jump all over.

The best thing Avigilon did was finally realize the rest of the industry was not adopting the JP2K and was not going to. This was an Achilles heel for them, not a seperator.

Having "Onvif" cameras but still providing an end to end solution is what makes Avigilon dangerous to other manufacturers.

Undisclosed Integrator #2

In reply to Undisclosed #4 | 10/17/14 02:59pm

Disagree with what? My opinion and reference to wavelet/jp2k compression?

My opinion remains, and in most cases the science of wavelet compression remains the superior format regardless of any prior vendor experience. Wavelet was chosen by the most critical video industry of all, hollywood, as their digital video format.

If I'm not mistaken, both 2K and 4K television is all based on JP2K - wavelet compression.

I will not be surprised to soon see another vendor take at stab at Jp2k since storage costs continue to fall..

Undisclosed #4

In reply to Undisclosed Integrator #2 | 10/17/14 03:21pm

Lol, yes. I am disagreeing with most all of that. I used to say the exact same thing in my sales presentations about the movie industry choosing JP2K. It's a great party line to parrot. But, again, the reality is the Surveillance industry is SO not the same as the movie industry. Not even close.

So, again, as long as your lighting conditions are perfect, those cameras are great. If not, they are crap. And that's what matters in the Surveillance industry and what I can make sales on.

Don't get me wrong, there are some cool things about JP2K. Certainly some advantages. But on the Surveillance side of things bewteen the ENTIRE industry adopting H.264 as a standard with lower storage costs, better handling of lighting, and inter-operability- Avigilon absolutely made the right call in ditching the JP2K line.

Undisclosed Integrator #2

In reply to Undisclosed #4 | 10/17/14 03:31pm

lol, I agree on most points, but to be fair we are comparing the H264 of today vs equipment designed in 2008/2009/2010. I never say never, but it's highly unlikely we'll see graceful video frame aging from h264.

John Honovich

IPVM | In reply to Undisclosed Integrator #2 | 10/17/14 03:56pm

"we'll see graceful video frame aging from h264."

I concur. And that's why multi-stream recording has become the de facto replacement for that.

Undisclosed Integrator #2

In reply to John Honovich | 10/17/14 04:02pm

Yup, and multi-stream recording is a poor replacement, given it's loss of quality.

John Honovich

IPVM | In reply to Undisclosed Integrator #2 | 10/17/14 04:06pm

You could do multiple streams at the same resolution, different frame rates - i.e., 1080p/30, 1080p/10, 1080p/3 if that's what you wanted.

Undisclosed Integrator #2

In reply to John Honovich | 10/17/14 04:08pm

What VMS's currently support that kind of configuation option within the VMS software interface itself, with no need to access the actual camera?

John Honovich

IPVM | In reply to Undisclosed Integrator #2 | 10/17/14 04:11pm

Off the top of my head, Exacq and Genetec, I believe Milestone Corporate as well.

Undisclosed #5

In reply to John Honovich | 10/17/14 04:46pm

"I will not be surprised to soon see another vendor take at stab at Jp2k since storage costs continue to fall.."

I believe the logic of this statement is flawed. It isn't the cost of storage itself that makes JPEG2000 an 'Achilles heel' - as D labels it above.

If storage costs go down (which they will), then all compression types enjoy this savings, not just JPEG2000.

It is the relationship of costs compared to other compression types that is the Achilles heel. No matter what storage costs, if JPEG2000 produces significantly larger file sizes then it will always cost significantly more to store than compression methods that produce smaller file sizes.

Luis Carmona

IPVMU Certified | In reply to John Honovich | 10/17/14 05:24pm

Geutebruck does. [Geutebruck dealing integrator]

Undisclosed

In reply to Undisclosed Integrator #2 | 10/17/14 07:16pm

One has to consider that storage was never a determining factor in the adoption of JP2K. Back then, it was hard to handle high-quality H264 due to CPU weakness so it wasn't useful for multi-camera systems. JP2K was an enabler of multi-megapixel imagery and smooth, flexible decoding on all computers. With the recent introduction of hardware-accelerated decoding and quad-core machines becoming mainstream, H264 is now the clear way to go. It has been for a few years now, and I think that is reflected in the gradual phasing out of the high-end JP2K products, as H264 chips catch up. The same will probably happen to the cinema industry eventually, as hardware offloading combined with H265/HEVC will diminish the relevance of JP2K, even for 4K/8K material.

Undisclosed Integrator #2

10/17/14 04:39pm

I would suspect this is dependent on the camera and it's ability to record at 2 or more stream at different frame rates. I suspect this isn't supported in any onvif spec.

John Honovich

IPVM | In reply to Undisclosed Integrator #2 | 10/17/14 04:49pm

Multistream support on the camera is very common now. ONVIF supports multistreaming. For example, Network Optix connects to multiple streams via ONVIf automatically.

Andrew Thomas

10/17/14 05:15pm

My experience with multistream is the secondary and tertiary streams follow the primary frame rates, albiet as lower frame sizes and/or compression rates.

Ethan Ace

IPVM | 10/17/14 05:25pm

Here are three cameras in Exacq using multistreaming. Honeywell and Bosch via ONVIF, Sony is a direct driver. All primary streams are 720p, varying framerates, and all secondary streams are 720p, 1 FPS. All streams are H.264 (cut off a little bit all the way on the right).

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