IndigoVision's Market Challenges Deepen

JH
John Honovich
•Published Oct 15, 2011 00:00 AM
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IndigoVision's fiscal 2011 financial results do not look good. While the company remains profitable, growth is far below their key competitors. For the past 2 years, IndigoVision has faced challenges. Now their 2011 fiscal year financial statement [link no longer available] shows that those challenges have deepened. In this note, we examine IndigoVision's finacials, what risks IndigoVision faces and how it is falling behind direct competitors such as Avigilon, Mobotix, Exacq, etc.

Let's start with a review of IndigoVision's key financial metrics:

  • Over the past year, IndigoVision's stock has plummeted from over 500 GBP to 175 GBP - a drop of more than 65%. Today, the company's market capitalization is only 13 GBP (~$21 Million USD).
  • For the fiscal year ending July 31, 2011, revenue was 28.9 GBP (~$45 Million USD). This was only up slightly from 28 GBP the previous year.
  • The stock is now trading at less than half of revenue - a very low level even relative to the conservative metrics common in surveillance (typically about 1 to 2 times revenue).
  • The company asserts that things are not looking better in the near future: "We have had a slow start to the current financial year and although sales in the first seven weeks of the current year are approximately in line with last year, order intake is down on the corresponding period last year." It is possible that revenue will actually decline over the next 6 months.
  • Most of the company's revenue comes from EMEA and North America but both regions revenue was down slightly. Solid growth was reported in both Latin America and Asia Pacific.
  • Gross margins dropped from 60% to 56%, operating profit margin dropped from ~10% to ~4%.
  • The company acknowledged problems in product release over the past year: "With the benefit of hindsight we underestimated the challenge of establishing a range of cameras and early products have slowed the business down."
  • Focus for improvements looks to be on improving new product introductions: "Over the last twelve months a great deal of work has been undertaken improving the rate of introduction of new products."

Financial Analysis

While growth has been essentially flat, relative to their direct competitors this is quite bad. The company with the closest business model - Avigilon - has been absolutely killing it in the same time frame - up about 90% YoY and now on pace to do $55 Million in 2011. While Avigilon's growth rate is exceptional, growth of 30%+ is fairly typical for focused IP video only companies. In the past year, Arecont Vision, Avigilon, Genetec and Milestone have all leapfrogged over IndigoVision in annual revenue with such growth rates.

On the other hand, the fall in their stock price, relative to competitors, seems overdone. Trading at ~0.5 price to sales ratio puts them close to Vicon territory - a company who has little hope of turning around and a weak product portfolio with multiple OEM'ed products. IndigoVision, while struggling, still has a strong product portfolio and technology track record. The company is also an IP only player meaning that it faces little risk from declining analog sales (as traditional CCTV manufacturers like Vicon do).

Potential Causes and Future Outlook

We believe the two main reasons behind IndigoVision's recent struggles is (1) the slow rate of new products and (2) their failure to open up fully. As the company admitted itself, over the last 18 months, it did not release many new products while competitors where releasing numerous new products. Equally important, the company has been slow to open up its VMS to other cameras and its cameras to other VMSes [NOTE: IndigoVision is now claiming to be supporting ONVIF both for the camera and VMS sides]. As the IP market goes mainstream and the level of competition increases, offering open options becomes increasingly critical.

Additionally, the company has had fairly significant turnover both in sales (the financial statement acknowledges very high turnover - "six new sales managers with an overall unchanged headcount") and in engineering (their CTO left a while back). We do not know what is going on inside IndigoVision but these are typically not good signs.

It will be interesting to see what progress IndigoVision makes in the next year. The company does have strong core products in both cameras and VMSes but it remains to be seen if they can re-accelerate new product development and catch up on lost ground.