Axis Monstrous Q3 2011 Results

Axis's financial results for Summer 2011 are simply monstrous - very high growth both relative to their own historical pace and compared to the overall video surveillance market. Net sales were up 32% year over year and, more importantly for measuring overall market penetration, net sales in local currency terms increased a remarkable 45%.

Even compared to other fast growing companies, such as Avigilon whose recently announced IPO coincides with their own massive growth, Axis's is still very impressive.

Looking at Axis's Q3 2011 Interim Report, a few other important financial details stand out:

• Gross margins actually grew 1% up from 50.4% to 51.5%
• Profit margins surged from 16.3% to 23.1% - not only is Axis selling a lot, they are making a ton of profits
• For the quarter, Axis's sales were 971M SEK or about $145 Million USD. This is a $600 Million USD annual pace.
• Year over year, in dollar terms, revenue increased about $35 Million USD. To put this in perspective, it's roughly the equivalent of them acquiring ACTi, a Top 10 IP camera sales company and doing that in 3 months.
• Geographically: Americas sales were up ~38%, EMEA was up ~25% and Asia was up ~27%
• The numbers were so good, Axis added disclaimers for the growth in the quarter, noting, "Different inventory strategies of the distributors were contributory factors to this trend. During the third quarter, sales growth in the Americas region was affected to some extent by stockbuilding among our US distributors."
• Stock price: despite the strong growth, Axis's stock price continues to drift with no major gains over the last 6 months and still with a market cap valuation of ~$1.5 Billion USD (though the stock surged over 10% on this news - from kr124.75 to kr141).

What makes this especially impressive is how big Axis already is. Even with Avigilon's own massive growth, Axis is still about 10 times the size of Avigilon. Now, that Axis has surged passed $500 Million annual run rate, it's one of, if not the largest company in all of video surveillance.

In any market, as companies get bigger, it tends to get harder to match overall market growth rates. However, Axis continues to match or beat the overall IP surveillance market's growth rate. We think this is almost certainly coming at the expense of incumbent analog providers who are stuggling to match Axis's aggressive expansion.

New Product Releases

A key driving force behind this growth is clearly Axis's impressive product expansion. In Spring 2011, we selected Axis as the big winner of the season due to their broad and significant number of new product releases. 

Going forward, it will be interesting to see how many and what types of new products Axis delivers. Currently, Axis spends about 400 M SEK annually on R&D (~$65 Million USD). To put that in perspective, Axis spend more on R&D than Arecont, a major IP camera supplier, generated in total 2010 revenue. On the other hand, Axis' R&D spending was actually slightly lower in Q3 than Q2 2011, despite the surge in revenue (see slide 6 of the Q3 2011 powerpoint). 

The big question is what will Axis do next? Will they throttle back R&D spending and soak up extra profits as they did this quarter? Or will they push R&D spending even higher?

Love or hate Axis, they are pretty clearly in a strong position that is hard to beat. Competitors will need to step up their offerings to compete and hope Axis gets lazy as well.