Avigilon Massive Growth Continues

Bucking an industry trend, Avigilon's massive growth continued in calendar Q4 2012, with revenue growing ~73% year over year, even higher than their 2012 overall growth rate. The note below details the key financials details and most interesting comments made on management's call.

First, key details from Avigilon's 4th quarter financial report:

• Total 2012 revenue broke $100 million (CAD), up 67% from 2011's $60 million (with the last quarter, Q4, higher than the year's average).
• Net income Q4 2012 was ~9%, the same as the quarter year over year but higher than earlier quarters in 2012.
• Marketing expenses for the year increased 177% from ~$3 million in 2011 to ~$8.5 million in 2012 but Q4 2012 was only up ~50% over Q4 2011 as the 'new' program with huge increase in marketing started in Q4 2011
• Selling expenses increased a far more modest 47% year over year plus "selling expenses as a percentage of revenue have fallen to 16% from 19%."
• Avigilon said manufacturing infrastructure can now support $200+ Million revenue

Massive Employee Growth Continues

Total employee count grew 71% from 149 to 255 year over year. Management said they might hire another 100 or more employees this year.

R&D Investments Lag

Gross R&D expenses were only up ~30% from ~$1.4 million in 2011 to ~$1.86 million in 2012. Plus, as a percentage of revenue, R&D expenses is just 5-6%, much below competitors. However, Avigilon notes, "We expect to continue to increase expenses, as a percentage of revenue, to a level more typical with industry norms as we focus on enhancing and expanding our product offerings." This is worth tracking.

Aiming for Enterprise Market

Avigilon emphasized growth in the enterprise market, larger deals, in contrast to what it describes as 'run rate business', the mid market where they do most of their business today.

Casino Development Growth

Avigilon reported strong penetration into a market that they just recently entered: "As of January 1, 2013 our system has been installed by 53 casino operators in 67 properties around the world, with a total of 10,420 channels of video running under our VMS. Our largest casino sale in 2012 was to the Hard Rock Casino & Hotel in Albuquerque, New Mexico, which included our ACC VMS, 250 Avigilon 4-channel analog video encoders and 200 Avigilon high-definition cameras."

Tyco

A major development of Q3 was signing up mega-integrator Tyco. In this Q4 report, Avigilon noted,"Although not a major contributor to our 2012 revenues, we anticipate that Tyco will contribute to a greater percentage of our revenue in 2013 and forward as we further execute on our plans. Our sales team is working closely with Tyco’s corporate office to educate their more than 69,000 employees in 50 countries about the advantage Avigilon and our products, and we are seeing an increasing number of orders from Tyco every week."

Additionally, during the call, Avigilon called deals with mega integrators like Tyco and Siemens 'long term strategic investments' that ramp up over 18 months and physically takes year to work through all the branch offices of these integrators.

Inside Sales

Avigilon is growing an inside sales team:"We also introduced an inside sales department in late 2012, based out of our Dallas office, which primarily makes outbound calls on sales leads that come through our website, trade shows, advertisements and direct mail campaigns. To date this has been very successful in generating new sales and supporting our existing sales teams. We will continue to add resources to inside sales during 2013."

UK Sales Performance

Geography, UK turned in the worst performance at 'only' 25%. Avigilon noted, "The UK market is one of the most highly competitive globally, due its acceptance of surveillance, and is experiencing a difficult economy currently. However, we do not believe that the decrease in the fourth quarter is indicative of a decrease in the market for surveillance in the UK, nor of a decrease in the potential for Avigilon in this market, as we have seen a number of the delayed sales close in the first quarter to date and anticipate the majority of the others to close before the end of the quarter."

Asia Pacific

A big 2013 sales focus is the Asia / Pacific region. Avigilon noted that they are building their own sales force, rather than using agents, saying that it might take longer to ramp up better to do their own. While Asia / Pacific grew 72% to $5.3 million, it is still only 1/10th of US revenue, as an example.

Future Products

Avigilon only mentioned that their next VMS version, ACC 5.0, is schedule to be released later this year.

Competitive Market View / Old School Dying Off

Avigilon viewed the competitive market largely unchanged year over year except that a handful of innovative companies from the ten year ago are dying off, and their customers are often choosing Avigilon. They did not mention any specific companies in that segment but we would suggest American Dynamics, Dedicated Micros, NICE, Verint, etc.

IPVM's Analysis

Obviously, an extremely strong quarter, made even more impressive because (1) their revenue growth re-accelerated (back up to 73%) and (2) their core competitor's revenue growth are almost all decelerating (i.e., see Axis and Mobotix's recent results). The main negative sign we see is the continued low investment in R&D. It will be interesting to see when and if Avigilon follows through on their plans to increase R&D to 'industry norms', which would mean more than doubling expenditures, even without factoring in for continued growth.

All in all, Avigilon's rapid expansion continues while core competitors slow down or lose ground.