Avigilon CFO Out and Q1 2014 Financials Reviewed

Avigilon's revenue increased 74% year over year, powered by foreign exchange rate swings and the inclusion of VideoIQ revenue.

Avigilon's CFO exited the day before, the 4th executive gone in 6 months (after marketing, operations and HR), triggering fears and a stock price 'slam'.

In this note, we examine the financial details and implications of these results.

Our preliminary estimate is that organic, local currency, revenue growth was in the range of 55% to 60%. This is still very strong, though notably lower than the past year.

Results Skewed / Strengthened by Weak Canadian Dollar

As Avigilon explained in their financial report:

"Revenue in the first quarter also reflects the impact of a weak Canadian dollar. A large portion of our revenue is denominated in US dollars (“USD”), British pounds (“GBP”) or Euros (“EUR”), depending on the region, although our exposure to the US dollar is the most significant. As discussed in our MD&A for the fourth quarter of 2013, based on our projected results for 2014, every $0.01 change in the exchange rate of Canadian dollars  (“CAD”) per USD has an estimated $0.9 million impact on our EBITDA and a $0.65 million impact on net
income."

Year over year, there was a roughly 9 cent shift, as shown in this USD - CAD exchange rate chart [link no longer available]:

At Avigilon's own metric of $0.65 million impact on net income that would mean a benefit / gain of $5.85 million annual, estimated for just this quarter that is ~$1.5 million, notable compared to total quarterly net income of $8.04 million and to total quarterly revenue of $55.7 million. [NOTE: Adjusted from earlier version that estimated this annually rather than quarterly].

VideoIQ Impact

VideoIQ added $2.45 million for the quarter (and an annual pace of ~$10 million), which was not present / accounted for in the comparable Q1 2013 quarter.

Net Income Best Ever But Skewed By Exchange Rates

Avigilon touted its best ever net income of $8 million and 14.3%. However, as explained above, exchange ratio shifts explain most of the increase.

Note, factoring in exchange ratio shifts is important because they can just as easily swing the other way at any time, so gains (or losses) there does little to demonstrate the underlying business strength.

Sales Spending Up, Marketing Spending Down

Sales spending were nearly doubled that of the previous year, also reflecting expansion of the sales team for future growth.

However, marketing expenses were actually notably down, with Avigilon explaining:

"Marketing expenses in the first quarter of 2014 were $0.5 million, or 24%, lower than marketing expenses in the same period of last year. This decrease is the result of a reduction in certain activities following a reassessment of marketing priorities following the changeover in executive responsibility for marketing at the end of 2013, as well as the delay of certain programs until this reassessment was complete. We anticipate that these programs will go forward in the coming quarters, largely in the second quarter of 2014, however the overall growth in marketing expense in 2014 is anticipated to be lower than in 2013."

Avigilon CFO Out

The day before earnings release, Avigilon announced that their CFO, Brad Baruda [link no longer available] "is no longer with the Company." The previous CFO (until 2012) and current Director, Wan Jung [link no longer available], will be interim CFO until a headhunter can find a permanent replacement.

Avigilon said Baruda's exit is "in connection with a personal health issue."

In the past 6 months, executives in charge of operations, finance, marketing and human resources have all exited Avigilon.

CFO Exit Sparks Investor Scare

Avigilon's stock price dived down the morning after the CFO exit announcement ('slammed'), going as low as -20%, before ending the day down -8.73%, as shown in this 5 day stock chart:

Volume was a record one day high of ~4 million shares traded.

The circumstances clearly caused concerns, such as:

• Why would they announce this 24 hours before the quarterly financial results were released?
• If he is sick, why is he not simply taking a leave of absence, rather than being 'no longer with the company'?
• Is there a pattern of executives leaving Avigilon and what does this say about the company?

The quarterly financial numbers certainly subsided fears and helped a rebound. However, it is unclear whether the CFO exit announcement was simply a PR blunder or it points to more significant structural concerns.

A number of analysts raised concerns with one opining, "Maybe there is no fire, but certainly some smoke."

At the end of the investor's call, one analyst asked if disagreements or issues with accounting procedures factored into the CFO's exit. Avigilon's CEO said this had no impact nor relation at all to the CFO.

Employee Growth

Avigilon added 101 new employees over the past 3 months, growing from 455 to 556, an increase of 22%.

The US had the most notable employee expansion, increasing 62% from 71 to 115 people. However, that number includes the added VideoIQ employees.

Options Under Water

Avigilon's stock price peaked at ~$34 in February. It is now trading in the $21 to $26 range, after sliding for the last 2 months and the dip after the CFO announcement.

This is a practical matter for current and prospective employees as a rising stock price typically mean extra money via stock options. However, for the first time, a significant number of new Avigilon employee options are now underwater as demonstrated by the chart below:

Getting its stock price moving back up is important not only for investors but employee expansion.

Termination Benefits

Avigilon reported $435,000 in paid benefits to terminated key management personnel. Though no details were provided, known terminated key managers in Q1 include the Operations executive and the HR executive.

When asked on the call about any termination benefits for the CFO, Avigilon's CEO did not give a direct answer either way.

Conference Call Notes

Here are notes from the investor's conference call (audio recording MP3 link [link no longer available]):

• The conference call lead off commenting on the CFO leaving but with no new details or commentary.
• Sales expansion focus in Latin America and Asia Pacific
• For the $100 million fundraising, emphasized that they are regularly presented with acquisition opportunities and this cash allows them to aggressively take advantage of good opportunities.
• "Focus for 2014 is unwavering"
• Analyst asking about executive changes: HR position still open, Operations executive still open, senior marketing position still open
• Says formal search for CFO started 'now'
• Access control product sales are 'hitting new records high' month after month but no more granular detail
• Enterprise sales only 6% of sales in Q1 2014, compared to 12% in Q4 2013, emphasized that such deals are 'lumpy'
• "Business has never been as strong ... in the history of the company"
• Cancelled direct mailing program - was not producing acceptable results
• 24 - 36 month window to implement new SAP ERP system, implication that it is not a rush
• Access control sold as a one time software license with no maintenance fee
• Says 'no price pessure' as they still 'have lower total cost of ownership'