Avigilon's (AIOCF) CEO Alexander Fernandes on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Avigilon Corp (AIOCF)

Avigilon Corp. (OTCPK:AIOCF) Q2 2014 Earnings Conference Call August 7, 2014 5:00 PM ET

Executives

Alexander Fernandes – Founder, President and Chief Executive Officer and Chairman

Wan H. Jung – Chief Financial Officer

Analysts

Justin Kew – Cantor Fitzgerald

Kris Thompson – National Bank Financial

Thanos Moschopoulos – BMO Capital Markets.

Pardeep S. Sangha – PI Financial

Doug Taylor – TD Securities

Michael Urlocker – GMP Securities L.P.

Steven Li – Raymond James Ltd.

Robin Manson-Hing – CIBC World Markets

Operator

Good afternoon, ladies and gentlemen. Welcome the Avigilon Corporation’s Fiscal 2014 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

Before beginning its formal remarks, Avigilon would like to remind listeners that today's discussion may contain forward-looking statements that reflect current views with respect to future events.

Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Avigilon does not undertake to update any forward-looking statements, except as required. Listeners are urged to review the full discussion of risk factors in the Company's Annual Information Form, dated March 28, 2014, and its short-form prospectus dated March 31, 2014, each of which has been filed with Canadian Securities Regulatory.

I would like to remind everyone that this call is being recorded today, Thursday, August 7, 2014.

I will now turn the call over to Alexander Fernandes, Founder, President, CEO and Chairman of the Board of Avigilon Corporation. Please go ahead, Mr. Fernandes.

Alexander Fernandes

Thank you, operator. Good afternoon, ladies and gentlemen. And, thank you participating on today’s call. Wan Jung, our Chief Financial Officer, is also on the call with me today. Hopefully you have had the opportunity to read the news release we issued earlier today, summarizing our results. We’ve also posted the MD&A and financial statement to the investor relation section of our website and filed them on SEDAR.

It was another strong quarter for Avigilon, highlighted by record revenue and increased adjusted EBITDA, while we made significant investments for future growth. Financial highlights include record revenue of $65.2 million, up 66% from Q2, 2013. Gross margin of 55% and adjusted EBITDA of 8.7%, a 61% increase over Q2, 2013. For greater perspective, this quarter sales surpassed our annual sales from 2011 the year we went public.

At our current run rate of a little over $260 million in annual revenue, we are more than half way to our target of $500 million. To achieve our growth targets, and rapidly gain market share, we are expanding globally in all departments of the company. We finished the second quarter with 586 employees up from 455 at the end of 2013.

One of our key strategies for 2014 is to continue expanding our global sales resources. We were increasing headcount in both our existing markets as well as newer markets. And this is generating strong results across the board. Compared to the same quarter last year, sales in EMEA were up 33%, the U.K. was 77% and the U.S. our largest market was up 93%. In Asia-Pacific a newer market for Avigilon sales climbed 123%.

Our business development team has been another important area of investment for growth. We are approximately halfway through building this team and continue to achieve positive results. As we said in the past, sales cycles for enterprise opportunities are typically much longer 18-months to 24-months or so and because the average deal size is quite large sales can be lumpy from quarter-to-quarter. We continue to expand our executive team as well.

During the quarter Dr. Mahesh Saptharishi was appointed Senior Vice President of Analytics and Data Science. Mahesh was formerly President, Chief Technology Officer and Co-Founder of VideoIQ and his widely acknowledged as a thought leader and pioneer and video analytics. In addition, we are expanding at the Vice President and Senior Director level providing more gaps to Avigilon’s Senior Management Team to lead and support our continued rapid growth.

I would also like to acknowledge the unfortunate loss of our friend and colleague Terry Neely last month. Terry was one of the most knowledgeable individuals in the access control industry. I had the pleasure of getting to know him during the acquisition of the RedCloud last year. He was a valued colleague who will be greatly missed.

With respect to the ongoing CFO search, a comprehensive process is underway and we are actively interviewing candidates. We've also strengthened our Board of Directors with the recent addition of Fred Withers as an independent director and a new member of our Audit Committee.

Fred was a Partner and Chief Development Officer for Ernst & Young. He has over a 30-year of senior level financial experience with Ernst & Young, including significant involvement in the firm’s governance and operations as the member of its executive committee. We look forward to his contribution as we continue to expand our business globally.

During Q2, we also grew our product development team, consistent with our strategy of accelerating innovation. In addition to our organic development efforts, we've broaden the range of our product offerings through the acquisition of access control and video analytics. There were several noteworthy product and technology highlights during Q2.

We began shipping the H4 Platform our next generation HD pro series of cameras, which features the latest edition of Avigilon’s proprietary HDSM 2.0. Sales of the new H4 Platform are very strong. Our HD Micro Dome Camera, the industries smallest HD Dome were recently made available with new in ceiling mount option. The Micro Dome Cameras provide a cost effective and easy transition from analog into HD video surveillance.

We broadened our access control portfolio with the launch of Access Control Manger 5.2 also known as ACM. This version has a wider range of application and deeper integrations with our Access Control Center video management software also known as ACC. Since the introduction of the first version of ACM in March sales have been growing rapidly.

We also added the Rialto video analytics product family to our portfolio, an important step in the integration of the VideoIQ acquisition. The Rialto products provides real-time, automated event detection and verification. Enabling end user to more effective identify and deal with unusual activity.

The response from our integrator and end user has been excellent and sales are ramping up. Lastly we released version 5.2.2 of Avigilon's Control Center Software, which incorporates Rialto’s real-time event detection and verification capabilities.

Increasing marketing and strengthening the Avigilon brand are also pillars of our growth strategy. Q2 is typically a busy quarter for sales and marketing, this part quarter we attended the largest trade shows in both North America and Europe, ISC West in Las Vegas and IFSEC in London.

On that note, I’ll turn the call over to Wan to discuss the financial results. Wan.

Wan H. Jung

Thanks Alex and good afternoon everyone. As Alex mentioned, revenue for the quarter grew 66% to $65.2 million from $39.2 million in Q3 2013 reflecting increased sales in all markets. Sequentially, revenue increased substantially from Q1 which is consistent with historical seasonal patterns.

Revenue in the second quarter also reflected the impact of a relatively stronger Canadian dollar compared to Q1. Our large portion of revenue is denominated in U.S. dollars, British pounds and Euros. Depending under region of our exposure to the U.S. dollar is the most significant.

We estimate that every penny change in the exchange rate of Canadian dollar per U.S. dollar has an estimated $900,000 impact on our adjusted EBITDA and a $650,000 impact on net income. Our gross margin grew from 53% in Q2 2013 to 55% in Q2 2014. The steady margin improvement reflected lower cots of sales as well as the ongoing effects of economies of scale in both purchasing and manufacturing efficiencies.

Total operating expenses increased by 84% in Q2 2014 compared to Q2 2013 and as planned we make significant increases in sales and marketing and R&D expenditures. Investing these areas is fundamental to our long-term growth strategy, however, as we have indicated in recent quarters these investments are incurred in advance of the social revenue, so they are expected to put some pressure on adjusted EBITDA and net income.

Sales and marketing expenses were $18.1 million in the second quarter as $7.4 million or 69% increase over the same quarter last year. As a percentage of revenue, this represented 28% up 1% from 27% in Q2 last year. This is consistent with our ongoing investments for future growth. Over time, we expect sales and marketing expenses to decrease as a percentage of revenue. As increases in revenue strip increases in sales and marketing expenses.

Second quarter net R&D expense was $4.4 million up from $2.3 million in the same quarter last year. On a gross basis R&D was $6.4 million, more than double of same period last year. As we continue to significantly expand the development team.

During the second quarter, we booked approximately $1 million of R&D tax credit and capitalized another $1 million of development costs. As we discussed in our last earnings call, these costs will be capitalize until such time as the related products are commercially launch and amortized.

Product development is the key factor in our ability to drive growth and we will continue investing in this area to enhance and expand of product offerings. G&A expense also increase substantially for the quarter $7.8 million or 12% of revenue, due mainly to additional resources within customer support, human resources and legal.

The second quarter results also include our approximately $1.5 million of related expenses to the business acquisitions of RedCloud and VideoIQ. We expect our admin expenses to increase in the near-term as we build infrastructure to support plan growth. However, who do not expect them to increase as a percentage of revenue.

Adjusted EBITDA for Q2 was $8.7 million an increase of 61% compared to $5.4 million last year. Net income for Q2, 2014, was impacted by a foreign exchange loss of $1.9 million, compared with a $300,000 gain in the same period last year and $1.5 million in acquisitions related expenses.

Adjusted earnings were $5.7 million for Q2, compared to $3.8 million for the same quarter last year. Q2 diluted adjusted EPS or earnings per share was $0.12 versus $0.10 in last year Q2. Looking ahead, Avigilon will continue investing significantly to expand sales, accelerate innovation and build brand awareness. We are well positioned to support these growth plans. As of June 30, 2014 we had cash for $157 million, no debt and net working capital of $209 million, compared to working capital of $136 million at the end of 2013.

I’ll now turn the call back over to Alex, to conclude our prepared remarks. Alex.

Alexander Fernandes

Thanks Wan. The second quarter was another period of record setting performance for Avigilon, extending our successful track record. Since, our very first commercial sale in December of 2007 we have achieved 26 consecutive quarters of year-over-year growth and we are doing it profitably.

We are rapidly capturing market share in the global security industry by executing our proven growth strategies. The outlook for sustained growth is positive. We have a very large and growing addressable market. We have the best-in-class end-to-end security solution that combines HD surveillance, access control and video analytics and we have a strong team to succeed. We look forward to reporting on our ongoing progress at the end of Q3.

At this point, I would like to open up the call for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Justin Kew from Cantor Fitzgerald. Your line is open.

Justin Kew – Cantor Fitzgerald

Great thank you. Thanks for taking my question. Good evening Alex and Wan. So first question Alex just on marketing, in terms of how has the marketing challenge evolved over the years. I know that early days it was developing the brand that was important and there was a big push to that and now it’s both developing brand and just block and tackling in terms of sales, but in terms of how do you think about the marketing challenge as you continue to grow?

Alexander Fernandes

Well Justin thank you for that question. It really remains the same challenge and so really in the very early days when Avigilon was kind of the in the start up phase we were really unknown and we are certainly within the inner circles of the industry a known a company, the brand as well known, but in the greater market sort of at the enduser level there is still a lot of ground to be covered in terms of making a Avigilon a household brand name if I may say that within that enduser level.

So really the challenge of increasing awareness and of course with that is a great opportunity and so if you look at the results that we've been posting over the past years coming really from nowhere to being one of the largest and certainly the fastest growing company in the industry, we've made great strives, but there remains lots of opportunity and lost of works to be done.

Justin Kew – Cantor Fitzgerland

Sure. And just in terms of Asia-Pac you talked about this geography being a new geography and we've seen couple of good sequential quarters here you are stringing together really good growth, particularly in the last couple quarters. Can you just talk about specific in this geography and kind of what we can look forward to in the next couple of – looking out three to four quarters?

Alexander Fernandes

Right and without giving specific numbers or forward-looking guidance, which we don’t do, but we just see about region as a tremendous growth opportunity, obviously its one of the very large economic areas in the world and also GDP is very healthy and has a lot of growth and we see lots of opportunity and a bright future for growth there.

Justin Kew – Cantor Fitzgerald

Okay. And just one of my last question. In the past you’ve talked about verticals and I know that you have kind of more specifically in your MD&A, in the last couple of MD&As you talked about kind of narrowing down the verticals that’s you are focusing on, but I just want to know what the status was on kind of the initial verticals that’s you are going after Casino, education, healthcare, critical infrastructure and whatnot. The ones that are less highlighted in more recent MD&As.

Alexander Fernandes

Justin to be frank, I'm not sure that we talked about narrowing. So I am no sure that that’s...

Justin Kew – Cantor Fitzgerald

May be not narrowing, but maybe the way its phrased here is adding resources to the specific verticals indicating these we are adding…

Alexander Fernandes

Oh I see okay, I think I understand yes.

Justin Kew – Cantor Fitzgerald

Does that make sense?

Alexander Fernandes

Yes, no I understand what you are referring to. So just to maybe rephrase the question for the other listener sake. So I think what you are referring to is our initial approach was really a geographic approach to generating sales. And what we've done more recently on top of our geographic strategy is we've created a new department within the sales team which is our business development and their mandate is to pursue enterprise level deals.

So to kind of give more color on that. So the geographic sales team which is the bulk of our sales team is really targeting primarily not exclusively, but primarily what we call a small and medium size system. So anywhere from a single camera, single software license up to lets a 100 cameras, 100 software licenses are sold and everything in between.

And that’s roughly globally about 80% of the industry, but there is what we call enterprise deals which are 100s and 1000s of camera type opportunities, so they are typically larger systems. We defined it as anything above a quarter million into the millions. And the sales cycles for these sales are much longer and the approach is different.

And so we created a business development team which has essential caved up the market not geographically but by industry vertical and so we have been working towards essentially building small groups of business development directors focused on specific verticals and that team is about half way built out and we are making great strides in increasing our market share within the enterprise business and I think that that’s what I think you are inquiring about. So we are making great progress there.

Justin Kew – Cantor Fitzgerald

Sure. Thank you very much. I’ll pass the line.

Alexander Fernandes

Thanks.

Operator

And our next question comes from Thanos Moschopoulos. Your line is open.

Alexander Fernandes

Hi, Thanos. Are you there?

Operator

His line has dropped. Our next question is from Kris Thompson from National Bank. Your line is open.

Alexander Fernandes

Hello, Kris are you there? Operator are we having perhaps some technical difficulties?

Operator

I will just check here.

Alexander Fernandes

If they call back, if they happen to call back if Thanos or Kris happen to call back please put them through.

Operator

Absolutely. Mr. Thompson is your line open.

Kris Thompson – National Bank Financial

Can you hear me?

Alexander Fernandes

Yes, I can hear you. Is that you Kris?

Kris Thompson – National Bank Financial

Yes it is, I don’t know what happened, thanks. Alex on the headcount if I heard you right that’s 586 employees, it looks like you growth has slowed a little bit and I believe you are targeting around 900 by the end of the year. Can you may be just comment on your headcount plans?

Alexander Fernandes

I wouldn’t characterize it has a growth slowing and so we are always number one and Paramount is hiring A players and B players that we feel we can develop into A players and so its quality first and quantity second. And the target – I would like to may be rephrase that more as putting one bodies into seats is not the objective so the measure is really we are planning to growth and it’s an approximate doubling of staffing if you look for me kind of historical perspective in a year-over-year. So we are well positioned in relation to our objectives of the where we want to be today and where we want to go.

Kris Thompson – National Bank Financial

Okay fair enough. And may be for Wan on the selling and marketing expenses, historically you divided that into selling and marketing, so we could get better idea of the variable cost if you will on the marketing. Are you able to disclose the figures anymore or you changing the way are going to report?

Wan H. Jung

Yes, we made a decision to change that because really sales and marketing – they should really viewed as whole rather than separately and for us do that it gives us just better perspective because like this quarter we could have said sales expense has gone up, marketing expense has gone down and the next quarter it cold be inverse.

Kris Thompson – National Bank Financial

Well, I guess what I'm trying to figures out is if there marketing spend as accelerated and that’s a permanent function under the new leadership or its going come down in future?

Alexander Fernandes

Yes, Kris if I may. Exactly what Wan said, the reason is that it has to be viewed holistically because really they two feed into each other and for example in the spring and the fall are typically two periods of greater spending for marketing and whereas the summer months and the winter months is reduced spending. And so viewing them separately really paint a meaningful picture and so it’s really the combination of sales personnel and marketing initiatives together in tandem that generates top line revenue and so we’ve made a decision to look at that holistically as Wan mentioned.

Wan H. Jung

In order to answer your question, Kris, sales and marketing expenses should decrease as a percentage of revenue going forward.

Kris Thompson – National Bank Financial

Yes, I understand. Okay, thanks and just last for me on the inventories, it looks like it was flat sequentially last quarter gapped up quite a bit and then obviously you generated substantial revenue growth sequentially with the inventory not building is that an indication of your pipeline flow and we shouldn’t expect that kind of a step in revenue growth sequentially?

Alexander Fernandes

Kris, if you go back to our seasonality as you know over the past six years, the even quarters Q2, Q4 are from a sequential perspective, the larger growth quarters. The odd quarters Q1, Q3 are typically somewhat inline with the preceding quarters and so you’ll see that we mange our inventory accordingly. So in the long-term you’ll see inventory increasing over time.

Kris Thompson – National Bank Financial

Okay, thanks for taking my question.

Alexander Fernandes

Absolutely, Kris. Thanks.

Operator

And, our next question comes from Thanos Moschopoulos from BMO Capital. Your line is open.

Thanos Moschopoulos – BMO Capital Markets.

Hello, good afternoon. Can you hear me now?

Wan H. Jung

Absolutely Thanos. Good to hear your voice.

Thanos Moschopoulos – BMO Capital Markets.

So just one more question on the sales and marketing just to clarify. Last year we saw the combined sales and marketing spend come down by about a $1 million bucks in Q3 relative to Q2. I think due to that seasonality you mentioned, and so should we be looking for similar decline this time round.

Alexander Fernandes

Yes, without giving specific numbers, again we don’t as a matter of policy give forward guidance, but from a marketing perspective the summer of Q3 is a lower spend, however, we are and as you can tell by the numbers we are adding headcount very aggressively, essentially investing in future growth and so that will have an offsetting effect on the marketing.

Thanos Moschopoulos – BMO Capital Markets.

Okay, and can you clarify the business acquisition costs in the quarter was that some restructuring at the acquired assets or which was that?

Alexander Fernandes

Yes. There are really two components, so one is one-time costs and so you wont see those again. And then, there was another component of essentially amortization, which is short-term, which will begin gone within probably three to four quarter from today

Alexander Fernandes

Well I'm sorry and then there are some other longer term costs that are over the life of the product, but the book that is really one-time and short-term related.

Kris Thompson – National Bank Financial

Okay. On the enterprise business, in the past you disclosed portion of revenue from enterprise project and can you provide some color as to how that trended this quarter?

Alexander Fernandes

Yes, actually I'm just going to refer to my notes here. Yes so I'm just try to reference my notes, I don’t that number off of the top of my head here, but I did jolt that down just if you could bear with me one moment. Maybe getting someone to look into that so maybe...

Kris Thompson – National Bank Financial

Maybe I can ask another, yes I mean the question...

Alexander Fernandes

Sorry you it right here. So its 18% it looks like.

Kris Thompson – National Bank Financial

Okay, so pretty significant then?

Alexander Fernandes

Yes, that is tracking I mean so just to kind of recap on that so we really started that in earnest maybe 18-month, 24-months ago and obviously starting from no business development dedicated resources to a number of individual and our view is the market as a whole outside of Avigilon is 18/20 split of small to medium versus enterprise. Enterprise being 20% and so the objective was to move toward that 20% revenue coming from enterprise business and so as you can see we are kind of approaching that and keeping in mind that the quarterly revenue tends to be lumpy as the deal size is very large, but definitely trending up.

Kris Thompson – National Bank Financial

Okay, great. And finally gross margins were down a little bit in Q1 and in the MD&A you mention that was just Canadian dollar and so with dollar word what kind of margin range do you think we should be looking at going forward?

Alexander Fernandes

Yes and so if I may just add a bit, its FX is one at component but it’s also product mix as you know we sell a significant amount of software. On the hardware side some high-end product carry higher margin than other and so eliminating FX is just a natural fluctuation. Really the 2% change is not indicative of any trend I would say that that FX is part of that, but I would consider that within in the normal fluctuation that we would see.

So its essentially exactly where we expect it to be so to kind of recap on that our business model calls for between 50% and 60% and so obviously gross margin is good, but we don’t want to – we want to know that basically incline with our objective in order to remain priced very aggressively in the marketplace and gain market share. So the short of it is the margin is where we like it to be where we expect it to be and we don’t expect any significant changes I think going forward.

Thanos Moschopoulos – BMO Capital Markets

Great thanks. I’ll pass the line.

Wan H. Jung

Thanks Thanos.

Operator

And our next question comes from Pardeep Sangha from PI Financial. Your line is open.

Pardeep S. Sangha – PI Financial

Hi thank you. If I could just follow-up on the couple of questions that have been asked. First on the enterprise sales side, as you said we are targeting sort of 20% its gotten there very, very quickly near the 18% mark, but is it really just lumpiness and hard to predict or are we really getting close to that 20% mark here?

Alexander Fernandes

Well no we are trending up. So I'm just going for memory here so forgive me if I get the exact numbers wrong, but I believe we reported Q4 in the range of 12% and I think Q1 6% 18% so if you kind of normalize so if you draw kind of straight line through all of that its trending up. Next quarter could easily be five percent or it could be 25% it’s really very lumpy I think if you look at it year-over-year basis we are trending up and it is business.

Pardeep S. Sangha – PI Financial

Okay. On the sales and the marketing side, can you give us a sense of number of headcount employee you have got under that whole organization?

Alexander Fernandes

We don’t really break it down that way, but its well over 200 and growing to keep in mind one of the reasons we don’t want be too specific is to avoid the inference of trying to tribute a specific revenue, because different individuals carry different quotas depending on the maturity of the market and also there is a lot of support function in there. For example, we sale engineers that obviously generate and support quota carrying individuals but they themselves don’t carry quotas and so it gets very complex.

We also identified sale personal in that and so indirectly generate top line growth but it could be misleading to try and simply plot headcount to revenue growth, its not quite that liner. It’s in the hundreds and growing. I think of we stay focused on really the objective of getting to 500 million in run rate by 2016. What I can tell you is our hiring and our execution on that target is very, very good. So we are very confident of achieving that objective.

Pardeep S. Sangha – PI Financial

One last question. Could you give us a sense of what you are sort of seeing Europe these day in terms of growth prospects, growth in U.S. was very strong this past quarter, Europe was lagging a little bit compared to U.S. in term of year-over-year growth. Are you seeing anything in Europe that we should be aware of?

Alexander Fernandes

No well actually that’s a good question, thanks for that question. So, what you have to look at is relativity and absolute, so Europe actually at the same time last year was a very strong quarter and so it’s not so much that is lagging it’s that we are comparing to a bigger base. So what happened is we had a bumper quarter I believe last year. And, so obviously if you have a record quarter and you’re comparing today’s performance in absolute terms is very good, very strong where we expect it to be.

But comparing it to a record quarter last year, it gives us perhaps the perception that the growth is less, certainly from a percentage relative perspective it is, but in absolute terms its good and so it could be – the smaller percentage could be due to two things, which is slower growth or simply that we are comparing to a record quarter, and what I'm saying is the later effect it was a record quarter there.

Pardeep S. Sangha – PI Financial

So, everything is good in all geographies?

Alexander Fernandes

Yes, it is.

Pardeep S. Sangha – PI Financial

Okay, great. Thanks.

Operator

And your next question comes from the Doug Taylor from TD Securities. Your line is open.

Doug Taylor – TD Securities

Thanks. Good evening, gentlemen. The enterprise deals, these are longer lead time items presumably they are tracked by your biz dev guys. Is there anything you can say about the pipeline of those deals?

Alexander Fernandes

Yes. So, the pipeline is growing and there is really tremendous opportunity there, particularly with the introduction and then further advancements of our ACC version 5. And all the subsequent revisions which is there are other features and benefits but that release was really focused primarily on building in enterprise features. And as that product and technology matures and as we get into the whole bidding tender process that’s tremendous opportunity certainly.

Doug Taylor – TD Securities

Last year Q3 was supported by large deals and also software upgrade had a positive benefit on the seasonality and also on the margin. Do you expect that to b tougher comp, are you going to benefit from the same sort of software upgrade revenue this year in Q3?

Alexander Fernandes

Well, indirectly in a sense that those features and that software is available for sale, but in terms of relatively speaking in Q2, we’re getting the benefit of that. So, I think what you are driving at should we expect some kind of a big bump? What I can tell you is we are investing very, very aggressively in growing both in headcount and in marketing initiatives and that’s evidenced by the sales and marketing spend in Q2. So, I think what you might see definitely results particularly going into the later half of this year so Q4 as typically these initiatives can take several months to kick in.

Doug Taylor – TD Securities

Okay and I thought to give you an opportunity to address the question recently about a channel, I mean and do you track how much inventory there is in the channel and has it changed appreciably in recent quarters?

Alexander Fernandes

Yes, so the way I mean to answer that perhaps in a slightly different way. So one of our competitive advantages among many is the fact that we delivery not only very quickly but very predictably and that’s part of the thinking behind keeping relatively comparatively to other company high inventory level so that we can fill orders very, very rapidly and predictably and the reason for that is most customer big and small and when I customer I mean integrators, it’s they want to minimize cash out flows and minimize their inventory.

And so many of our integrators if not most don’t stock Avigilon product. And that’s one of our competitive advantages, so that they don’t have the outlay of cash and so the answer is there is not need to track that because there effectively is no stocking of Avigilon inventory in the channel, essentially we get order as they need to be filled. We typically fill ordered within 72-hours and we typically ship overnight and then product gets installed typically within days of delivery.

Doug Taylor – TD Securities

That’s helpful. Maybe question for Wan did you guys provide the VideoIQ revenue this quarter, I know you did last quarter.

Wan H. Jung

No, we didn’t

Doug Taylor – TD Securities

All right. So you are not able to?

Alexander Fernandes

Sorry just to give you a bit f color. So I think actually that question was asked earlier on that call but just kind of…

Doug Taylor – TD Securities

I'm sorry I missed it.

Alexander Fernandes

Yes, no, no worries. So the thing is we sell systems, so we don’t sell individual, we are not selling widgets and we seldom sell any one of our products individually, so they are always combined in systems and so it doesn’t really paint a good picture to look at one without the other and so we really focus on system sales and so that’s why we don’t break it down by product line.

Alexander Fernandes

Fair enough. I’ll pass the line. Thank you

Wan H. Jung

You are welcome. Bye.

Operator

And your next question comes from the line of Michael Urlocker from GMP Securities. Your line is open.

Michael Urlocker – GMP Securities L.P.

Thank you. Hey Alex revenue and financial performance is very strong, the business is doing well as it has for quite a while. So when that’s occurring I wonder if you might step back and just look at the business overall and offer a perspective of whether there is any parts of the Avigilon machine that maybe could deliver better or where you are sure if the company is fully on track? Are there any areas you want to see improvement in?

Alexander Fernandes

Well, I guess there are two answers to that question. I think, one is we are exactly where we want to be and that is at the mid-point of getting to our $500 million, we announced at our IPO and so it’s kind of a recap for everyone at the IPO back in November of 2011, we were at a run rate of approximately $50 million and the main purpose of the IPO was to capitalize the company in order to fuel growth to go from $50 million to $500 million, fast forward to today we are little about half way in timeline to the 2016 timeframe of $500 million in run rate. And we are over the hump so to speak over $260 million in run rate today. So, well on track to getting there.

And the other answer I wanted to give Michael is you know in a way its nice to sit back and look at all we’ve accomplished, but at the same time we don’t want to become complacent, so we always want improvement, everywhere. So, we want to increase the efficiency, we want to reduce cost, we want to move faster, bring more new features to market quicker, add value to the customer with features and enhancement and so it’s a never ending process really Michael is what I am saying.

We are constantly looking at our business from every angle from the customers eyes back you know how can we service the customers better in warranty, tech support, sales people, how do we train them better, better equip them to answer questions it’s a full gamut. So really it’s a never ending process, but today here and now I think we are really in a very, very good place.

Michael Urlocker – GMP Securities L.P.

Okay, thank you. I think that’s helpful. And then I guess if we look at towards the long-term and forgive me I’m going to trying to take away from taking about numbers and instead of talk about industry trend over the long-term. When you and the Senior Executive team look at, what lies ahead in the industry are there any other developments where you can say okay we see an emerging new opportunities that we want to address or we see gap in the marketplace or we see some new trends from customers that we want to capitalize on. Any kind of long-term vision planning here?

Alexander Fernandes

Yes, I think without giving away any secretes I think the centre more and more around fully integrated end-to-end solutions. And so I think the industry for a long time has been made up of sort of grab bag of desperate products and technologies that are cobbled up by the integrators and I think more and more people are coming to see the value and appreciate the value and really demand end-to-end solutions, one-stop-shop so to speak which makes the installations and commissioning that much more robust and much easier and predictable and then we just see the further integration of complementary technologies and I’ll reference again you know I said it many times about access control, video analytics. We also see video analytics going forward is becoming more important piece of the overall industry.

So I think those are the kind of larger trend I think as well as the commoditization of camera hardware which is something that we fully embrace and we fully expect is happening and going to continue happening and I think the emphasis will be less on the hardware although that’s an important piece, it will never go away but it will become more commodity, but it is really a shift toward if I may the buzz word big data for video, intelligent video as we add more value in sort of all that data mining and use of the data, so that those are the large macro trends that I see.

Michael Urlocker – GMP Securities

Okay. Thank you very much. It’s very helpful, I appreciate it.

Alexander Fernandes

Hey, great Michael.

Operator

And our next question comes from the line of Steven Li from Raymond James. Your line is open.

Steven Li – Raymond James Ltd.

Thank you. Hi Alex and Wan. Just a couple of questions, Alex you highlighted the video analytics sort of an exciting area. Can you really talk a little bit more about your integration progress so far and many be even what's on the product road map to take advantage of that opportunity?

Alexander Fernandes

Yes, in our prepared comment we covered that but I can reiterate that. Its really the same as its been since that we outlined from the acquisition which is to what we've integrated obviously from an operational perspective and accounting and order fulfillment, the next area of integration was essentially putting a portal through our video management software ACC, which was released in Q2, the ability to interface with the analytics Rialto and VideoIQ cameras and then finally when we take out the VideoIQ hardware long term of porting that ultimately into our HD video platform and those initiatives are underway.

And as far as features, I mean there is really we are just scratching surface everything from sort of during behavior detection, face detection, people counting the application go from retail which are non-security related and essentially business analytics all the way into public safety where you can detect bad behavior or the potential of people basically accreting the bad things like leaving bombs behind and doing other things and crowd gathering, crowd disbursement, mobs that kind of things. So right it’s basically the early formations of right and things like that so that was really broad range airports, where security critical infrastructure is paramount.

Steven Li – Raymond James Ltd.

Okay great and Alex just to understand your seasonality comment. So we should expect Q3 to be kind of flattish from Q2 even though the last two years Q3 has been up from Q2 thanks.

Alexander Fernandes

Yes, so thank you for that question I’ll put a slightly different twist on the answer; I can answer that question from a historical perspective. So historically the third quarters have been generally inline if I may say characterize it that way so they have been generally inline with the Q2, but as far as what Q3 will bring I think we all have to dial-in next quarter and then we could talk about future then.

Steven Li – Raymond James Ltd.

Great thanks.

Alexander Fernandes

All right, bye Steven.

Operator

And our next question comes from Robin Manson-Hing from CIBC. Your line is open.

Robin Manson-Hing – CIBC World Markets

Hi, in terms of growing the bottom line I know obviously top line is statistical, but as you look towards your 500 million run rate goal, are you still hoping to get 20% to 25% EBITDA margin by that time?

Alexander Fernandes

Yes, so Robin that’s certainly margin that the business can support even today. So the reason its not there today is because we are spending on growth and if you look at from a historical perspective the trajectory that we are on leads us to getting to 500 million in advance of the stated timeframe and so and really saying its investments today for greater opportunity tomorrow is what where doing.

Robin Manson-Hing – CIBC World Markets

So do you think 2014 is obviously a year growth, do you see 2015 as obviously another year growth. Do you see that as a year of some margin expansion or continue to growth and worry about that at a later date?

Alexander Fernandes

I think it’s really worry about that a later date. I think what you would like to keep people focused on is the getting to that 500 million which is coming up very soon, I mean you know were just basically not that many quarters way, I think 10 quarters or so and so basically yes stay focused on that and that’s really the objective and the track that we are on.

Robin Manson-Hing – CIBC World Markets

Okay and in terms of integrators, is that number over 2000 is that a number that has still fairly close to 2000 or is that closer to 2200 or what’s your – just a general feel on that and where do you integrator the number of integrators growing over the coming quarters.

Alexander Fernandes

So the first part of answer to that question is that the integrator base is always growing, but within that growth there is also a reshuffling, so some of the less loyal or less performing integrators are being moved out and being replaced by better integrators, but the net number is always growing. And of course, we are getting – we see the greatest growth within new markets.

And we are also seeing now the addition of integrators that have specific vertical focus so in conjunction with our business development initiatives there are in fact integrators that themselves focus on specific verticals for example there are some integrators that do only prisons, others do airports, some do you know whatever area of vertical that they focus on, some do only casinos and so on and so forth, but some do only government facilities so on and so forth, but the net number is growing.

Robin Manson-Hing – CIBC World Markets

Okay and I guess maybe I’ll just leave it with one more question. Just enterprise, how do you kind of define enterprise versus a normal sales to a business, is that through your business development managers, sales versus normal regional sales managers or like how do you kind of define that internally?

Wan Jung

Well it’s actually really simple its $250,000 and up. So projects that have budget spend or a system design that calls for $250,000 or greater that’s an enterprise sale and that’s how that works.

Robin Manson-Hing – CIBC World Markets

Whether or not it’s supported by a business development entry or not. Okay that helps a lot.

Alexander Fernandes

Yes the regional people are always involved and they participate in that opportunity, so they – its not that once it become enterprise that they no longer benefit so the local regional sales directors and sales managers and sales engineers participate in that but the business development personnel do not participate in sub-250,000 so they are big game hunters and so they basically eat what they kill and they are all hunting for the big deals not the little ones, but the local regional get to participate in all business in their territory and so they provide support even when the business development director cant be available.

Robin Manson-Hing – CIBC World Markets

Okay. Great thanks a lot.

Alexander Fernandes

Yeah. Thanks Robin.

Operator

And we have no further questions in queue. We’ll turn back to the presenters for closing remarks.

Alexander Fernandes

Thank you operator and thank you everyone for participating on today’s call. We appreciate your questions as well as your ongoing interest in and support of Avigilon. Have a good evening. Bye for now.

Operator

This concludes today’s conference call. You may now disconnect.

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