This is my third article on Avigilon (OTCPK:AIOCF or AVO on the TSX) and I couldn't be more pleased with this Canadian company's performance since I began following it and became an investor. You can read my previous two articles here and here.
On March 3rd, the company released its FYQ4 and full-year results. A conference call was also held after the close of the markets on that same day and included the participation of the Founder, President and CEO, Alexander Fernandes, as well as the CFO, Wan Jung and the VP of IR, Dennis Fong.
Following are some of the company's financial highlights for the quarter and the entire year.
- set records in revenue, adjusted EBITDA and adjusted earnings for both the quarter and for the year.
- Q4 record revenue of $79.5 million, a 42% increase over Q4 2013.
- Gross margin in Q4 of 58%.
- Q4 adjusted EBITDA of $17.2 million, 44% increase over same quarter in 2013.
- Current annual run rate of $300 million and on track to achieve annual run rate of $500 million by the end of 2016.
The significant growth in both revenue and earnings was due to higher sales volume worldwide, greater customer adoption in existing and new markets, new product launches, and strengthening of the Avigilon brand.
Avigilon is performing extremely well in a global market estimated to have reached $US 18 billion in 2014 and is set to grow to over $US 28 billion annually by the end of 2018.
The company saw strong growth in all of its markets, as the following figures indicate:
- US sales increased 60% over 2013.
- EMEA sales increased 48% over 2013.
- U.K. sales increased 51% over 2013.
- APAC sales increased 77% over 2013. (APAC is a newer market for AIOCF)
One of the factors that I believe provides a very positive investment thesis for Avigilon is the fact that no single customer contributed in excess of 4% of its revenues in the fourth quarter or for the entire fiscal year. The company is very well diversified across verticals and customers.
Avigilon is focused on selling more end-to-end video analytics surveillance/security systems. This is where the future in this market is, according to Alexander Fernandes. Video surveillance has typically been a reactive analysis tool, but what many customers want now is a surveillance tool that can proactively prevent crime, and this is exactly what Avigilon provides and it's the leader in this market.
To shore up the companies continued dominance in this market, in Q4 the company acquired the entire patent portfolio and patent licensing program of ObjectVideo. Subsequent to this, the company also acquired additional patents and patent applications from four other video analytics companies. Currently, Avigilon has 251 U.S. and international patents as well as 254 patents pending. The company feels it has the strongest video analytics intellectual property portfolio in its industry.
With 700 employees at the end of 2014, the company is continuing to add to the senior management team. Dennis Fong joined the company in January 2015 as VP of IR. He has a strong background in software development and startups, equity research, strategic communications and investor relations.
Also in January, Collis Heath joined the company as Senior VP of Global Operations. He has 20+ years of experience in leading global operations teams in the tech industry. His most recent role was with Foxconn Technology Group as the leader of the company's Americas operations.
In order to facilitate its impressive growth, the company is going to open a 40,000 square foot manufacturing facility near its U.S. office this year (Plano, Texas). Like the company's Canadian facility, the new U.S. manufacturing plant will also have an annual revenue capacity of $500 million.
Because the U.S. is Avigilon's largest end market, the manufacturing facility in Plano, Texas will enable quicker delivery times to U.S. customers, lower costs and will also provide opportunities to serve customers who are preferential to U.S. made products.
On February 27th, 2015, the company also announced an agreement to purchase a 135,000 square foot office building in downtown Vancouver, Canada. This will support the company's industry leading growth and expanding workforce.
At the end of 2014 Avigilon had no debt, working capital of $132 million and cash and cash equivalents of $73 million. The company is expecting capital expenditures of approximately $20 to $25 million in 2015. The company has a lot of flexibility in terms of its availability to loan money to finance its growth plans with the opening of its U.S. manufacturing facility as well as purchasing the new office in downtown Vancouver.
Regarding the purchase of the new office in Vancouver, Mr. Fernandes stated: "We have several financing options available to us and if we choose a mortgage or similar debt financing the monthly financing costs are expected to be on par or less than what we pay for our leased office in Vancouver today."
Avigilon's investment in sales & marketing and R&D increased significantly in 2014 - 52% and 53% respectively. Sales & marketing were 23% of revenues in 2014 and R&D expenses were 9% of revenue for the year. These investments are fundamental to the company's long-term growth strategy. The company expects operating expenses to increase modestly in 2015. It's important to keep in mind that such investments are usually incurred in advance of revenues.
Following are some more highlights related to Avigilon:
- Avigilon has had 28 consecutive quarters of year-over-year growth.
- Avigilon is the largest pure play end-to-end solution provider for video surveillance and access control.
- The new Plano, Texas-based manufacturing facility should be fully operational by the end of 2015.
- Manufacturing in Plano, Texas will provide a natural FX hedge because the related CapEx, overhead and expenses to run the facility will be denominated in U.S. dollars.
- The company is cash flow positive, self-sustaining, profitable and has strong positive working capital and a strong balance sheet.
- The main reason for acquisition of the patents is to position the company to effectively dominate the global video surveillance market, which is projected to be US$28 billion by the end of 2018.
I continue to be excited by Avigilon's continued future growth prospects. Remember, as Alexander Fernandes has emphasized, this is still a pure growth story and the company's management continues to stay focused on their market and executing completely in line with their objective of achieving annual revenue of $500 million by the end of 2016.
The market for Avigilon's world-leading end-to-end solutions is growing and I believe this company is set to deliver future outstanding returns for shareholder.
I continue to hold Avigilon in my Pareto Portfolio.
Disclosure: The author is long AIOCF.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please conduct your own due diligence before purchasing shares in any company. I am not a registered investment advisor and you should not take this article as a recommendation from me for you to purchase Avigilon's stock.