Avigilon CEO Says He Has to Spend Money to Make Money

Avigilon Corp. (AVO), one of Canada’s worst-performing stocks after outstripping the market last year, is making no apologies for a spending surge some analysts say puts the video-surveillance company’s profit at risk.

The provider of network-based video systems for San Diego’s public transit system and Toronto’s Rogers Centre stadium has dropped 34 percent this year, the third-worst performing stock on the Standard & Poor’s/Toronto Stock Exchange Composite Index. That follows a 583 percent gain between the Vancouver-based company’s initial public offering in November 2011 to December.

“It’s short-term pain for long-term gain,” Alexander Fernandes, Avigilon’s chief executive officer, said in an Aug. 8 phone interview. “If we were to reduce investments in future growth, we could dramatically increase the bottom line, but that would come at reduced gains in the longer term.”

Avigilon’s goal is to upgrade surveillance cameras to high-definition quality, enabling customers including retailers and governments to protect against theft or terrorism by providing detailed images usable in court or by facial recognition software, Fernandes said.

The company’s cameras can identify faces and license plates from 46 meters (150 feet) away.

Avigilon reported second-quarter adjusted earnings of 6 cents a share on Aug. 7, 63 percent below the average analyst estimate of 16 cents. Sales rose 66 percent to C$65.2 million, according to data compiled by Bloomberg. The stock fell 11 percent the next day, the most since Chief Financial Officer Bradley Bardua unexpectedly quit for health reasons in early May.

‘Land Grab’

The company is targeting sales of C$500 million ($458 million) by the end of 2016, up from a projected C$260 million at the end of 2014, Fernandes said in the interview. Avigilon announced a 69 percent increase in sales and marketing expenses in the second quarter over a year earlier, a 128 percent rise in general and administrative expenses and a more than doubling in spending on research and development.

After spending $32 million to buy Billerica, Massachusetts-based VideoIQ in January, Avigilon raised C$100 million in a share sale in April.

The concern is about the pace of growth, said Pardeep Sangha, a Vancouver-based analyst with PI Financial Corp.

“They want to have a $500 million run rate by 2016,” he said by phone on Aug. 8. “Can you get there by just spending a lot of money and getting a lot of customers in a land-grab opportunity or do you do it profitably?”

Growth Levers

Sangha maintained his buy rating on the company while dropping his target price on the stock to C$33 from C$38. The average twelve-month target price of nine analysts stands at C$33.06, according to data compiled by Bloomberg. Eight analysts say buy the stock, one says hold and one says sell, according to the data. Avigilon rose 0.3 percent to C$20.44 at 4 p.m. in Toronto.

The reason for caution is that earnings are not a primary goal of Avigilon even by 2016, Robin Manson-Hing, a Toronto-based analyst with CIBC World Markets, said in an Aug. 8 note to clients.

“Despite a number of levers to easily reach this target along with $500 million run-rate sales, they may choose to continue and accelerate the build-out of their workforce,” Manson-Hing said in the note.

Fernandes said he can boost profit while still reaching his revenue target. The $15 billion market for surveillance-camera systems is growing 15 to 20 percent a year, he said.

“By 2016, the market should be approaching $20 billion dollars,” Fernandes, a founder of the company, said.

Plants Overseas

Avigilon plans to hire more salespeople and eventually build manufacturing plants to make the cameras in Brazil and China to avoid import tariffs, he said.

Investments in regions outside the company’s core will pay in the long term, said Raymond James analyst Steven Li. Finishing the integration of acquisitions, including analytics company VideoIQ Inc., will make products even more attractive in the coming quarters, he said in an Aug. 8 note to clients.

Avigilon doesn’t have any current plans for more acquisitions, Fernandes said in an e-mailed statement today.

So far, Avigilon has managed to offer its blend of hardware, software and service without a direct competitor. If that changes, it could make Fernandes’s goal harder to achieve, Manson-Hing said.

How Profitable

“We’re not waiting around for competitors to copy our stuff, and they will,” said Fernandes, who owns about 10 percent of the company’s shares, according to a May 25 notice to shareholders. Focusing on innovation and being the first to market will keep Avigilon ahead of the game when that day comes, he said.

For now, investors are waiting to see if the company can execute on its revenue goal without damaging its potential to make profit, said Sangha.

Avigilon finished the quarter with C$156.7 million in cash, earning C$5.7 million from operating activities during the quarter, according to the second-quarter report.

“At the end of the day how much cash are they going to generate on a quarterly basis?” Sangha said. “How profitable will it be as they get to that C$500 million goal?”

(An earlier version of this story corrected the publication date.)

To contact the reporter on this story: Gerrit De Vynck in Toronto at gdevynck@bloomberg.net

To contact the editors responsible for this story: Jacqueline Thorpe at jthorpe23@bloomberg.net Carlos Caminada

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