Last week, video surveillance company Avigilon (TSX:AVO) reported 2013 year-end results that were impressive on many fronts. The company continues to achieve impressive top-line growth along with impressive bottom-line growth. What are the key takeaways for investors, and what’s next for this fast-moving company?
Profitable growth is key
Avigilon has demonstrated its ability to achieve impressive revenue growth while still growing margins. Revenue increased 78% in 2013, accompanied by an improvement in margins. Gross margins increased to 54.2% in 2013 versus 49.3% in 2013, and operating margins increased to 15.7% from 10.4%. This margin improvement is attributed to purchasing economies of scale as well as manufacturing efficiencies as sales have increased. Free cash flow increased to just under $20 million, an increase of over 150%.
Investing to drive future growth
R&D expense in the fourth quarter was $3.7 million, double last year’s level, and will continue to rise as Avigilon continues to invest in innovation. However, this growth in R&D expense is expected to be lower than sales growth, thus maintaining margins and profitability.
Management’s goal is to have a revenue run rate of $500 million by 2016. On the results conference call the company reiterated that it is very confident that it will be able to achieve this goal. With revenues currently at $178.3 million, this goal would imply an annual revenue growth rate of just over 40%. Management also said on the call that it believes this goal is actually a conservative one.
During 2013, Avigilon completed two acquisitions, RedCloud and Video IQ. RedCloud is a provider of web-based, physical and virtual access control systems, and gives Avigilon access to a complementary product line to its surveillance solution. Video IQ is a leading global video analytics company that gives Avigilon a strong portfolio of intellectual property (40 pending or granted patents). Once completed, these acquisitions will enable Avigilon to seamlessly combine and control HD video surveillance, access control, and video analytics.
Foolish bottom line
Avigilon’s shares have performed exceptionally well and are trading at high valuations. However, I believe that there is still plenty of room for further gains. In my view, this is just the beginning. Avigilon gives investors exposure to strong industry growth trends that are just beginning, and a profitable company that is achieving strong margins, strong ROE, and strong financial health. And it is successfully using this strength to profit from these industry trends.
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Fool contributor Karen Thomas has no positions in any of the stocks mentioned in this article.