Once again, Avigilon Corp. (TSX: AVO) has reported a quarter that highlights the strength of the company’s business. After a disappointing second quarter relative to expectations, investors will be happy to note that Avigilon has reported a better than expected third quarter, with revenue and margins posting healthy gains.
Revenue came in just shy of $71 million for an increase of 38.7% versus the same period last year and an increase of 9% versus last quarter, and the company’s gross margin increased to 56.5% from 53.1% in the same quarter last year. Of the most notable performers on the revenue line was the U.K. (9% of total revenue), with a 53% increase in revenue, the EMEA region (24% of revenue), with a 47% increase, and the U.S. (61% of revenue), with a 45% increase.
Key to the quarter is the fact that margins held strong and increased relative to last quarter. Gross margin increased to 56.5%, and while this improvement was driven to a large degree by foreign exchange gains, it also reflects economies of scale, product mix, and improved efficiencies. It also highlights the absence of pricing pressure. The EBITDA margin came in at 22.1%. Selling and marketing expense was 21% of revenue in the third quarter, compared to 27% of revenue in the prior quarter as trade shows and marketing efforts are strongest in the second quarter.
R&D as a percentage of revenue declined slightly to 4.2%, and General and Administrative expense increased to 13% of revenue as the sales force continued to grow, albeit at a slower pace than last quarter. Investors will be breathing a sigh of relief as the company has shown that margins are holding up amid talk of increasing competition and pricing pressure for the company, which has not come to pass.
Another shining feature in these numbers is in the company’s balance sheet. The company’s cash balance continued to increase this quarter, with cash on the balance sheet increasing to $167 million, up 6.4% from the prior quarter. This equates to $3.50 per share. There is no debt on the balance sheet, so management is faced with the question of how to deploy this cash. Investors have brought up a share buyback as one of the possibilities, but it seems that the company will more likely reinvest in the business through an acquisition.
CEO Alexander Fernandes reiterated on the conference call that the company is on track to meet its goal of $500 million in revenue by the end of 2016 while maintaining EBITDA margins of 20-25%. While not without risks, at a current annual revenue run rate of $283 million, the company once again showed that it is in a good position to meet this target.
To be sure, there will be quarters in the short term (6 to 12 months) when we will see margins weaker than we would like due to continued investments in future growth. But given that this is against the backdrop of a healthy balance sheet, awash in cash and with negligible debt, investors can take comfort in the fact that the company has a couple of levers to pull to generate shareholder value, such as a share buyback or potential acquisitions.
Should you buy?
While there are still risks inherent in a company that is growing at the pace that Avigilon is growing, with big investments still required to grow the business and with the risk of competition creeping in and driving pricing lower, Avigilon has given investors a little bit (or a lot) of reassurance this quarter. The company continues to grow, and grow profitably, and the opportunity to continue to capture its share of this highly fragmented market is still a big one.
