Although Avigilon Corp. (TSX:AVO) CEO Alex Fernandez did say last quarter that margins would be under pressure and volatile in 2015, as he reminded investors that EBITDA margins have historically ranged from 15% to 25%, the extent of the hit in margins this quarter has still caught many by surprise. The degree and extent of the ramp up in spending for growth was significant this quarter. Total operating expenses increased a whopping 71% compared with the first quarter of 2014.
The increase in the general and administrative expense was due to the headcount additions that were made in order to be able to support future expected growth, as was the increase in the sales and marketing expense. Additions were made in human resources, customer support, finance, and legal, as well as in sales and marketing.
Avigilon Corp. will continue to add to its infrastructure and its personnel for the remainder of the year. Fernandez believes that this quarter’s spending will be at the high end of spending for the year as a percentage of sales. While we should still expect elevated levels of spending throughout 2015 versus 2014, it won’t be as high as this quarter.
Revenue growth was also somewhat disappointing. Revenue increased 35% compared with expectations for a 40% increase. On the conference call the CEO stressed that one quarter does not make a trend. While this is certainly true, what I see here is yet another quarter of results falling short of expectations and this can be a bad sign. However, through all this, the 2016 revenue run-rate target of $500 million certainly still looks achievable given recent additions to personnel and infrastructure, as this target implies a revenue growth rate of 38% in 2015 and 33% in 2016.
Video Analytics licensing a strategic opportunity
At this point in time it is believed that Avigilon has the only end-to-end security solutions offering with embedded video analytics. This gives Avigilon a competitive advantage, and management is encouraged because video analytics has been very well received by customers.
The company has been buying video analytics patents in order to keep this advantage and now has a collection of 260 U.S. and International patents with many more pending. The recent acquisition of ObjectVideo’s patents and patent licensing program also gave Avigilon 19 royalty revenue licensing streams. The company intends to strike some more of these deals in order to increase this type of recurring revenue.
Management says that growth trends are still strong and they see no changes. From an investor’s perspective, the risk has definitely gone up because the fear of expense increases eating away at profitability has already happened, and it is difficult to say where margins will normalize. But the question we must ask ourselves is whether or not the long-term thesis has changed.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Karen Thomas owns shares of Avigilon. Avigilon is a recommendation of Stock Advisor Canada.