CIBC - SO May the force be with USWhat's Changed
Avigilon reported slightly better-than-expected Q3 results. Q3 sales were $95.1M (up 34% Y/Y) versus our estimate of $90.2M (up 27% Y/Y). Constant currency sales however were up 16% Y/Y versus our expectation of up 19%. Adjusted EPS of $0.27 compared to our estimate of $0.18 but included a ~$1.5M benefit from a one-time SBC reversal due to the recent management restructuring. The Q4 implied guidance range fell in-line with our expectations.
Implications
The biggest takeaway for us was U.S. sales being $57.8M versus our expectations of $51.9M. This bodes very well for our quota forecast, as we estimate that close to 20 U.S. sales managers (SM) and business development managers (BDM) were added since the start of Q3. The implication is that not only are existing U.S. SMs and BDMs doing better than expected, but new hires should perform better than expected. On the downside, the gross margin impact from the opening of AVO's Texas manufacturing facility will have a 200 to 300 bps negative impact on gross margins near term.
We continue to believe that Avigilon will see EPS growth in the medium term. However given the recent hiring, earnings power is more likely to come into focus in '17. With the strong U.S. results, we believe there is upside to our EPS forecast if SM/BDM hiring slows due to fewer bodies being necessary to reach $125M in sales for Q4/16. Our thesis is that EPS in '17 will move higher based on:
1) Revenue growth of 23% and 14% in '16 and '17 respectively
2) We estimate '17 EBITDA margins of ~16%, rebounding after a dip to ~14% in '16 due to GM% declines and material 2H/15 hiring.
3) A video surveillance market forecast by IHS sees a 5-year CAGR of 12%. We believe Avigilon will grow faster than
the market.
Valuation
Our price target is $20, based on 18x our 2017 EPS estimate of $1.12. We believe Avigilon's share price will move higher as 2017 earnings come into focus.