Aug. 11 (Bloomberg) -- Avigilon Corp., 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 in a 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 fell 7.7 percent to C$20.38 at the close in
Toronto yesterday.
     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, Michael Lowry, a spokesman for Avigilon said in an
e-mail yesterday.
     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 3.2
percent of the company, according to data compiled by Bloomberg.
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?”