Avigilon Corporation Reports Second Quarter 2016 Results

OREANDA-NEWS. August 16, 2016. Avigilon Corporation ("Avigilon" or the "Company") (TSX: AVO), provider of trusted security solutions, today reported financial results for the three and six months ended June 30, 2016. All figures are in United States ("US") dollars unless otherwise stated.

Second Quarter 2016 Financial Highlights

• Record revenue of \\$85.7 million, an increase of 17% over Q2 2015 revenue of \\$73.0 million, reflecting greater customer adoption in existing markets, further penetration of new target regions, sales of new products, and the Pricing Adjustment (as defined below).
• Gross profit was up \\$0.7 million, compared to the same period last year, primarily due to increased sales volume.
• Gross margin percentage was 50%, compared with 58% in Q2 2015, primarily due to the Pricing Adjustment.
• Adjusted EBITDA* was \\$8.0 million, compared with Q2 2015 Adjusted EBITDA of \\$12.5 million.
• Adjusted Earnings* were \\$2.6 million, compared with Q2 2015 Adjusted Earnings of \\$5.8 million.
• Diluted Adjusted Earnings Per Share* of \\$0.06, compared with \\$0.12 in Q2 2015.

"We've increased revenue for the 34^th consecutive quarter on a year over year basis, captured additional market share and continued to invest for growth," said

Alexander Fernandes, Avigilon's Founder, President, Chief Executive Officer and Chairman of the Board. "To expand our addressable market, we reduced prices on our H3 camera line and select NVRs and achieved record overall unit sales and revenue. This adjustment also increased cash flow from operations and benefited gross profit dollars at the expense of gross margin as a percentage of revenue. Over time, we expect gross margin to increase due to greater economies of scale, and growing revenues from patent licensing and video analytics.

"To support long-term growth we continued to invest in every department, notably in sales and marketing, manufacturing capabilities, and research and development. We're advancing our video analytics, such as our recently announced Avigilon Appearance Search technology, and plan to launch several new exciting video analytics-enabled products in the coming weeks."

Second Quarter 2016 Business Highlights

• Announced Avigilon Appearance Search video analytics technology, a sophisticated search engine for video data.
• Avigilon's year over year sales growth outpaced that of the industry.
• Successfully completed the Early Adopter Plan for the Avigilon Patent License Program, adding eight new licensees to the Program.
• Implemented a new enterprise resource planning system to help ensure effective scalability.

Summary of Second Quarter 2016 Financial Results

Detailed Financial Review

Avigilon reported Q2 2016 revenue of \\$85.7 million, an increase of 17% over revenue of \\$73.0 million in Q2 2015. On a constant currency basis, revenue in Q2 2016 grew by 18% over the same period in 2015. Revenue growth reflects increased sales driven by greater customer adoption with year over year sales growth in all geographic regions, further penetration of target regions, sales of new products such as the H4 and H4 ES camera lines, and the Pricing Adjustment (as defined below). In the second quarter of 2016, Avigilon reduced prices on the H3 camera line and select Network Video Recorders (the "Pricing Adjustment") to drive unit sales and revenues, expand addressable market and capture additional market share. The Pricing Adjustment resulted in increased cash flow from operations and benefited gross profit at the expense of gross margin as a percentage of revenue.

Gross profit was \\$43.0 million in Q2 2016 compared with \\$42.3 million in Q2 2015, an increase of \\$0.7 million. The increase was primarily due to overall increased unit sales as a result of the Pricing Adjustment, in addition to strong unit sales of the H4 and H4 ES camera lines. As a percentage of revenue, gross margin percentage in Q2 2016 was 50% compared to 58% in the prior year primarily due to the Pricing Adjustment. Over time, the Company expects gross margin to increase due to greater economies of scale, and increasing revenues and sales from patent licensing and video analytics. Separately, gross margin percentages may fluctuate quarterly due to changes in product mix, pricing, and foreign exchange rates.

Sales and marketing expenses in Q2 2016 were \\$20.5 million, an increase of 15% compared with \\$17.9 million in Q2 2015. The increase in Q2 2016 reflects investments to expand the Company's global sales and marketing team and initiatives, which management believes will drive continued revenue growth. In Q2 2016, sales and marketing expenses represented 24% of revenue, compared with 25% of revenue in Q2 2015.

Research and development ("R&D") expenses, net of related income tax credits and capitalized development costs, were \\$4.6 million in Q2 2016, compared with \\$2.7 million in Q2 2015. Gross R&D expenses were \\$8.4 million in Q2 2016 (10% of revenue), compared with \\$5.9 million in Q2 2015 (8% of revenue), an increase of 43%. The increase in R&D expenses are consistent with the Company's ongoing plan to further enhance and expand upon its product offerings and intellectual property portfolio.

General and administrative ("G&A") expenses in Q2 2016 were \\$13.3 million (or 16% of revenue), compared with \\$12.1 million in Q2 2015 (or 17% of revenue). The \\$1.2 million increase was primarily due to additional personnel and their related expenses to support business growth. Management expects the Company's G&A expenses to increase in the near term as the Company continues to invest in infrastructure to support planned growth, but that these expenses will increase at a slower rate than revenue over time.

Amortization and depreciation in Q2 2016 were \\$5.2 million, compared with \\$3.5 million in Q2 2015. The increase was primarily due to the additions of property, plant and equipment to support the Company's growth and additions to capitalized development costs in the current and prior periods.

Total operating expenses for Q2 2016 were \\$43.7 million, an increase of 21% compared with \\$36.2 million in Q2 2015. The increase in operating expenses was driven by: an increase in R&D expenditures; greater amortization and depreciation; and adding full-time personnel to support the Company's global growth. Historically, operating expenses have been seasonally affected by sales and marketing activities and overall hiring initiatives in the first half of the year, benefiting operating leverage in the second half of the year.

Net loss for Q2 2016 was \\$2.0 million, compared with net income of \\$1.8 million in Q2 2015. Loss Per Share in Q2 2016 was \\$0.05 (basic and diluted), compared with Earnings Per Share in Q2 2015 of \\$0.04 (basic and diluted).

Adjusted EBITDA of \\$8.0 million in Q2 2016 decreased 36% compared with Q2 2015 Adjusted EBITDA of \\$12.5 million.

Adjusted Earnings for Q2 2016 were \\$2.6 million, compared with \\$5.8 million in Q2 2015. Diluted Adjusted Earnings Per Share were \\$0.06 in Q2 2016, compared with \\$0.12 in Q2 2015.

Adjusted EBITDA, Adjusted Earnings, and Adjusted Earnings Per Share decreased compared to the same period in the prior year, primarily due to the Pricing Adjustment.

As at June 30, 2016, Avigilon had net working capital of \\$97.1 million, including cash and cash equivalents of \\$22.0 million. Net cash from operating activities for Q2 2016 increased to \\$12.0 million, compared with \\$4.6 million in Q2 2015. The increase was primarily driven by the Pricing Adjustment, and the resultant record unit sales volumes. As at June 30, 2016, the Company had 43,393,858 common shares issued and outstanding. The weighted average number of common shares issued and outstanding for the quarter was approximately 43.4 million basic and 44.1 million diluted.

Due to the effect of the Pricing Adjustment on unit volume and gross margin as a percentage of revenues, the Company's fiscal year 2016 actual Adjusted EBITDA margin and Adjusted Earnings Per Share may be materially lower, and the effective income tax rate may be materially different, than the Company's guidance for fiscal year 2016 initially disclosed on March 1, 2016. Because the elements of future oriented financial information contained in the guidance are interconnected, a change to one such element may correspondingly affect one or more others. Accordingly, and for the reasons set out in Management's Discussion & Analysis for the three and six months ended June 30, 2016 and 2015 under the heading "Forward-Looking Statements", undue reliance should not be placed on such information.

Conference Call

Avigilon has scheduled a conference call to discuss these results on Monday, August 15, 2016, beginning at 5:00 p.m. ET (2:00 p.m. PT). To access the live call, dial 1-888-231-8191 or 647-427-7450, or view the webcast at http://ir.avigilon.com or http://bit.ly/29Zfuzs. A replay will be available for 90 days on the Company's website, and for one week by dialing 1-855-859-2056 or 416-849-0833, reference number 55474904.

This news release is qualified in its entirety by the Company's consolidated financial statements for the three and six months ended June 30, 2016 and 2015 and the associated Management's Discussion & Analysis respecting the same period, which can be downloaded from the Avigilon website at http://ir.avigilon.com or from the Company's profile on SEDAR at http://www.sedar.com/.

*Non-IFRS Measures

Management uses certain non-International Financial Reporting Standards ("IFRS") measures that it believes are useful to investors in evaluating the performance and results of the Company. The term "Adjusted EBITDA" refers to earnings before deducting interest, taxes, depreciation, amortization, foreign exchange gain or loss, business acquisition-related costs, restructuring costs, non-recurring legal costs, non-recurring lease termination costs, and share-based payments. Management believes that Adjusted EBITDA is a useful measure as it provides an indication of the operational results of the business prior to taking into consideration how those activities are financed and taxed and also prior to taking into consideration asset amortization, foreign exchange gain or loss, business acquisition-related costs, restructuring costs, non-recurring legal costs, non-recurring lease termination costs, and share-based payments.

Management also believes that analyzing operating results exclusive of significant non-cash and non-recurring items provides a useful measure of the Company's performance. The term "Adjusted Earnings" and "Adjusted Earnings Per Share" refers to net earnings and earnings per share, respectively, before share-based payments, foreign exchange gain or loss, business acquisition-related costs, financing costs, restructuring costs, non-recurring legal costs, non-recurring lease termination costs, amortization of acquired intangibles and related tax effects. Please refer to the reconciliation table that accompanies the financial statements discussed in this news release and which is included in the Company's Management's Discussion & Analysis for Q2 2016.

Adjusted EBITDA, Adjusted Earnings and Adjusted Earnings Per Share do not have standardized meanings prescribed by IFRS and are not necessarily comparable to similar measures provided by other companies.

Investors are cautioned that Adjusted EBITDA, Adjusted Earnings and Adjusted Earnings Per Share should not be construed as an alternative to operating income or net income determined in accordance with IFRS as an indicator of the Company's financial performance or as a measure of its liquidity and cash flows.

About Avigilon

Avigilon Corporation provides trusted security solutions to the global market. Avigilon designs, develops, and manufactures video analytics, network video management software and hardware, surveillance cameras, and access control solutions. To learn more about Avigilon, visit avigilon.com.

© 2016, Avigilon Corporation. AVIGILON, the AVIGILON logo, and AVIGILON APPEARANCE SEARCH are trademarks of Avigilon Corporation.

For further information:

Darren Seed
Vice President, Capital Markets & Communications
T: (604) 629-5182
investors@avigilon.com

Forward-Looking Statements

Certain information and statements in this news release contain and constitute forward-looking information or forward-looking statements as defined under applicable securities laws (collectively, "forward-looking statements"). Forward-looking statements normally contain words like 'believe', 'expect', 'anticipate', 'plan', 'intend', 'continue', 'estimate', 'may', 'will', 'should', 'ongoing' and similar expressions, and within this news release include, without limitation, any statements (express or implied) respecting Avigilon's: mission, strategies, and objectives; projected growth, revenues, expenses, capital expenditures, earnings and gross margin; anticipated enhancement and expansion of its product offerings, intellectual property portfolio and associated R&D plans; expected investment in and expansion of infrastructure and personnel; and the expected benefits of the Pricing Adjustment. Forward-looking statements are provided for the purpose of presenting information about management's current expectations and plans relating to the future and allowing investors and others to get a better understanding of our anticipated financial position, results of operations and operating environment. Readers are cautioned that such information may not be appropriate for other purposes.

Forward-looking statements are not guarantees of future performance, actions, or developments and are based on expectations, assumptions and other factors that management currently believes are relevant, reasonable and appropriate in the circumstances. The material expectations, assumptions and other factors used in developing the forward-looking statements set out herein include or relate to the following, without limitation: Avigilon will be able to successfully execute its mission, strategies and objectives; the business and economic conditions affecting Avigilon's operations will continue substantially in their current state, including with respect to industry conditions, general levels of economic activity, regulations, taxes, interest rates, and foreign exchange rates; there will be no adverse material changes to Avigilon's key personnel, facilities, production capabilities, supply chain, sales channels, reseller network, or contractual arrangements; Avigilon will be able to attract and retain qualified personnel; Avigilon will be able to successfully manage cash flow, operating expenses, capital expenditures, and foreign exchange risk; existing and future financing will be available to Avigilon on favorable terms when and if required; Avigilon will keep pace with or outpace the growth, direction, and technological advancement in its industry; industry data and projections obtained from external sources are accurate and reliable; Avigilon will be able to design, manufacture and market new products and enhance its existing product lines; Avigilon will be able to enhance and expand its intellectual property portfolio; Avigilon will continue to generate revenues from patent licensing; Avigilon will be able to successfully integrate businesses, intellectual property, products, and technologies that it may acquire, if any; Avigilon's investment in its global sales and marketing team and initiatives will drive revenue growth; Avigilon will not face any material unexpected costs related to product liability or warranties; Avigilon's protection of its intellectual property against third party infringement or misappropriation is sufficient and its products and technology do not materially infringe third party intellectual property rights; Avigilon will be able to obtain necessary third party licenses on favorable terms; Avigilon will not become involved in unexpected material litigation or otherwise subject to materially adverse claims; the lower prices of Avigilon's products under the Pricing Adjustment will drive unit sales and revenues, expand addressable market and capture additional market share; that Avigilon's plans respecting the pricing of its products and services, including without limitation under the Pricing Adjustment, will proceed in substantially their present form; Avigilon will be able to achieve greater economies of scale based on increased sales and manufacturing volume; and Avigilon's new enterprise resource planning system will have the intended benefits.

Although management believes that the forward-looking statements set out herein are reasonable, actual results could be substantially different due to the risks and uncertainties associated with and inherent to Avigilon's business, as more particularly described in the "Risk Factors" section of Avigilon's Annual Information Form dated March 1, 2016, which is available under Avigilon's profile on SEDAR at http://www.sedar.com/. Additional material risks and uncertainties applicable to the forward-looking statements set out herein include, but are not limited to: unexpected changes to accounting policies, accounting standards or internal controls and procedures over financial reporting; and unforeseen events, developments or factors causing any of the aforesaid expectations, assumptions and other factors ultimately being inaccurate or irrelevant. Although Avigilon has attempted to identify important factors that could cause actual actions, events, or results to differ materially from those contained in any forward-looking statement, there may be other factors that cause actions, events or results not to be as anticipated, predicted, estimated, or intended. Many of these factors are beyond the control of Avigilon. Accordingly, readers should not place undue reliance on forward-looking statements.

Avigilon undertakes no obligation to reissue or update any forward-looking statements as a result of new information or events after the date hereof except as may be required by law. All forward-looking statements contained in this news release are qualified by this cautionary statement.