February 9, 2018 -
Investors are suddenly dealing again with that old bugbear, stock market volatility. The easy, breezy days of of 2017 and early 2018 — when markets went in one-direction, up — have faded. Investors are again dealing with the fact that markets can also go down. And that has many worried.
The sell offs have been big in terms of points. But it’s also the case that the sell-offs have not been as big as those in 2008 or back in 2000 when the dot-com bubble burst. Percentage-wise the declines have been comparable to August 2011 when markets reset after overshooting underlying fundamentals. This is arguably the case again. Many have expected some kind of retrenchment as recent gains seemed to be too good (and rapid) to be true. With rates rising on bonds there is an attractive alternative to risky equities. And so the declines may be getting markets back to where they should be. From the perspective of one common market valuation, the Price-Earnings ratio, market values would have to decline a bit more from here to get back in line with long-term trends. So it there could be further sell-offs yet. Of course, the meltdown has an upside. If the declines push off further interest rate hikes by the U.S. Federal Reserve that would be good for equity markets. But make no mistake: The volatility that typically defines stock markets has returned.
Within the panic and worry around broad market indexes there were some single stocks that did well this past week. One of those is a Vancouver-based organization, Avigilon Corporation, that is applying biometric technology to high-end video surveillance systems used on major commercial projects like airports, public venues and healthcare centers. The company holds more than 750 U.S. and international patents. It offers fingerprint scanners. But its main product line is a video surveillance system that can rapidly search through hours of footage to locate a specific person or vehicle of interest. The technology incorporates the characteristics of a person’s face so that the tech can understand, “… it is searching for the same person, even if items such as their clothing change over time.” Without using predefined rules the technology is also able to continuously learn what typical activity in a scene looks like, and can then detect and flag unusual motion. The company was founded in 2004 by Alexander Fernandes. It began selling products in 2007 and then grew quickly after that. For a while it was the third fastest growing company in Canada. It went public in 2011 on the Toronto Stock Exchange. Today the company sells it products in over 113 countries. Just last week all the work the founder and employees put into the company came to fruition last when old school U.S. technology company Motorola announced Friday it is offering CAD $27 a share (about USD $1 billion) for all the outstanding stock of the company.
The all-cash offer sent Aviligon stock rocketing up almost 19% in the hours after the announcement. Shares closed that day right at $27, exactly the amount Motorola offered per share.
According to a report in the Canadian newspaper The Globe and Mail the company has enjoyed a comeback of sorts over the past few years. The company’s biggest competitor in surveillance-equipment is a Chinese firm, Hangzhou Hikvision Digital Technology. That company is partly owned by the Chinese government. It had significantly underpriced competing technologies to gain market share. But clients became concerned that the company supplying their surveillance gear was owned by the Chinese Communist Party. According to the Globe report, “as people became more wary about buying cameras” from a Chinese state-affiliated company, clients began to switch to Avigilon’s products. A big shift occurred when Hikvision acknowledged a “software vulnerability issue in its technology.” A U.S. Army base in Missouri was said to “rip” out its Hikvision cameras and replace them with Aviligon products. An analyst quoted in the Globe story said, “Ultimately end users are deciding for themselves what products and solutions they feel most comfortable with. What we’re seeing now given the current times is there’s an increased focus on domestically made products, of which Avigilon has been a big believer for quite some time, manufacturing in Canada and the U.S.” Through 2017 Avigilon posted better-than-expected earnings and the stock really began to surge, rising 65 percent over the year. The Motorola offer caps a great run for the stock. Two days ago the founder Fernandes announced he will retire as CEO and chairman of the board. “I’m very proud of what we’ve accomplished at Avigilon, growing from a start-up to become an industry leader,” said Mr. Fernandes in a press release. “Avigilon has a strong and proven leadership team, and I’m confident about the company’s future.”
A Motorola press release said the acquisition will allow the company to compete in new markets such as oil and gas, transportation, utilities and manufacturing. “This acquisition will bring Avigilon’s advanced video surveillance and analytics platform to the rapidly evolving public safety workflow, while also expanding our portfolio with new products and technologies for big commercial customers,” said Greg Brown, chairman and CEO, Motorola Solutions. “Video can play a powerful role in creating safer cities and thriving businesses. It can serve as highly efficient ‘eyes and ears’ for monitoring a given location, and advanced video analytics can proactively alert officials to a perimeter breach or quickly find a person who left behind an object of interest.”
The deal is the biggest in two years for Motorola Solutions, which is a successor company to Motorola Inc., the organization known for making handsets. The mobility division was hived off into a separate company in 2011. That business was subsequently bought by Google and later resold to Lenovo. Since then Motorola Solutions has seen its stock rise steadily in recent years as it returned to its roots of providing communications solutions to government agencies and infrastructure. This new firm is backed by the private-equity firm Silver Lake Partners, a big name in that rarified sector. Silver Lake injected $1-billion into the commany three years ago.
Motorola Solutions just reported fourth quarter and full-year financial results. The numbers are good. According to a press release the company recorded record sales and cash flow in 2017. Revenue was about $2 billion, up four percent from year ago. Earnings per share were negative $3.56 as a result of the recent changes to tax law (a common theme this earnings season). But for the year ahead the company is predicting first quarter 2018 revenue growth of approximately seven percent.
According to a press release Motorola has sufficient capital (cash and a commercial credit facility) to complete the Avigilon acquisition without having to go to market to raise money. The transaction is expected to be completed by the end of the second quarter of 2018.
Another name active in biometrics-based video surveillance is a company called BrainChip Holdings. Like Avigilon it is also listed on a smaller, obscure stock exchange based in an English-speaking commonwealth country; in this case the Australian Stock Exchange. The company provides software for use in civil surveillance and gaming. It utilizes facial recognition and visual inspection systems. It just released its fourth quarter financials and summarized its most recent deals.
One interesting project is a development and licensing agreement with a company called Gaming Partners International, which provides software security systems to casinos. Brainchip will contribute biometrics-based vision recognition technology that will be used by gaming houses that want to secure the rooms where money is counted by employees, as well as to watch for cheating at tables. This software to be developed will be tapping a huge market. According to statistics there are over 3,500 casinos worldwide with over 60,000 gaming tables. This is an addressable market of over US$200 million annually for video analysis.
Under the terms of the agreement BrainChip will receive USD $500,000 in license fees, a non-recurring engineering fee of US$100,000, as well as a share of long-term revenue from the sale of the developed technology. An early version of the coming product was just shown at the Global Gaming Expo in Las Vegas this past fall.
According to BrainChip’s CEO, Louis DiNardo, “The opportunity to partner with GPI, a world leader in casino currency and game products, provides BrainChip a worldwide presence for its technology in the casino gaming industry. GPI has very deep expertise in casino game operations, a broad base of existing customers, and a premier global sales and service team that will bring these products to market. Our Artificial Intelligence expertise is well suited to address the challenges of achieving high quality video analytics in the difficult casino environment. We are very excited about this development.”
Brainchip also unveiled this fall a new accelerator card that serves as a key accessory for something called “neuromorphic computing.” The goal is to emulate the workings of the human brain. The tech can be used to help hardware complete such tasks as object and facial recognition. According to a press release the product is ideal for applications in surveillance and tracking, where the speed of processing is important without increasing the power draw. A bright spot on this front: In October 2017 BrainChip shipped its first accelerator card to a major European automobile manufacturer that will evaluate the card for use in Advanced Driver-Assistance Systems (ADAS) and Autonomous Vehicle (AV) applications. AVs need fast object recognition, but with low power draws, so this product fits into this growing market.
BrainChip also announced it has been chosen to deliver an AI object search and facial recognition system to a massive municipality-wide project in France. The project has a potential value of more than USD $1.2 million and the deployment encompasses over four thousand cameras across several towns and cities. BrainChip’s object search and facial recognition tech is already deployed in 11 pilot locations, with broader deployments to follow later in 2018. So the company is generating orders for its products.
According to its latest financials, last quarter operating cash flow came in at a loss of USD $1.88 million. The company still has several million in its coffers. But to keep its corporate mission on track this past fall Brainchip raised AUD $21.5 million in a share offering that was described as “heavily oversubscribed.” The cash will be used to accelerate the commercialization of the company’s products. The placement was offered at an issue price of AUD $0.18 a share. That was a 27% discount to the price of shares at the time. According to BrainChip the offer attracted a large number of institutional investors such as pension funds, insurance companies and mutual funds. BrainChip shares are currently trading around AUD $0.22. That’s off the AUD $0.33 they traded at earlier in the year. But with some solid projects in the pipes interest should increase in the months to come.