Q4 Update

The Good

• Order backlog of $8.5m sets up a good position going into FY25 and an order intake of $9m annualises out to $36m which still sits inline with the bottom end of the FY25 guidance so Ava is roughly tracking in the right direction. Most of this is propped up by the detect business.

The Not So Good

• Ava just scraped into its guidance range with a full year revenue of $30.2m. This means that there is extra work that needs to be done over the next two years to meet previous sales targets.
• There were previous indications that the illuminate business unit would start to show signs of growth in H2FY24. So far both the illuminate and access business’s have been fairly stagnant. Changing the sales orders from the stacked column graph highlights this.

Watch Status

• No Change

Valuation Status

• Review at full year results. Current growth rate is below previous forecasts.

What To Watch

• Telstra trials of illuminate and detect products to be completed in H1FY25. Mal hinted in the Strawman meeting in April that the first sales from this agreement will be a surprise, so likely from one of these two business units.
• Impact of US sales on illuminate orders.

The Good

• Sales orders up substantially on prior quarters to $12m. This annualises out to $48m which indicates that if sales can be maintained then revenue forecasts for FY25 are achievable.

• Wide range of projects signed over the quarter which is a positive for the technology base, in particular, Aura Ai-X.

The Not So Good

• Illuminate unit still struggling to show growth, Q2 slightly up which is potentially showing signs of turning.
• H1 revenue of $14.2m is flat over the last several periods, however, it was within the guidance range provided.

• Costs increased against this, which has resulted in a $2.3m loss for the half.

• The cash position at the end of December was precarious with only $1.78m and a negative free cash flow of $3.5m for the half. Unless there are some payments coming in, money will be running out very quickly.

Watch Status

• Neutral - Negative financial offset by slight improved outlook

Valuation Status

• Increased chance of Bear Case. Need to review forward revenue projections to better align with management forecasts

What To Watch

• Further details on sales commitments from the Telstra Agreement. Telstra has a large network of assets that could be protected by AVA products and this is AVA’s first with a telecommunications provider.
• New LoRa product to be launched in H2FY4 which may provide a boost to sales orders.
• H2 revenue guidance of $16m to $20m. Order backlog of $8.9m with $6.8m set to be delivered over CY24.
• Management is confident of improvement in the Illuminate division in H2FY24. (This has been reported previously)

The Good

• Significant improvement in sales from the access division, which was previously indicated by management on the back of the certification of the cobalt series of locks. These are stocking orders under the framework agreement, so whether or not the level of sales can be maintained is yet to be seen.

The Not So Good

• Revenue guidance for H1FY24 of $14.2m to $15.2m which is in line with $15m from H2FY23. This also means that the revenue in H2 needs to be at least $22m to meet management’s previous 3 year targets from the September investor presentation.

• Illuminate division still struggling to show signs of growth. This was put down to macro factors. Management once again reiterated confidence in seeing growth in FY24.

Watch Status:

What To Watch

• Slower sales in detect was put down to sales cycles and likely to see an uptick in Q2.
• Q2 sales orders will need to be significantly higher for revenues to enable time for revenue to land in FY24.
• Potential sales growth in illuminate from growing global footprint.

Announcement

The Good

• Maintaining FY23 revenue guidance with full year revenue falling around the $28.5m mark.
• $7.7m of sales orders for Q4 which is an improvement on the PCP. Most of this comes from the detect segment with lower sales orders from Access.

The Not So Good

• In Q3 management indicated improving orders from the Access division in Q4 going forward. Whilst there was a small improvement over Q3, order intake is still down on Q4FY22.

What To Watch

• Progress of sales now that the restructure of the sales teams has been completed.
• Certifications being gained for the access division products which are expected to be completed in Q1FY24 and lead to additional sales beyond this period.
• Company is confident of growing orders in the illuminate division in FY24, which have been impacted by challenging economic conditions.
• Growth of recurring revenue from Aura Ai-X and Aura IQ platforms and how this is reported in the full year results. (Carried Over)

Strawman Meeting Notes:

• Building of commercial focus in the business as the technology is sound. Large changes over the first 6 months, turning the commercial group into a single entity under a single manager with four regional groups sitting below that.
• 65% change across the team mostly completed 
• Execution story, still more work to do in getting the technology to market and getting customers to understand the problems that can be solved.
• Against bespoke product development. Develop and sell your own product. Integrate good ideas when they come along.
• Building an online integration platform to ensure all products are compatible and can be integrated.
• Clear focus on the number of larger deals over $1m which need to be achieved by the sales team. More clients, more regions and more applications will help reduce the lumpiness in revenue
• Coming off a low revenue base Mal sees a clear avenue to meeting the mid term sales targets of $70m+
• Not comfortable with a single product in a single market as a basis of growth. Aura-AiX is the next step from Aura IQ into a wider range of applications. Aura IQ is still part of the AVA product range.
• Will continue to develop new unique IP and develop patents on technology.

Ava’s update has been covered by the community so these are just some notes for myself

The Good

• Sales orders for Q3 up to $8.3m. Growth is largely driven by the Detect business.
• Sales orders YTD up to $23.1m which is 46% organic growth of the Detect and Access divisions

The Not So Good

• Access sales orders continue to decrease / remain flat. So far the agreement announced with Dormakaba in Dec 2021 is failing to produce any impact.
• Illuminate / GJD was reported to have had revenues of $7.95m in FY21. Based off the recorded revenues so far it looks like it would have been short of that number for FY22 and for FY23.

What To Watch

• H2 revenue guidance of $14m to $16m which would be an improvement over the $13.6m in H1. At the upper end of guidance this is on track with the growth rate required for previous three year revenue projections.
• Management have flagged improved sales orders for Access division in Q4 and going forward
• No updates provided on the Anglo American install progress.
• Growth of recurring revenue from Aura Ai-X and Aura IQ platforms and how this is reported in the full year results

The Good

• H1 Revenue in line with guidance, with H2 expected to exceed H1. If maintaining the same organic growth rate, revenue for FY23 full year could be around the $29m mark.
• Organic growth of 16% over the previous period if GJD is excluded. This is predominantly from the “Detect” side of the business.
• Rearrangement of divisions into the key areas rather than by brand helps send the message of a single source for security rather than an owner of discrete businesses.
• The investor presentation deck provides a good overview on where the AVA product strengths lie in terms of AI & Machine Learning. If the message has improved in the investor deck it is likely the same for the business development teams.

The Not So Good

• Decrease in FFT / Detect orders for Q2 compared to Q1. This typically has been lumpy / cyclical so not a warning sign yet.
• BQT / Access growth still remaining flat

• With both of the above comments it is hard to see a strong signal for maintained growth as management are forecasting, however that may also mean that there is a large potential sales pipeline they are confident about to be able to be making such statements about the long term plans for the business.

What To Watch

• Anglo American AuraIQ to be installed in H1CY23. Watch for execution of order within the nominated timeline and then for timing around “ongoing” revenues.
• To meet the $70m baseline FY26 guidance AVA needs to continue maintaining the current growth rate of around 16% per half. The next several quarters will be a key indicator if this long range target is achievable.
• The other way growth plays out is through a series of acquisitions. What potentially also lends itself to this outcome is the restructuring into Detect / Access / Illuminate business areas.
• Further FFT orders expected from the existing North American energy client in H2.

The Good

• Increase in sales orders for the quarter to $5.5m with FFT sales orders increasing back to Q1/Q2 levels. Annualises to ~$22m which is ~15% growth on FY22 revenue. A further $0.8m in FFT contracts announced for North American energy facilities demonstrating growth in the region.
• Increase in BQT sales orders over last 2 quarters. Potential increasing contribution from Dormakaba agreement? 
• First Aura IQ signed in July, which although small at around $300k this looks to be just under 10% of the FFT sales orders for Q4. The announcement also gets past the ongoing “first order” milestone forecasts which were impacting the perception of management. Having said that, they are continuing to announce further “anticipated sales” with time frames which given the past history, I’m not sure I see the benefit in. The contract being with a conveyor manufacturer may reduce some of the margin compared to going direct to the asset owners, however provides an ongoing sales channel and potential for easy option in on new conveyor sales.
• Acquisition of GJD Manufacturing to expand product range and distribution regions and puts the cash balance to work.

The Not So Good

• A slight miss on revenue guidance which was to be expected given the updates in Q3.
• Order backlog of $1.2m, although this will contribute to FY23 revenues, ongoing delays in being able to deliver and meet sales orders has potential to impact company reputation.

What To Watch

• Review revenue breakdown across regions for FFT & BQT in annual report. Also if ongoing service revenues are separated out.
• “Anticipated” Aura IQ contracts in H1 FY23 should continue to contribute to FFT sales.
• Strategic acquisition of GJD Manufacturing expanding distribution within the UK. FY21 revenue of $7.95m. FY22 ending in September, monitor organic growth of GJD separate from AVA.
• Cash balance of ~$10.5m after the GJD acquisition which leaves a chunk of cash for further acquisitions.

The Good

• Slight upward movement in BQT sales, too early to determine impact of dormakaba agreement, but a positive sign that there is an increase following the Global Framework Agreement

The Not So Good

• A fairly decent drop off in sales orders for Q3 in the FFT space. The announced 49 maintenance agreements may help provide a baseline for future quarters.
• A bit of signposting of a potential miss on revenue contingent on supply chain issues. Yes it’s tough out there at the moment, but everyone has similar issues to face. If management isn't confident of the number they are forecasting they should adjust it down.
• As @Strawman has pointed out the reported metrics don’t provide a very transparent update on business performance

What To Watch

• The company has given a window of Q4 to get an AuraIQ contract across the line. This has been a tough one for AVA having to continuously reforecast the first contract for the conveyor technology, so this will be a key point to watch. This was on the watchlist last quarter so another miss will be a definite red flag.
• Updates on second AIQ Proof of Concept 
• Company meets provided revenue guidance of $31.3m at the end of Q4

The Good:

• Company is maintaining a FY22 Revenue target of > $20.2m & EBITDA > $2.2m that was provided in the Q1 update. Currently tracking to meet this target with half year sales of $10.2m, so it doesn’t feel like this was too much of a stretch target.
• The growth of FFT Sales in North America is in line with business goals provided in the FY21 Annual Report and indicates that the company is getting results from the resources allocated to this area.
• The business has a strong cash position with $16.2m left after what is allocated for the return of capital from the services division sale.

The Bad:

• The return of capital decision is still in limbo, which in isolation isn’t a huge issue, however if it drags on, it is time where the capital could have been potentially deployed in a more productive manner.
• No word on Aura IQ. This was foreshadowed in the December update so this isn’t a surprise that there wasn’t a mention, but it has been a can that has been kicked down the road for a while now.
• Slight decrease in sales from previous quarter (Up YoY). A single down quarter isn’t an alarm bell by itself as Q2FY21 was also down on Q1. 

What To Watch:

• Growth impact from the BQT global distribution agreement, with first orders to be commencing this quarter. BQT sales have been flat over the last 12 months so any decent uptick here can likely be attributed to this agreement.
• Ongoing US growth or if the uptick was a once off.
• Award / announcement of Aura IQ contract in Q3. In the December update the company re-forecast contract awards for early calendar year. Given how many times they have announced and missed this, I think this is a key for short term market sentiment.

Impacts to Price Forecast:

• In my previous forecast I am pretty out with earnings numbers so this will need to be revisited.