I just got off the AVA call.

Key takeaways:

Mal emphasized that FY24 was a transitional year, completing restructuring, launching new tech/products, and setting a firm foundation for FY25. It was a tale of two halves, with things accelerating in the final quarters.

Margin drop was due to a shift in segment mix -- Detect has the best margins, but strong growth in Access was why group margin eased back. Should normalise going forward.

Detect is really the core business, and Mal described this as a program or project based business, one that can have long lead times (3-12 months)

A $100 million pipeline, particularly strong in the Detect segment, is noteworthy. Mal repeatedly emphasised these leading indicators and you can see from the latest outlook table that they continue to expect high revenue growth against a relatively fixed costs base

At the mid point, you have ~62% revenue growth expected in FY25 and an EBITDA of ~$20m -- a 42% operating margin.

(interesting to hear Mal say "I know you've heard this before")

Aura AI-X has been transformational since its launch, contributing to improved detection and lower false alarms. The strong sales of over 100 units and Cobalt 2’s 48% growth in Access orders demonstrate successful product adoption and integration across segments

There was discussion about H1 traditionally being weaker than H2, with specific references to Q1 (northern summer) and Q3 (holiday season) slowdowns, aligns with their operational cycles.

Illuminate’s expected move to break-even or profitability in FY24

There was a noticeable shift toward emphasizing predictability in revenue, seen in their focus on bookings, pipeline, and backlog as core metrics.

Its a fractured and competitive market, and AVVA is trying to distinguish itself by focusing on the tech and aligning with bigger customers.

Company well funded, no expectations to raise capital. Board happy to commit to paying 30% of EBITDA as a dividend, which they think leaves ample room for growth investment.

Could FY25 finally be the year where things take off? Cost base and operating segments now set, good momentum in orders and sales.. Maybe. If they get anywhere near guidance you'd have to assume something of a rerate.

A do or die year for me.

tl;dr -- It was a good final quarter, but H2 revenue was at the very bottom of guidance issued in April and FY revenue was up only 5.6% for the full year. EBITDA was positive (but unquantified) in H2, compared with -$900k in H1. Positioned well for accelerating growth -- according to the company -- but no guidance given at this stage.

Here's the key figures:

• Q4 sales order intake of $9m, second highest on record (pro forma), 50% above preceding quarter and 17% above previous 4th quarter
• The company brought in $35.3m in sales across the full year -- 14% up on last year
• The sales order backlog of $8.5m compares with $3.5m a year ago.
• FY24 revenue of $30.2m compared to $28.6m in FY23, representing growth of 5.6%
• At the end of Q3 in April, they said they were expecting $16-20m in revenue for the second half. Given they did $14.2m in H1 revenue, the result was at the very bottom of the range
• Telstra supply agreement disrupted a bit by restructuring within Telstra

My view: good to see a decent lift in sales orders and the partnerships with some big clients seem to be progressing well. Nice to see some cross-sell wins, and extensions to previous contracts. But material growth remains elusive.. Still, at 1x revenue (pre market open) it's not exactly priced for much growth. With the *potential* for good operating leverage, and some major trials in the pipeline, FY25 could be the year we finally see some good earnings growth.

If not, I'll concede defeat and move on.

A new contract win. Not a lot of detail, but the ASX announcement is here

AUD$700k isn't huge, but not insignificant either. The more interesting thing is that the counterparty -- Johnson Controls Inc -- is quite a big company. It's listed on the New York Stock Exchange under the ticker symbol JCI, and valued at $45 billion.

From what I can see, it is extensively involved in the management and security of various types of critical infrastructure, including electricity substations. But I cant find an exact number. The related segment generated around $2.8b in revenue in FY23, so I assume it's a lot more than the number of sites associated with the AVA contract. Moreover, it looks like they manage a significant portfolio of infrastructure assets and buildings.

Johnson Controls manages a large portfolio of buildings and infrastructure, with a substantial focus on security. The Building Solutions segments contribute significantly to the company's revenue, driven by a wide range of security and building management products and services.

If they like what AVA provides, there is potential to substantially broaden their use of the Aura tech. And it seems there's an increase in intrusion and vandalism at sites across the US.

I wont extrapolate too much, maybe this is just a bespoke, one-off type deal. But it's encouraging.

The market, of course, is like "meh" :)

Blimey -- AVA really can't catch a bid.

It's very thinly traded, so maybe I shouldn't put too much weight on the drop today, especially in the absence of any news (at least any that is ASX disclosed).

Anyway, shares are basically trading on 1x sales! And that's with the business reaffirming guidance at the latest quarter for a 20% lift in H2 sales (at the midpoint) and positive EBITDA. Not to mention the much touted operating margin expansion Mal reckons he can deliver.

This thing is either super cheap, or management's grand plans are built on nothing but unfounded hopium..

Time will tell, but I'm continuing to hold for now.

Not a terrible Q3 update from AVA, but not great either.

Sales orders are up 15% comparted to the same time a year ago, and they have $8.6m in order backlogs (2/3rds will be converted to revenue this financial year).

The company still reckons it will do $16-20m in H2 revenue (the wide range due to the timing of project delivery). They did $14.2m in the first half of FY24, which means the full year figure will be between $30.2m-$34.2m. That's exactly what their 3 year outlook calls for, and the outlook is unchanged from what they said in March.

Still, this picture is worth a thousand words:

Growth may be 15% for the FY-to-date in sales orders, but it was Q2 that did all the heavy lifting, and the most recent quarter is down on what they did in the previous corresponding period. Detect was underwhelming due to project timing, and Mal said he expects to finalise various opportunities in the last quarter.

So, it's great to see they are on track to hit their guidance, but what we really need here is an acceleration in sales. You have to give some slack for the variability of revenues, but the market probably wont move much until there is some very clear evidence of growing traction.

[HELD]

So what did we think?

Some of my notes from the meeting.

In regard to the Telstra deal:

• The supply agreement with Telstra is material and fundamental for AVA. Telstra is one of the biggest fibre operators in the region and the 10th largest telco in the world.
• The due diligence process with Telstra was extremely thorough, taking 7 months, which gives some confidence that it is a solid commercial deal. 
• The agreement covers all of AVA's product SKUs across its three divisions. AVA expects one of the divisions to see commercial impact first (in a "surprising way").
• As part of the deal, AVA and Telstra have a major program review each month to go through every opportunity. The agreement is with Telstra corporate, giving AVA access to every Telstra business unit.
• No minimum purchase quantities are defined as it is a supply agreement. But Mal emphasized that Telstra would not go through the arduous 7-month process if they didn't intend to purchase.
• The deal gives AVA credibility with other large customers globally. Other companies have already engaged with AVA as a result of the Telstra announcement.
• AVA is providing Telstra the base fibre monitoring data on which Telstra can build its own application models and services. AVA monetizes through its hardware, software and support.
• Mal portrayed it as a landmark deal for AVA that provides significant growth opportunities, credibility, and a long-term revenue stream, even without guaranteed minimum volumes.
• He clearly thought the ASX was unreasonable in it's "please explain" -- saying that a supply agreement was exactly that, and he couldn't easily add more specific financial detail.

In regard to the capital raise:

• The board and management considered various capital options, including the raise, debt facilities, and trade financing. The decision to raise capital from shareholders and institutions was deemed the most sensible approach to underpin the company's growth.
• The capital raise was driven by the success of large deals and to ensure AVA had sufficient capital to support that growth. McGinnis emphasized that the raised capital was not needed to run the business but to give them an extra buffer.
• The $20 million in sales order intake during the first half of the year had an impact on capital requirements. While the company is currently well-positioned, the raise provides additional firepower if any large opportunities arise.
• The dividend paid out after Q1 did not have a material impact on the capital base and aligned with the board's stated dividend policy and commitment to shareholders. In total, the special dividend amounted to <$500k so it wouldn't have made a difference if they had kept the money.

In regard to the tweaked 3-year outlook:

• When Mal joined AVA, he set a 3-year strategy based on calendar years, but this caused confusion (which he said was an error on his part)
• The reason for providing a range in the outlook is due to the timing uncertainty inherent in AVA's program-based business. The low end of the range is based on higher confidence levels from existing backlog and near-term opportunities, while the high end factors in less certain, longer-dated projects.
• Contracts in the latter part of the second half of each fiscal year, particularly those in the second half of FY26, are difficult to predict accurately for forecasting purposes, hence the range.
• He emphasized that the change in the outlook range was primarily a function of the timing adjustment from calendar to fiscal years and the inherent challenges in precise forecasting given AVA's project-based revenues, rather than a fundamental change in the business trajectory.

Miscellaneous:

• The fixed cost base is set at $19m for the foreseeable future, although if justified by sales this could increase by a further $3m in FY26. But he really doubled down on this and stressed the operating leverage of the business.
• His focus was all about driving sales orders and turning that into free cash flow
• He put the share price performance down to negativity in the small cap space, and that the market likely wanted to see some real runs on the board.
• AVA is working on integrating its products across divisions, with the LORA illumination product connecting well with the detect fibre business
• The company is looking at opportunities 3-4 years out and targeting large infrastructure projects. AVA's pipeline is 3-4 times the size of its revenue, giving management confidence in future growth.

I think Mal gets it -- he needs to deliver some tangible results, but believes that after his first year the company is now well placed to execute. Let's see!

[HELD]

Cap raise inbound!

Let's wait until we see the details, but i suspect the cost of capital could be up there. And if it's just for 'working capital purposes it's more difficult to swallow. Perhaps another situation where a line of credit would be more appropriate? Anyway, getting ahead of myself.

We will see.

A good part of today's results were known, following the company's Q2 update less than a month ago.

The best parts being strong sales order growth of $12m in Q2. (And I guess the company reckons this is a pace they can maintain given they thought to annualise this in today's preso..) This has been underpinned by some large value contract wins, and there's a healthy sales back log to give some confidence in a decent second half.

The recent Telstra deal was highlighted, and although it was a botched announcement, it's clearly a deal with some interesting potential (albeit one that the company isn't able to quantify).

Still, the detect segment saw a decline in revenue of 8%, following a weak first quarter. As AVA said at the time, that was mainly due to some timing issues with bigger contracts in Q1, and we did see a very strong Q2 in this segment, but overall it was a weaker half compared to the pcp. AVA reiterated it expects a strong second half here. I hope so.

Part of the issue with AVA in recent periods is that one segment seems to always zig when another zags. And it was the Access segment that did all the heavy lifting this half, and that was largely an stocking event associated with the distribution deal with dormakaba.

But Detect is the biggest segment and that meant total EBITDA dipped back below neutral and continued R&D and inventory expansion saw a $1.8m drop in cash -- there's now only $1.8m in cash left. They said the cost base will stabilise at the current level, but the risks of a capital raise are perhaps higher than I first expected.

The biggest new news for me was a revised 'outlook' scenario, which they have now aligned with financial years.

Before it was this:

Now it is this:

So essentially the same, but clearly the real expansion in operating margins is not expected to start showing up until FY25.

Using the mid-points above, you get only a 5% EBITDA margin for FY24, and basically nothing at the lower end. Yes, things start to look very good after that, but they're basically saying to not expect much this FY. Beyond that, you just need faith these targets are somewhat reasonable.

Maybe they are, and I'm sure they're put forward in good faith, but until we see good evidence in the financials there's a good amount of faith that is required.

Later in the deck they again reiterate the target for $70-100m in revenue over the next 3 calendar years, with minimal cost increases. And given what they have above for FY26 ($57 -- 71m), and with a good chunk labelled as 'adjacencies' (ie. currently untapped applications of their products), I'm a bit nervous there's a fair amount of "hopium" in managements outlook.

Maybe they're right to be optimistic, and there really is good growth in sales orders, but we're yet to see this translate into anything exciting in the statutory numbers.

There is potential for some acquisitions to help the company reach it's goals, and that can be good cover for a capital raise, but this type of growth isn't always accretive to shareholders and has all kinds of risks. I don't think their GJD purchase is doing much for them yet.

There's clearly some big potential for AVA, and I know that building the foundations for growth always take longer than you think to build, and for that to deliver accelerating sales traction, but this one really is testing my patience. Especially with some recent communication blunders.

Hopefully we can get a better picture of things when we speak with the CEO next month.

Not a lot of extra info here:

All we can surmise is that the contract is "significant". But it seems there is no minimum spend, and AVA are at pains to avoid mentioning any specific financials.

Maybe there are some commercially sensitive aspects to the deal, but this is frustratingly vague...

AVA has signed a major supply agreement with Telstra, where it will provide its tech to monitor the group's fibre optic network.

AVA will connect its tech to parts of Telstra existing fibre optic network -- effectively making the cable one giant sensor that can be used to monitor and protect the network.

No financials given, other than Telstra has 650,000km of cable. It seems installation should be reasonably easy and low cost -- you're basically adding some detectors to existing cable nodes.

The deal comes after a 10 month of collaboration and trials, and open up a new and significant market for AVA (there is 5 billion km of fibre cabling globally).

So it feels like this is big news, but can't really say for sure without knowing much about the commercial terms. We have a meeting with the CEO in March, so hopefully get some more detail then.

[HELD]

You beat me to it @Bear77 -- agree the update is generally positive, and while we need a solid second half for the company to land in its targeted revenue range ($36-45m), they seem to be suggesting that is very much in play with a "substantively stronger" second half. In Mal's words:

They'll need second half revenue of $22m to hit the lower end of their target range.

In the first half they have secured just shy of $20m in new sales orders (37% growth), with the second quarter representing 61% of the first half total and representing yoy growth of 39%. There's $8.9m in backlog to be fulfilled this calendar year, most of which is project delivery work -- this compares to a $5.2m backlog at the end of FY23.

This suggests (i think) that most of the sales order intake is converted to revenue relatively quickly (ie they added $19.7m in new sales orders in the 6 months to Dec 31, but the order backlog only increased by $3.7m. (someone please sanity check this assertion!).

Still, the reality is that H1 revenue is only 10% higher than H1 FY23, and is at the very bottom of the guidance they issued in October ($14.2-15.2m). The access segment had a great half but this was helped by stocking orders from their channel partners -- we'll need to see some good end-customer sales before we really know how their new Cobalt locks are being received by the market. And Illuminate was flat, albeit with a good improvement between the first and second quarters.

For me, the main game is with Access and Aura Ai-X, which has accounted for roughly 2/3rds of new sales orders. And they really do seem to be seeing some good sales traction there. Group targets aside, even if they 'only' get $18m in H2 revenue, that'll still be annual growth of 15% at the top line. (the previous second half did $15m in revenue, so I dont think that's too much of a stretch target)

Holding gross margins and fixed costs steady -- which is what management have essentially said to expect -- under that scenario you should still get an EBITDA figure that is more than double what we saw in FY23 (from cont. operations) and an operating margin expansion from 7% to ~12%.

The market obviously remains somewhat sceptical (if it wasn't the share price should be easily above 20c imo). But for me I consider the thesis still on track and shares good value. The next 6 months will be telling.

AVA today announced, after market close, that they had won a number of important contracts relating to its fibre sensing business.

In aggregate, it says it is expecting more than $10m in sales orders for Q2, which would be a record for the company and a big improvement on the $8m-odd generated in Q1.

Maybe this will help shake shares out of their malaise when trade resumes tomorrow?

ASX announcement here:

multiple contracts won for ava risk groups aix fibre tech1703050260pdf.pdf

This is a bit better -- a $2-3m contract with UGL Ltd for the groups Aura Ai-x product. It includes a 2 year support services agreement and is for a Sydney transportation project.

ASX announcement link here

Barely warrants a post, but AVA have announced a 5 year support agreement with Sydney Trains valued at $500k.

It's associated with their perimeter detection product, which Sydney trains have been using for some time already.

So it's good they extended the agreement, it's nice to have recurring revenue locked in (and I'm sure it doesn't take much work/cost to deliver on given the nature of the product) but it's very small in the grand scheme of things. Will need a lot of these kind of deals if they are to get close to their aspirational targets.

The announcement was marked as market sensitive, which I thought was a bit odd. It feels too small a contract to be sensitive, and if it is, I'd have hoped to have seen a lot more of these sized deals announced!

Have been away from me desk all morning, but I got an alert while I was on the go that Ava's first quarter update was out. A quick check of the price (as you do) and saw it was about 5% higher -- "must be good news", I thought!

Anyway, just got back in the saddle to have a look at the update and noticed the price is now down 7%.

Not sure how many times I need to be reminded how irrelevant the market price signal can be for small, illiquid stocks. In this instance (at the time of writing) we're talking about a price move that has been affected by less than $50k worth of trades, and where the high and low of the day ranges from 19c to 21.5c

Anyway, having now read the actual update, and thought for myself (as opposed to letting the market tell me what to think), I think the news is respectable.

I'll let you read the finer details yourself, but the big picture takeaway for me is that although sales order intake was basically flat ($7.7m vs $7.8m in the pcp, and $7.7m in Q4 FY2023), the Access segment (locks) finally saw a good bump as product certification was received for their Cobalt Lock range and Ava's partner Dormakaba stocked up, and the contraction in the Detect segment (fibre optic perimeter detection) was seemingly a timing issue with new orders expected to close in the current quarter.

(The illuminate segment was again disappointing with AVA again citing difficult economic conditions in the UK. The expectation is for FTY growth here -- we'll see i guess)

So adding that all together, the revenue outlook for the first half is for $14.2-$15.2m, an 8% lift on H1FY23 at the midpoint.

What we really need here is for all the segments to fire at the same time -- But it seems one always seems to zig when the others zag. As Mal told us earlier this year, this is a lumpy business.

Nevertheless, Ava seems to be winning new customers in the detect segment, they now have new products and distribution in America and Europe and, for what it's worth, management remain very optimistic for the full year:

"..management expects that second half revenue will substantively exceed the first half."

Take from that what you will, but given the margin assumptions AVA have previously released, it looks very likely that they will at least double FY23's EBITDA. Frankly, with FY revenue of $35m and a 14% operating margin, EBITDA could grow by 150% or so.

Anyway, thesis seems to still be on track.

HELD.

Another contract announcement for Aura Ai-X

Relatively small (A$1m), like the one announced recently, but great to see some traction for the product since its launch 6 months ago.

Held.

You can watch the recording for today's briefing here (passcode: B3@&hDEJ)

Some notes from the call

• Mal has been in the role for 8 months
• Sales order intake is the key KPI for the board
• Detect has the longest sales cycles
• Mal called Access a "world leader" & "outstanding business"
• Illuminate largely off the shelf products
• Access & Illuminate are largely distribution businesses, with much shorter sales cycles. But good channel into the Detect offering.
• Commercial side of the business has been completely restructured in just five months
• Aura AI-X launch has been "very successful" with uptake in "critical European border"
• Illuminate gives a great base for expansion into European market, and is where the group CTO is based.
• Detect and Illuminate as a combined offering is compelling, and enables cross-sell
• Sales order intake has mapped to new revenue well, so it does seem like a credible forward indicator.
• Illuminate gross margins are around 48%
• Neville (CFO) said EBITDA margin effectively double and evidence of how well the cost base can scale
• "really well placed" to see an acceleration in orders through Access segment in FY24 as certifications locked in.
• Significant potential for more expansion in the US
• Higher receivables just timing with Detect orders at the end of the year
• Inventory build-up is very deliberate. And has helped maintain margins as prices locked in.
• Mal said plan to grow was still "fundamentally sound" and supported by second half results.
• Recurring and OEM/Distribution revenue to grow to 60% of the base
• First major sales through Dormakaba in current year
• Huge infrastructure growth in MENA
• Corrections and Energy are growth areas in North America
• Geographic reach is significant, with senior execs in each location
• New commercial team have brought existing contacts with them.
• All 3 tech platforms are market leaders
• The market size is huge, and AVA only addressing a very small part at present
• The "hardening of security" is a tailwind
• Net profit is expected in FY24. On the path to profitability "quite meaningfully"
• EBITDA margin should be "solidly" in double digits for current year (currently 7%), around 14-15%
• July & August have seen "solid" orders for Illuminate and Access, which gives confidence for FY24 growth target of 25-57%.
• Licensing deals seem to be low priority under Mal. More focused on the high-end large programs (where there are a lot of opportunities). Mal doesn't want the one-off deals
• Dividends will commence in the next three years

Ava's FY23 results seem good to me. The market disagrees :)

The highlights from their results update:

If you look only at new revenue from the detect segment (an additional $3.8m in revenue), and ignore Illuminate which added $6.8m in revenue following the acquisition of GJD which was acquired in August last year, you still have a 20% lift in revenue. Indeed, around a third of orders for Detect came from North America, which saw a 20% lift in orders received over the year.

In fact, sales orders were up 36% if you ignore the GJD acquisition (up 71% in total). This is a great leading indicator for revenue growth.

Access was disappointing as the company awaits key product certification for the Cobalt 2 locks. Once received, the company expects that to open high quality distribution channels. We'll see.

Gross margins were essentially flat, which ain't bad given the shift in product mix (Illuminate products are lower margin), but the operating margin (ex restructure costs) was up 3% to 7%. A good demonstration of the operating leverage potential. They maintained their slide that highlights ambitions to growth the EBITDA margin to 14% next year, and up to 25% within 3 years. Also had the $100m sales target, which Mal talked about when we chatted with him recently. Very bold aspirations, but not unreasonable in my view.

At the bottom line there was a $1.1m net loss for the year due to higher depreciation and interest charges associated with GJD purchase. (compared to $0.7m in the prior year, ex discontinued operations).

Cash flow was negative for the full year as the business bulked up its inventory in response to supply chain issues. But op Cash flow was positive in the second half of the year. The company has $3m in net cash, but given receivables from recent orders, non-cash depreciation charges and working capital movements, I don't see a big risk of a capital raise.

At a current enterprise value of $46.8m, the EV/EBITDA ratio is 23.4x. That does not strike me as high given the pace of growth in revenue, sales order intake and the demonstrated scalability of the business.

I missed the briefing this morning, but will try and track down a recording and post here.

Full ASX presentation is here.

[HELD]

Some notes from the 4th quarter update today

Looks like AVA will deliver revenue bang in the middle of guidance, somewhere between $28.4 and $28.7m (guidance in April was for $27.6m - $29.6m.)

That means the second half has delivered about $15m in revenue -- 10% up on the first half of FY23 and up 50% on FY22 H2 result.

Sales orders also growing OK -- excluding the GJD which was acquired last August, sales orders increased 13% for the last quarter and were 36% higher over the full year. (up 71% if you include GJD)

Breaking things down across the various segments:

The Detect segment (this is the area that does the fibre optic sensing tech) saw $5.1m in new order intake. For the year, the order intake was $20.7m (an increase of 55%) which was in part driven by the new Aura-AiX product. Still, order intake was $6.4m in Q3, so that's a drop quarter on quarter.

The Access Segment saw a 50% lift in new orders from Q3 to $1.1m, but was down 17% for the full year. Not great, but apparently things have been held up by attaining product certifications in various channels.

The Illuminate segment was very "meh", generating just $1.5m in new sales orders in the last quarter and $6.3m for the full year. The company blamed challenging conditions in the UK.

Sales orders tend to be pretty lumpy, as can be seen above, but I am encouraged to see the Detect segment -- by far the largest -- making some progress. There's been a real dearth of announcements, so it seems this is a story of a lot of small wins, rather than any single large contracts.

If AVA are to hit the lower end of their 3 year aspirational target ($70-100m), they'll need to do at least 35%pa top line growth from here. We need to see increased momentum on an organic basis if they have any hope of doing this. We're speaking with the new CEO tomorrow, so it'll be good to get some more detail. And the full year results will be out in another month, and I'm pretty keen to get a sense of what margins look like.

Disc: held.

Pleased with the latest from AVA.

ASX announcement here

The number of new sales orders was 47% higher, thanks in large part to the acquisition of GJD. However removing this still shows a 15% jump in the sales intake for continuing operations.

Statutory revenue was up 50% to $13.6m (looks like about 16% higher without GJD). And EBITDA margins rose to 9% to $1.2m (the pcp was messy due to divestment of Services division and IMoD contract, but excluding these the EBITDA margin was 2.5% for continuing operations last year).

All segments delivered growth. And the business seems to be scaling well.

Operating cash flow was -$2.2m due mainly to changes in working capital (increased receivables and inventory due to increased orders and recently completed projects), and also added R&D. There's still a bit of padding on the balance sheet with net cash balance of $4.4m, after subtracting $2.7m in borrowings.

AVA reiterated that over the next 3 years they expect $70-100m in revenue at 25% EBITDA margins. Even at the lower end of that range, and assuming 20% EBITDA margins, that's $14m in EBITDA, or 6x higher than the current annualised level.

If they do that, you'd get a 10% average annual capital gain so long as AVA trades at a EBITDA multiple of 6x or above at that point. At the upper end of guidance, EBITDA comes in at $25m.

Anyway, aspirations are one thing, delivery is another. As of this point, shares are trading at roughly 26x annualised EBITDA.

But i see a business that is growing well, with improving operating margins (and stable gross margins), industry tailwinds, and that is likely to be self-funded (in the absence of an acquisition).

Held.

Decent result from AVA it seems.

Revenue from continuing operations expected to be up 50% to $13.6m (guidance was for $13-15m)

Sales order intake up 16% if you exclude orders from GJD acquired in August 22, but 47% if you include. Existing FibreOptic and access control businesses saw sales grow 15% and 21%, respectively. Good momentum into north American energy sector with more sales expected. New CEO says they expect continued growth and operating leverage in second half. Received "strategically" important orders for AuraIQ.

Next half we'll get a full 6 month contribution from GJD, but on a pro-rata basis AVA is on 2x sales.

Growth continuing, strong balance sheet, CF positive, undemanding valuation and doesn't seem to be facing any real headwinds. Valuation, undemanding.

Held.

$300k to install Aura IQ in combination with a fire detection system at a iron ore terminal in Brazil. Due to occur first half of calendar 2023.

Client is a joint venture between Anglo American and Prumo Logistica.

Again, not overly material, but good to see some orders coming through and that the sales pipeline remains strong.

ASX Announcement

This isn't overly material in it's own right (in dollar terms), although new deals are always welcome.

Where it's noteworthy is that this is the third implementation for this facility, and is replacing another system. That is, the customer gave it a go, found it superior and is extending its use -- all after only a few months since the first system was installed.

And, as the statement says, more sales are expected down the track.

We know from speaking with Ian Olson from Pointerra that the energy sector is very cooperative in the US (they don't directly compete and there is a large sharing of ideas and solutions). I can imagine this will become an important reference site for AVA in the US utility sector.

Disc. Held.

Looks like Rob Broomfield is retiring.

I'm not sure of his exact age, but he started his degree in 1978 so i'm guessing he'd be around 65. He's staying on for a further 3 months, will be doing consulting for a further 12m and the Chairman had a lot of nice things to say about Rob in the announcement -- so it all seems very amicable. He also said he remains a "committed shareholder"

Given they already had a replacement lined up, I'm assuming the board knew this was coming.

Rob will be replaced by Mal Maginnis, formerly the president of Rapiscan Systems, an airport security firm which did close to A$1b in revenues in FY22. Mal has 35 years experience in the security sector.

It seems the team at AVA have some history with Mal, having known him for some time. I've also heard from a broker that Mal was the person who recommended the recently appointed global head of sales Jim Viscardi -- whom he worked with at Rapiscan. So the chemistry between sales and Chief Executive is well established

The remuneration package seem appropriate for the role and size of the company. $330k pa fixed (Singapore dollars, which is about $360k AUD). Plus he gets 1,000,000 shares vesting annually in 3 tranches over 3 years -- about $185k at today's share price.

He'll get another 500,000 shares per year for 3 years, if the share price is 20%, 40%, and 60% higher from his start date.

ASX announcement here

Let's see if he can kick some goals.

A few notes from the management call:

• The support agreements have potential to be a significant contributor to earnings. The company has a near term target of 250 systems, each of which they expect $20k per year from. ie they are hopeful of initially building this to $5m in revenue and expect it to be very high margin (i took it as north of 90%). Most of the support is essentially systems upgrades which can be delivered remotely, and don't require any changes to hardware.
• Rob acknowledged the disappointing pace of progress with AuraIQ, and said it was essentially a function of the how fast the Proof-of-value trials were within existing mine sites (ie. he seemed to suggest this was outside of their control). That being said, future sales will point to reference sites and won't need to go through a POV trial. Rob said he expected a "significant uptake in FY23" for AuraIQ and also reiterated the target of $50m-plus in annual revenue from this system.
• There remains huge scope for this type of product across 'smart cities' and Rob emphasises that these weren't pie in the sky aspirations, but rather things they have already demonstrated and even had existing customers for. The group's domain expertise in this area was unparalleled, according to Rob.
• In terms of licensing sales, existing clients (both in India and Brazil) were keen to do more of these, but the company wanted to see them successfully implement existing sites first. They said they "wouldn't get out of bed" for any licensing deals that weren't in the "millions of dollars".
• Cost base, as it stood at the end of FY22, and including GJD, was "representative" of what it would look like going forward.
• The company expects operating margins to improve significantly as it scales. The CFO suggested "double digits" compared to 4% at present.
• The company was very optimistic about GJD as an acquisition. It provides material distribution capacity for BQT products in Europe and GJD's existing product set was very complimentary to FFT. Importantly, they expected minimal integration effort/cost.
• AVA is not focused a lot on other acquisitions, but where it made sense there could be 1 or 2 strategic purchases in the coming years.

AVA reported revenue of $19m, in line with what they suggested at the last quarterly update. That's a 25% drop from last year, even when you exclude the now sold services division, but it's a 12% improvement when you take out the license fee revenue for the Indian Ministry of Defence (IMoD) and covid grants.

nb: We shouldn't easily dismiss the IMoD revenue from previous years, but this type of (extremely high margin) license revenue is always going to be lumpy. So stripping them off does offer some insight into 'core' operations, which pretty much seem to be chugging ahead nicely. Hopefully we see a few more significant license fee deals -- and in fact there's one due to start in Latin America this year -- but we shouldn't extrapolate too much from them.

It was also good to see the gross margin lift to 65%, especially in light of the current macro backdrop. This was a feature of more sales from the higher margin FFT segment. So overall, again focusing on core, continuing operations, gross profit was 14.1% higher.

Moving further down the income statement, added expenses saw EBITDA drop 10.4%, with the operating margin moving from 5% to 4%.

This was because R&D, sales and marketing, office and travel costs were all higher -- about 63% higher to almost $3m for the full year. That feels like a lot, but all told it's an extra $1.2m and this expense is to help penetrate into new markets and underpin future growth.

Indeed, revenue for North America, which is the stated priority region, saw revenue double for the year.

Operationally, the business is investing further in machine learning processes to help improve the efficacy of detection systems, and increase the attractiveness of long-term support contracts. Indeed, AVA has 52 support contracts signed -- up from just 4 last year. This will hopefully become a good source of recurring revenue and improve client retention by ensuring they are getting the most out of installed systems. In fact, they have 2,500 customers in their existing install base, so there should be a good deal of low hanging fruit here.

There wasn't much on the new Dormakaba agreement, other than there was "significant momentum" in performance as of the end of FY22.

Management did warn that although they had navigated global supply chain issues successfully, they expected the situation to remain challenging in FY23.

Although the company distributed $38.8m back to shareholders during the year (due to the sale of the services division), the balance sheet remains in excellent shape with $15.2m in cash and no debt.

All told, we have a business that looks to be at a decent inflection point. With the company now firmly in the commercialisation phase, and with some encouraging momentum, there's good potential to scale from here -- something that should multiply any top line growth. And, importantly, this is cash flow positive, with a strong balance sheet.

$66m market value (at time of writing) gives a 3.5x sales multiple, or EV/EBITDA of 64.

I'll dial into the results call and update on any insights.

disc: held here and in real life

AVA has announced that it has secured 2 new contracts to supply and install its Fibre Optic Intrusion Detection system within the US Energy sector. In total, these contracts are worth US$800k and will be fulfilled in the current quarter.

For context, these sales represent about 6% of total technology sales for FY22.

The first contract is for US$500k and is a rollout for a second site from an existing customer. When the first order was announced in June, it represented a record energy sector sales order.

The second is for US$300k, and is for a new customer.

Always good to see an existing client deepening their relationship -- it's a strong signal they are happy with the value prop.

Also encouraging to note that AVA reckons it has identified other critical assets in this space and are currently pursuing these. Here's hoping the expanded resourcing in North America continues to pay off.

AVA has acquired UK based GJD Manufacturing, a security equipment designer and manufacturer focusing on intruder detection systems.

The equity value of the deal is A$7.82m, of which 60% will be paid in cash ($4.7m using the current cash reserves of $15.2m), and 40% in AVA shares (11.8m shares worth $3.13m, or 26.5c per share, with shares being in escrow for 12-24 months).

in FY21, ending September 2021, GJD did A$7,95m in revenue and A$1.6m in EBITDA. So the purchase price was 4.9x EBITDA.

You can dig into the details here, but it looks like the idea here is mainly to gain access to GJD's distribution and customer network, with AVA able to compliment the existing product set with FFT and BQT products.

At a high level, it seems a reasonable multiple was paid, there's less than 5% dilution, and no discount to the market price for shares. It's hard to get a clean read on AVA's normalised EBITDA after the divestment, and while the business is still driving towards scale, but a simple pro-rata of the first half results would suggest there's a significant multiple arbitrage here, and so using equity to fund 40% of the deal seems like a prudent move. Especially to help align the incoming management team, and it helps keep the balance sheet in a very sound position.

The real question is just how much sales of AVA products are boosted through the improved access to the UK and European markets.

@jayjayjayjay @juneauquan

Yup, I hear that re AVA Risk. Although here's another take in a classic example of endowment effect rationalisation :)

For me the issue isn't whether they met some expected quarterly deadline. If it's just a case of the sales slipping to the next quarter it's not a big deal for me. I'm far more interested in the general trajectory. The timing of these things is always hard, especially for companies dealing with rather long sales cycles (clients will often drag their feet for a variety of reasons). The bigger error, to my mind, is that given the nature of things for these businesses, management feel it necessary to provide such specific guidance. I know they face a bit of pressure from analysts but, frankly, who cares what these promiscuous, fair weather friends want?

If I was running the shop, I'd just be a lot more vague in terms of near term revenue expectations. Of course, give owners (us shareholders) as much info as you can without compromising any commercially sensitive stuff. But even your best guess at next quarter's revenue is likely to make you look like a fool (or worse).

Also, I know it's not a popular opinion, but I rather prefer companies to release market sensitive announcements after close on a Friday. It gives us investors the maximum amount of time possible to reflect and form an opinion before trade resumes. Buffett has said the same thing.

Of course, I get that it looks dodgy, and plenty of crappy companies do this, but honestly, has such a tactic EVER worked? Like, in the entire history of the market, has anyone really not noticed bad news just because it was released on a Friday? As tactics go, it's a pretty stupid and entirely ineffective one in my opinion.

Anyway, I'm just looking for a positive spin at this point. Given the choice I'd far prefer a guidance beat!

My forecast for FY22 sales for the technology division was $21m -- and it looks like they will do about $19. Well, Yogi Berra did say that it’s tough to make predictions, especially about the future..

Still, excluding the IMoD revenue from FY21, that represents 12%-odd revenue growth for the FY22 year. Not as high as I would have liked, but a pretty good match on the growth in sales order intake (a horrible metric imo) they reported.

Let's hope their "strong" sales pipeline is indeed strong, and that we'll see good conversion. I'll be keen to see more detail when they report FY results on August 26

AVA has *finally* secured its fist Aura IQ contract with a "leading global manufacturer of conveyor systems" (this is the product that monitors conveyor belt systems -- see here)

The contract, however, is tiny, clocking in at $300k, although noteworthy in the sense it is commercially ready and something of a milestone.

CEO Rob Broomfield said "Additional contracts...are progressing through procurement processes and are expected over the remainder of calendar year 2022".

The company has previous said that this is a $50m pa opportunity (annual sales are presently around $20m).

Interesting to see this news being released the day after a 10% spike in the share price..

Full announcement here

AVA Group chairman, David Cronin, bought an additional $100k worth of shares today.

He now holds 33.3m shares, or 13% of the company.

Ava has won a $0.7m contract to supply its intrusion detection system to a major US energy facility (see here). It should be fulfilled this year, and I estimate it represents roughly 4-5% of pro-rata sales wins for FY22.

So, relatively, it's fairly material in size, and also noteworthy for being the largest win in the energy sector -- an area the company is targeting and has so far won $1.8m in sales year-to-date.

Excluding divested operations, the company remains on track to generate in excess of $21m in revenue this year with 66%-odd gross margin -- a roughly 20% lift from FY21 when ignoring the IMoD contract -- and is presently being valued at $46m by the market.

Ava last week released a trading update (see here)

Q3 FY22 sales orders were $2.8m, and on a year to date basis were $13m, which is 17% higher than a year ago (excluding Indian Ministry of Defence). Seems pretty good, but the 3rd quarter itself was underwhelming -- but by exactly how much is hard to say. For reference, they reported $3.2m in Q3 revenue last year...but revenue is not sales orders.

What I've found confusing is the switch between reported revenue and confirmed sales orders in different quarterly updates. I really can't stand it when companies lack any consistency in their reporting -- at least not without good reason, and clear explainers! Plus we have the divestment of the services division, and the Indian Ministry of Defence license fee to try and account for.

For example, in the recent first half, AVA had sales order intake of $10.2m (the addition of the latest quarter's $2.8m is what gives them the $13m YTD figure). But in the first half, revenue from the technology division (ex IMoD) was $9.1m. Similar, but not exactly the same.

In this 3rd quarter update, they only discuss order intake, and make no mention of revenue. And certainly nothing that gives us a clear Q3 FY22 vs Q3 FY21 comparison. Maybe I'm missing something (?) so let me know if anyone else has a clearer read!

Anyway, moving on...

AVA has a confirmed sales backlog of $5m, of which $2.6m is expected to be realised in the 4th quarter. So that's $15.6m in confirmed sales order for the full year. Plus whatever else they can win and book during the quarter.

Again, not sure how that compares on a like-for-like basis with last year, in terms of sales orders. In terms of actual reported revenue, AVA did $16.9m the Technology segment in FY21 if you strip out the IMoD.

So i'm finding it hard to get a read on the nitty gritty here. Any help would be appreciated!

The BQT segment did show a good lift in sales orders in Q3, but this should be expected as their partners bulk up inventory. FFT, on the other hand, showed a big decline -- something they explained by a seasonal slowdown and timing of orders, with the 4th quarter expected to return to the first half run rate. Still, this was the weakest quarter for FFT we've seen for some time, roughly 1/3 lower than the previous corresponding quarter (but that's just guessing by squinting at the provided chart -- no actual figures provided!).

Zooming out, Ava reiterated guidance for $31.3-33.3m in FY22 Revenue. BUT, some of the FY revenue is from the now divested services division. Revenue related to the remaining technology segment is expected to come in at $20.2-22.2m, and that compares to $24.7m in FY21 (a 14% drop at the midpoint). HOWEVER, no revenue is expected from the IMoD license this financial year, so if we normalise for that, and treat FY21 revenue as $16.9m, we have a like-for-like revenue growth of 25%.

That being said, management did insert a pretty big disclaimer, saying "forecast revenue is contingent on the fulfilment of orders expected to be received during Q4 and that supply chains remain unimpeded."

So, yeah. A lot of if's and but's there, and it's all pretty muddy to my mind. I definitely think there's a lot of improvement that could be made in terms of shareholder communication. (Or maybe i'm just not smart enough to tease it all apart better)

Still, if I'm right (and i may be way off base here), we have a business whose core operations are experiencing very solid growth, which have a very decent runway, and with the potential for some other big kicks -- such as another license deal similar to the IMoD (which is essentially 100% margin), the dormakaba agreement, and the long touted AuraIQ product..

Indeed, the company said it was confident of receiving their first order for Aura IQ "in the near term" -- but as others have noted, this has been promised before... Supposedly there were some delays as the company looked to integrate this system with existing fire control fibre, and this work has been finalised and the approach validated at the end of the quarter. Ava says that "based on the successful integration, purchasing approvals within the global mining company have recommenced and are expected to be completed within Q4.

We will see!

Based on what Rob told us at during the Strawman meeting, we can expect the cost base to remain unchanged, and that we'll get something like a 66% margin on core technology segment operations. So if we see continued growth, the current 3%-odd EBITDA margins have the potential to expand considerably. And, unlike a lot of growth companies, the business is cash flow positive with a strong balance sheet.

You're looking at a business currently on a forward price to sales of 2.6x -- which is a pretty crude yard stick. But my valuation of 30c still feels about right given what i think are reasonable assumptions.

I hope you found the discussion with Ava's CEO Rob Broomfield useful (recording here if you missed it).

Some key takeaways for me:

• The services business was very successful, but continuing to grow it would have required a lot of capital investment. Rob said that selling the business for a good price and focusing on the tech operations (which have better economics and growth potential) made more sense. With much of the money being returned to shareholders, I think that demonstrates a tight focus on return on equity, shareholder value creation (senior management and the board are large shareholders) and management's optimism for the potential of the remaining business. You don't sell a profitable, fast growing segment if you're pessimistic over the rest of the business.
• I think the focus on partnerships and licensing also shows great capital discipline. Leveraging these means a lower share of the end-customer spend, but it's very high margin (100% in terms of IP licensing) and means the business doesn't need to ramp up expenditure on sales, manufacturing etc and gives very fast access to new markets.
• Sales cycles can be long, but once a customer is onboarded they are very sticky and often have a lot of upsell potential in regard to other sites.
• The secret sauce of the FFT business is really the IP associated with extracting a reliable signal from the cable network. With machine learning and AI enhancements in recent years this advantage is being further entrenched, and the company enjoys the benefits of being a first mover in this space and having access to a lot of data for ongoing optimisation and training.
• The technology can be augmented onto existing fibre optic networks, making it more cost effective and significantly broadening the use case
• in regard to BQT, the Dormakaba agreement is set to substantially grow revenues -- and all at significant margin. EG they have 80 sales reps in the US alone. Previously this delivered less than 500k in annual sales, but over time should be significantly enhanced.
• The cost base should be fairly well contained, so I'd expect operating margins to be substantially higher at scale.
• Have a long-standing a capable core development team, but will outsource some work that is not IP sensitive.
• Covid did prove challenging in terms of running trials and access to customers, and also in access to components.

I might have missed a few other things, so please feel free to add any observations.

Full disclosure, i own AVA on SM and in real life and I plan on adding to my position. So I'm biased, and would really welcome any bear case arguments.

Overall, i think this is a business with an outstanding, long-standing and aligned management team, with a strong balance sheet, growing sales, capital light structure and attractive economics.

Sales will be lumpy though, and given covid, the IMOD contract and Services divestment, this full year probably wont be that exciting. But in the years ahead i see significant growth opportunity. I have a conservative valuation of 33c (20% above the current price), but there's more upside over the next 3-5 years if they execute well.

Finally an update from the ATO on AVA's proposal to return $39.2m back to shareholders.

Unfortunately, the ATO was only prepared to treat $7.567m of this as a capital return (a mechanism that would allow shareholders to defer any tax). That's equivalent to $0.03114 per share. They will seek shareholder approval for this at a special meeting on the 22nd April.

As such, AVA will distribute the rest of the money as a special dividend of 13c per share. Sadly, this will be unfranked (they simply don't have any franking credits to distribute given they have barely had to pay any tax due to the use of carried forward losses).

The record date for the dividend payment is 28th of February, which means anyone on the share register at that stage is eligible. Given the settlement period, that means you need to buy shares no later than the 26th to be eligible.

Obviously, a full capital return would have been the most tax effective method of returning excess money given AVA's situation, but there's little they can do if the ATO isn't going to play ball. Still, the fact they are returning this capital, and are not tempted to invest it on an acquisition or new capex shows a good bit of discipline to my mind.

This was a solid result from Ava (see here)

The group's technology division -- now the core focus after the divestment of the Services business -- received confirmed sales orders of $4.9m, a 63% improvement on the previous second quarter despite some covid related impacts. Year to date, Ava's tech division has generated $10.2m in the first 6 months of the year, a 42% improvement.

The FFT segment was the key driver of the improved result, with significant growth in the US market, up 150% year to date. Military installations and solar farms were called out as especially strong.

The company also has a confirmed order backlog (awaiting fulfilment) of $4.2m -- the majority of which is expected to be realised in FY22. Note that this excludes the Indian Ministry of Defence (IMOD) contract, which the company doesn't expect any material contribution from for the remainder of the year.

The new Dormakaba agreement came into effect at the start of 2022, and an initial order is expected before the end of January. I expect the blue part of the chart above to become more meaningful as this starts to ramp up.

The balance sheet remains insanely strong with $55m in cash and no debt, although $39.2m of this will be returned to shareholders (about 16c per share) as soon as they (hopefully) get a favourable ruling from the ATO. As a business delivering free cash flow, even after the return of capital, the balance sheet will be in very good shape.

The company also reaffirmed guidance of $20.2-21.2m in H1 revenue and EBITDA of $2.2-2.5m. This will include 3.5 months contribution from the divested Services segment. Still, removing this and accounting for the 16c cash return, you have a high margin, fast growing, profitable, well funded technology business, with an attractive market opportunity, that's probably on a Price to Sales of roughly 3x.

Will be good to get a "clean" set of results, but the business just seems good value to me.

The global agreement with Dormakaba announced today, was foreshadowed at the AGM and has been a stated strategic goal.

While there was already an agreement in place, it was limited to just a few countries and generated less than half a million per year. This new agreement opens up all the markets that Dormakaba operate in, including new ones in Europe and the US. (Dormakaba's website says they operate in 130 countries)

Details of the revenue share weren't disclosed, but obviously AVA is taking a cut to gross margins in order to leverage Dormakaba's distribution. In principle i think that's a smart move. As management have said, they expect operating expenses to remain steady, and will only need to fund extra working capital for production and inventory.

The alternative would have been a big ramp up in new offices and staff costs, higher risk and a longer timeframe.

Sales are expected to start as soon as next month.

Disc:held

It wasn't a great quarter for Ava, with revenue for the first 3 months of FY22 down 7.7% on the 'normalised' first quarter of last year (removing impacts of large contracts, FX and covid impacts) to $15m.

That's down ~12% from the statutory Q1 result from last year, which came in at $17m (73% higher than Q1 FY20).

Group EBITDA, including the now divested services division, was just $2m, compared with $7.7m last year. That's in part due to the gross margin dropping from 49% to 38% as a result of Indian Ministry of Defence (IMOD) license fees, and weaker margins in the services business.

Looking ahead, the company gave first half guidance for $20.1m-$21.2m in revenue and $2.2m-$2.5m in EBITDA, that's compared with $35m in revenue and $12m in EBITDA for the previous corresponding period.

It's a BIG drop, but there's a bit of nuance needed here.

The current quarter will only include 18 days worth of contribution of the services division -- a segment that delivered ~$10m in revenue for Q2 last year. So on a like-for-like basis, completely stripping out the services division for the first half of last year and the current year, the first half revenue guidance represents first half sales in the remaining technology segment of $7.6m, down from $16.6m last year.

That's still a big drop, but the first quarter included zero licensing fees from the IMOD (last year it generate $7.8m in total for the group). Big deals like this and the Australian Department of Defence will naturally lead to some lumpiness.

The good news is that the order intake for the core Future Fibre Tech (FFT) business was up 53% on last year and up 8% on a strong 4th quarter of FY21. The order backlog was also up ~50%. Again stripping out the IMOD contract, FFT quarterly revenue just reported was up 40% from a year ago, and 23% above last year's quarterly average.

The BQT segment was impacted with site closures due to covid, but here the outlook is also encouraging -- especially with their licensing agreements. This model gives them less revenue per sale, but is much more scalable and yields 100% margins, and allows them to leverage of partner networks.

Overall, i can't see any structural issues with the business and in fact see AVA as well positioned to capture further growth. They have a strong position in a large and growing global market, with long-standing, top tier blue-chip clients, a highly scalable business model, with an expanding use case, aligned management a rock solid balance sheet.

All that being said, we need to see some good sales momentum build in the coming year.

Ava Risk group has reported net operating cash flows of $4.4m for Q2 -- up $0.7m from the proceeding quarter and up $4.6m from the same time last year.

$2.6m was from the Indian Ministry of Defense (IMOD) and the same amount is exected in the current quater. After this, most of the contract value will have been paid but the business should remain cash flow positive.

AVA has $13.4m cash at the bank. 

Ava Risk Group has released a very encouraging first quarter report.

Sales for the 3 months to to September 30 were 73% higher at $17m, with EBITDA up a massive 522% to $7.7m (45% margin).

The services division reported $8.1m in revenue with EBITDA of $1.6m. Improving economies of scale helped lift gross margins to 33% (compared with 25% in FY20). But it was the Technology segment that really propelled operating profit, with $6.1m in EBITDA being generated off $8.9m in sales.

You can read all the detail here