This article is about Vimicro (VIMC). Generally speaking there are two kinds of businesses. The first are the innovative revolutionaries who bring a brand new concept or idea into life. These companies fundamentally change the way things are done and can go on to be wildly successful. One of the most obvious examples is the motor industry that was pioneered by men like Henry Ford or the aviation industry that was able to grow from humble beginnings inspired by the Wright Brothers at the beginning of last century.
The returns from this kind of business can be incredibly high, but because they are taking an unproven and untried concept, the risks are also huge. For example, while flying cars and jetpacks have been talked about for decades, no company or individual has ever come close to successfully commercializing one.
The second type of company is one who takes an existing concept or idea and refines or improves it. These are companies who are able to adapt a product to the changes that the environment demands. For example, Amazon and Apple foresaw the decline of physical books and magazines and created e-readers and iPads to target the new market. The core product, of words and pictures on a screen, stayed exactly the same, but these companies figured out a better way to deliver them.
Again, the rewards for doing this can be high, particularly for those who act early and are therefore “first movers” who can build viable customer bases because of favorable contacts, geography or timing.
That’s exactly what Vimicro International Corporation (VIMC) is doing in the realm of surveillance and video processors in several markets. Their business model and execution has seen their share quadruple by over 400% this year, from under $2 to highs above $10.
So is Vimicro poised to capture more market share and profits and continue it’s stellar price run through to the end of the year?
Understanding the Business
Vimicro (VIMC) is the head company for a range of businesses. The core pursuit of these businesses is the original design, manufacture and distribution of multimedia processors and video surveillance products to a range of clients.
Some companies are able to achieve business success based on improving existing products. That is what Vimicro is doing. CCTV and surveillance footage, along with processors are not new technology, with the core capabilities having been around since the 1980’s. However, in years gone by, only large well-funded organisations could afford to adopt these systems because monitoring, storing and accessing video data was expensive and cumbersome.
Now, with data transfer speeds faster, costs lower and the ability to move large video files instantly around the globe in seconds, there are a whole new range of businesses who can use CCTV and video technology.
In fact, the customers of Vimicro include schools, supermarkets, community banks, public transport stations as well as the expected large government contracts and utility companies that always used this kind of product.
The point of difference for the company is that it is a first mover in the growing and lucrative Chinese market, with operations in Hong Kong and the United States as well. Contract wins in recent months have included some of the largest municipal councils in China, and each win increases the chance of gaining future work in different regions as word of mouth spreads and reputation grows.
Metrics and Measures
Vimicro (VIMC) recently reported it’s third quarter results for 2014 to the market, which was well received by analysts and shareholders alike. Quarterly revenues were up to $27.6 million, which was up by double digits in percentage terms from the year before.
The gross margin was also a very sound 39.4%, with a stable trend between the previous period and the most recent one. This is a strong result in light of the fact that retailers typically operate on much lower margins and rely on large volumes and low margins to drive profits. In this case, margins are high while volumes are low, but volumes have the potential to increase without significant negative effects on the margins.
The net profits numbers were the standout, with a quarterly increase over the last period of 75.4%, to a healthy $3.5 million. That put net cash flow in a strong position, and meant that further investment can be funded from internal cash generation rather than external funding sources.
The Investment Case
The investment case for Vimicro International Corporation (VIMC) is an interesting one. It is a leading player in the fairly new Chinese marketplace for video surveillance and processing technology. In addition to that, it receives substantial government funded research and development grants, totaling $4.9 million in the last quarter alone.
These government grants mean the company has a strong source of funding, and also good business connections, something that is vital to doing business in China and Hong Kong especially. These connections have proved their worth with half a dozen new contract wins with city councils and municipalities across China announced in recent months.
Investing in Vimicro is partly an investment in the growing and continuing urbanization of China, as more urban spaces means a greater demand for surveillance and video monitoring systems. It is also an investment in the network of contacts and connections that the company has, with “black books” of contacts a strong and defensible competitive advantage in the marketplace.
The company also has strong cash in the bank with over $27 million, and low operating costs in it’s key market meaning that significant resources can be brought to bear in continued sales and marketing drives to sign up new customers, which will have the effect of growing revenue and profits.
Vimicro (VIMC) is a business whose share price has benefited greatly from continued contract wins and the strong ties to government spending in China. Continued success will depend on the ability of management to continue to sign up new customers and leverage the existing client base to show their reputation and expertise and sell new products in both existing and new regions.