The Vitec Group Drives Record Results Through M&A

Josh Stinehour | February 26, 2019

The Vitec Group, owner of more than a dozen brands in the broadcast industry released its results for the full year 2018.

Total revenue for 2018 was £385.4 million, an increase of 9.1% versus 2017.  On a constant currency basis revenue increased 10.8% in 2018.  Earnings per share (“EPS”) was £0.76 for the year, an increase of 24% compared to 2017 EPS.  Both total revenue and earnings per share were record results for Vitec.

“I am delighted to be presenting a record set of results for the group with a real step-up in financial performance” began Steven Bird’s (Group Chief Executive of Vitec) presentation of 2018 earnings results.

The revenue growth was driven by Vitec’s Imaging Solutions division, which manufactures and distributes photographic and video equipment to professional users and imaging enthusiasts.  The growth in the division was attributable to the 2017 acquisitions of JOBY and Lowepro.  To highlight just how much of the revenue growth is coming from acquisitions, we’ve included the below waterfall revenue slide from Vitec’s investor presentation.

As illustrated in the above, but for acquisitions, total revenue would have declined in 2018 due to adverse currency effects (£5.7 million versus underlying revenue growth of £2.4 million).

Acquisition-driven growth is growth, and it has been a stated objective of Vitec’s management team to use acquisitions to augment organic initiatives. From the start of 2012 until the end of 2018, Vitec invested £140 million in acquisitions.  Growth – both in terms of revenue and profit – is the return from the investment.

Vitec is well-positioned to maintain its M&A strategy given modest net debt levels of 1.2x EBITDA and low interest rates, illustrated by the Company’s average borrowing cost of 3.4% during 2018.

Returning to 2018 financial performance, gross margin for the year was 45.2%, a 90 basis point increase over 2017. Operating profit was £53.5 million, an increase of 18.4% versus 2017 (17.1% on a constant currency basis).  Operating margins for 2018 were 10.4%, an 190 basis point rise over the 2017 period.  (We are citing statutory operating profit as opposed to adjusted operating profit highlighted in the release; the difference is primarily the cost of acquisitions).

Vitec reports financial results across three divisions: Imaging Solutions, Production Solutions, and Creative Solutions. The broadcast products are primarily in the Production Solutions and Creative Solutions divisions.


Vitec Production Solutions Results:

Vitec’s Production Solutions business comprises the video heads, tripods, lights, batteries, and specialty camera system products, which in turn covers the results of Anton/Bauer, Autocue, Autoscript, Camera Corps, Litepanels, OConnor, Sachtler, The Camera Store, and Vinten.

Revenues from Production Solutions were £118.7 million during 2018, a 3.9% increase over 2017.  On a constant currency basis, year-over-year revenue growth was 5.6%.

Management attributed the growth to demand from the 2018 Winter Olympics in Pyeongchang and new product launches from the Litepanels Gemini lights and Flowtech tripod product lines.  Revenue also benefited from a rebound in the US market, which management attributed to the impact of the initial spectrum repack activities in 2017 (and subsequent draw down of activity in 2018).  The increase in the US was offset by lower demand in the EMEA region.

Operating profit was £18.7 million for Production Solutions, representing a 33% year-over-year increase.  Operating margins for 2018 were 15.8%, a substantial rise over the 12.3% level recorded during 2017.

During 2018, Production Solutions represented 30.8% of The Vitec Group’s total sales.  In 2017 Production Solutions accounted for 32.3% of total sales.


Vitec Creative Solutions Results:

The Creative Solutions reporting business covers the Offhollywood, Paralinx, Teradek, SmallHD, VitecEV, and Wooden Camera brands across product offering for video transmission, monitors, lens control systems, and camera accessories.

Revenues in this segment were materially impacted by a fire at SmallHD’s North Carolina facility on April 26, 2018 (most important, there were no injuries).  SmallHD moved into a new facility in November 2018 and has returned to full production capacity.  Insurance claims arising from the fire resulted in a £7.8 million pound payment received in 2018.

Creative Solutions’ revenues were £65.1 million, a year-over-year increase of 3.0%.  Revenue increased by 6.2% on a constant currency basis.

This revenue growth figure included acquired revenue from the 2018 acquisitions of Rycote and Amimon.  Without the benefit of the acquisitions of Rycote and Amimon, and at constant exchange rates, growth was 2.3%.  Since management has guided investors to a view of 6% annual growth in Creative Solutions’ addressable market, the 2.3% organic result would suggest Vitec’s products lost market share.  Management stated, however, that adjusting for estimated SmallHD revenue lost, the Division would have outperformed the market.

During its first half result announcement Vitec indicated Creative Solutions was growing at 9% year-over-year prior to the SmallHD disruption and SmallHD itself was experiencing 70% year-over-year growth in Q1 2018.

Operating profit for Creative Solutions was £6.3 million during 2018, a more than doubling compared to 2017 operating profile of 2.9 million.  Operating margin was 9.7%, which compares favorably to the 4.6% from 2017.  Again, Vitec also cites adjusted operating profit, which was £15.7 million for the Creative Solutions division in 2018.  This is achieved by excluding the £9.4 million of costs associated with acquisitions integrated into the Division.  While those costs are not associated with the current operations of the Division, they are a cost of the Division and are allocated accordingly in the audited financials.

For the full year 2018, Creative Solutions represented 16.9% of The Vitec Group’s total sales.  In 2017 Creative Solutions accounted for 17.9% of total sales.


Syrp Acquisition

On January 22, 2019, the Vitec Group acquired Syrp Limited, a New Zealand based company providing motorized camera sliders and motion control products.  Sryp will be integrated into the Creative Solutions Division.

The structure of the acquisition illustrates the future accounting impact (mentioned above) and also Vitec’s typical approach to structuring acquisitions.

The initial cash consideration was £2.4 million; total consideration could be upwards of £13.4 million (or over 450% times initial consideration).  Now the maximum consideration is only payable if the contribution from products using Syrp’s technology exceeds £7.0 million in 2020.  This is an ambitious target for a 22-person company, even with the added resources of Vitec.  If met, then Vitec would have rewarded (or incented) an exceptional result.  In either circumstance there has been a sharing of risk and reward between the two parties.

As part of the acquisition announcement, Vitec indicated the addressable market for Syrp’s solutions is USD $50 million (£39 million at prevailing rates) and growing at 6% per year.  (The reader will note the maximum consideration for the acquisition is almost 30% of the addressable market).

Bringing the discussion full-circle, these future contingent payments and other associated costs of the deal will impact future operating profit of the Division.

It is interesting to note Vitec’s acquisition of its supplier Amimon (November 2018) is going to start at a deficient in terms of adding growth.  Vitec disclosed during its earnings presentation that half of Amimon’s sales (prior to the acquisition) were to to Teradek (Vitec’s subsidiary).   As part of the integration that portion of revenue disappears and becomes instead a cost synergy to the Creative Solutions Division.


Market Commentary

Given the breadth of Vitec’s solutions in the media technology sector, the Company’s results offer telling data points about developments in various vertical markets and geographical regions.  We’ve already noted the discussion of the rebound in US sales from progress with the spectrum repack.  In addition, Vitec’s results noted the initial efforts by Chinese broadcasters to update to 4K production and the start of Japanese studio upgrades ahead of the 2020 Olympics.

At the same time, Vitec is a good gauge for several external developments in the macro-economy since Vitec is headquarter in the United Kingdom; reports financials in Sterling; manufacturers its products in Dollars (Costa Rica) and Sterling (Bury St Edmunds); and has end-user currency exposure globally.  There were several relevant examples in the investor presentation of 2018 results.  For instance, commentary for the year noted a slight negative impact of US tariffs against Chinese imports, and Vitec made clear it is actively implementing a Brexit mitigation strategy.  Regarding the later, according to Vitec’s annual report filing, a currency movement of €0.10 would equate to an associated impact of £2.1 million in Vitec’s operating profit.

During Management’s prepared remarks and the question and answer session with analysts, The Vitec Group offered a candid assessment of the market environment.  Referring to the Production Solutions business, Bird characterized the Core Broadcast market as “broadly stable” with some of the more traditional areas declining.  The Division is seeing growth in the APAC region and with on-location news and sports use case, and in product categories with greater technology components such as robotics.

More applicable to the Creative Solution Division, Management continues to express widespread enthusiasm for the market for independent content creators.  The primary driver of this market is the vast sums of money being spent by non-traditional participants in the media sector, such as Netflix, Amazon, YouTube, and Facebook, on original content.  Management believes this investment in original content has led to the expansion of owner / operated production companies, and in turn is increasing demand for Vitec products.


Business Outlook:

Stephen Bird concluded his prepared remarks with the following, “Vitec is now a higher quality, higher-margin, higher-technology business operating in a really attractive fast-moving, fast-growing market.” Bird continued, “despite potential geopolitical challenges, I am confident that we will achieve further progress in 2019.”

The focus of the earnings report added additional emphasis to Vitec’s continued transition to a higher-technology business.  Among the many statements on the subject, Vitec took the opportunity to provide an update on the recent Amimon acquisition.  According to Management, the acquisition is transforming Vitec’s wireless video capabilities.  “What I am most excited about is our ability to steer Amimon’s R&D investment and ensure it focuses on developing products for our customers” stated Bird.

As alluded in the above quote, a consequence of the transition to higher-technology products is a related, necessary increase in technology development spend.  Vitec’s annual reports lists product development spend in 2016 and 2017 at 4.4% and 4.6% of sales, respectively.  That will almost certainly increase materially; an interesting data point to track in future earnings announcements.



Related Content:

Press Release: Vitec Group 2018 Results



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