March in search of steady pace

The headline puns practically wrote themselves.

“Kanata firm March-ing backward,” declared The Ottawa Citizen one year ago.  Ottawa-based March Networks Corp., a maker of video surveillance systems, had just posted its second quarter results.  Revenues were poor; March had stopped predicting sales and earnings in its grim reports.

Quarter after quarter of missed expectations were even more disappointing in the face of March’s early successes.  Within a year of its 2005 IPO, March stock was worth almost $40 – more than three times its original price of $12.  But March relied too heavily on continued sales to Wal-Mart, its biggest customer, and when Wal-Mart turned to other suppliers for its surveillance needs, March and its investors (including the Canadian government) paid the price.

March’s share price plummeted until 2009, when it evened out in the $4 range.  But instead of meeting a bankrupt end, March survived by restructuring, cutting costs and wages, and falling back on a strong cash reserve.


Now, March can boast two consecutive quarters of profitability.  But if share prices are any indication, investors are not yet ready to believe that March is marching in the right direction.

“The street takes a ‘wait and see’ stance,” said Simon Gwatkin, head of investor relations for March.  “Two or three quarters of profitability would be a good thing [for March’s share price].”

At present, industry analysts estimate that IP video systems comprise about one-fifth of global video system sales, meaning there is plenty of room to grow.

Gwatkin noted that Canadians are traditionally conservative investors, and expressed his belief that investors will wait for a catalyst before moving on March’s stock.

March may provide that catalyst if can successfully grow its IP video products.  IP (internet protocol) video is the next trend in CCTV surveillance.  By sending digital video signals through network cables or wireless protocols, the resulting high-quality footage can be stored, viewed and analyzed on a central server.  For organizations looking to monitor many cameras simultaneously, IP video can be a much more cost-effective and user-friendly solution than traditional analog cameras transmitting video over old-style coaxial cables.  At present, industry analysts estimate that IP video systems comprise about one-fifth of global video system sales, meaning there is plenty of room to grow.

March entered the IP video market when it acquired Italian company Cieffe in 2008.  Analysts initially expressed some concern about March’s IP video systems; they could not support large camera networks and were incompatible with third-party cameras. However, March’s new Command platform has addressed these shortcomings, helping to drive up earnings expectations.


“In our view [Command] was essential for the company to stand a good chance of being able to compete for much larger deals versus staying in the comfortable spot of selling networked DVRs to banks,” wrote TD Newcrest analyst Chris Umistowski in a November 24 report.

Thanos Moschopoulos, an analyst with BMO Nesbitt Burns, is more circumspect.

“It seems like a good product, but it’s a competitive market,” said Moschopoulos.  “The challenge for March is that historically all their customers have bought their software as part of a complete solution.  The deals have been led by March’s hardware.  The question is, can they start getting traction with the software-based deployments, and we’ll have to wait and see.”

Wal-Mart remains one of March’s leading customers, representing a quarter of revenues in the most recent fiscal quarter.

March’s future success will depend on its ability to sell IP video systems to clients in its four key sectors: retail, banking, transportation, and commercial/industrial (which includes the public sector).  As the global economy recovers and retailers, banks, and the public sector seek to upgrade aging surveillance systems, March will have to offer a cost-effective, flexible, and innovative product to distinguish itself from much larger competitors such as Tyco Fire and Security, Honeywell Security Group, and Bosch Security Systems.

March’s focus on the transportation market may pay off in the future, as many public transportation systems are just beginning to install video surveillance systems to address public safety concerns and the threat of terrorism.  Mobile camera installations require a great deal of customization, however, and any new transportation deals will likely require significant lead time before generating revenue.

Wal-Mart remains one of March’s leading customers, representing a quarter of revenues in the most recent fiscal quarter.  Other key clients include Wabtec (a supplier of railway products), the Toronto Transit Commission, Bombardier, and the Maryland Transit Authority.  Earlier this year, March signed a $7 million contract with a large, unnamed American bank.  Dunkin’ Donuts may become another significant source of revenue; the company is encouraging its franchise owners to install March systems in their stores.


Even with large customers and impending product rollouts, the nature of the video surveillance equipment business makes it difficult to maintain an even revenue flow.  When March secures a customer, its balance sheet improves as the customer purchases the products needed to install a video surveillance system.  But once the rollout is complete, revenue from that customer falls dramatically.

While uneven revenue streams can wreak havoc on March’s stock price, some analysts believe it opens new avenues of opportunity for savvy investors.

“Over time, customers come back for more when they build new stores, bank branches, busses, or replace old equipment,” wrote TD Newcrest’s Umiastowski in his a report.  “Lumpiness means stock price volatility.  Right now, investors are able to take advantage of a down cycle.”

In its most recent quarterly report, March posted net earnings of $284,000 and revenues of $28 million for the second quarter of fiscal 2011, ending on October 31.  March stock closed at $4.17 today.