Security industry expectations high

Renewal of growth in 2010


With the exception of the very largest security companies who can choose between direct or channel-based go-to-market strategies, we are seeing the channel of integrators and dealers hold up as long as they satisfy the demands of increasingly savvy and demanding end-users. The Internet has allowed end-users to become much more cognizant of product and labor costs, ROI considerations, the types of remote services available and the types of in-house services they want to keep. They are better educated on what type of security solution they need, not simply what the integrator or dealer wants to sell. End-users also are demanding that providers of products to the integrators, be they VMS or service providers to the channel, be available to help them solve problems before, during and after installation. Going to market via a referral from a happy customer is therefore becoming an increasingly important means to make a profit and increase market share and brand for everyone from manufacturers to integrators.

Growth trends in 2010

Even if the industry as a whole does not grow 10 percent in 2010, as some predict, some sectors we have discussed will continue to exceed 25 percent and even 50 percent growth. Older legacy and analog segments in physical security would be the culprits holding total percentage gains down. Margins are still holding up on many higher-end cameras and access equipment (like biometrics), but there is compression taking place as more product gets produced in low-cost countries and end-users become more savvy about price lists. Ultimately, all product margins have to come down, though the value they provide should, we believe, cushion integrators from seeing anything close to what happened to product and installation in the IT integration space.

The continued adoption of standards for IP video (PSIA or ONVIF) may certainly put pressure on product margins but should be extremely helpful in allowing application writers to increase the functionality of video at lower cost. This should improve the growth of IP video which fell from 30 to 40 percent growth rates in 2007 to 15 percent in 2009.

Both the high-yield market and private equity interest in technology and recurring revenue has been very strong. We have seen senior lenders slightly loosen their criteria for advance rates and covenants, which has helped support industry growth and investment. Senior lenders also have broadened their knowledge base in the security industry on what constitutes recurring revenue from alarms to video surveillance and managed services. Transactional activity in the industry has been robust, as evidenced by the largest companies, ADT and Stanley, digesting major acquisitions, the Devcon and Protection One alarm monitoring transactions and a spate of smaller deals, and L-1's announcement that they are looking at "strategic alternatives." Nevertheless, we see the likelihood for continued significant M&A and financing activity in the market in the near term, signs that security continues to move forward with refreshing results.

PSIM and Leading Video/Access Managed Service Companies

In 2010 government, critical infrastructure (transportation and power) and institutions which are focused on large installations increasingly have been expressing a desire for PSIM or other brand name device integration capability in their projects. This is one area where every major PSIM provider has seen growth, some spectacular, albeit off of relatively small revenue bases.

Collapse of Horizontal Layering in Video

Three years ago, IP video software platforms, manufacturers and video management systems (VMS) providers were discreet-and partnering with each other. Now, many of the leaders in these segments may still be partnering with each other but increasing numbers of manufacturers and platform software providers seem to be offering their own VMS in response to customers demands for a one-stop solution. Increasing client demands for a video "solution" puts more pressure on margins from individual, discreet, product companies (unless that product is exceptional, market leading, or "bleeding edge").

ENTERPRISE SECURITY

Major developments in 2010 include:

- Formal industry acceptance of remote, managed access and video monitoring services;
- PSIM as a differentiator in obtaining large contracts;
- More evidence that the IT "takeover" of the industry is an internal matter, with personnel turning over rapidly instead of the long-feared outside "hordes" of IT integrators taking share; and
- On a case-by-case basis, vendors, integrators and end-users seemingly settling on a menu of video analytics to provide the highest utility for given projects. This has both improved the reputation of analytics and caused several vendors to integrate (or acquire) analytics as part of their own offerings.

Jeff Kessler is managing director for Imperial Capital LLC, New York, N.Y. He can be reached at JKessler@imperialcapital.com.