Alarm.com IPO a watershed moment for the connected home market

July 6, 2015
Company's listing on the NASDAQ a validation for the industry and where it's headed

There was a time in the residential security market when having home automation features to go along with window and door contacts and motion detectors was simply a “nice to have” rather than a “must have” offering. The industry has evolved to the point, however, where even the term “home automation” is passé, having given way to the more commonly used terminology of “connected home” or “smart home” space in which security is part of much bigger overall solution for today’s homeowners.

The growing prevalence of this technology was further reinforced late last month when Alarm.com, one of the dominant players in the smart home space, launched an initial public offering on the NASDAQ.

According to John Mack, executive vice president, co-head of investment banking and head of mergers & acquisitions at Imperial Capital, which acted as a co-manager on the offering, the IPO serves as a “strong validation” for this paradigm shift that has taken place with regards to the integration of home security with automation and where the market could eventually go.

“I think it is very important for the overall security alarm industry to see what has really been the leading player in home automation software and has really played a key role in enabling the home automation side of this industry to be able to go public at a very attractive valuation and get a lot of very positive attention from the best of the investment community,” explained Mack. “A lot of the validation that came with a big valuation for Alarm.com is effectively a view of the potential for the whole industry.”

Aside from the Alarm.com IPO, Mack said there are also other data points which really reinforce how prominent the connected home space is becoming. For example, according to Mack, more than 50 percent of all new ADT installations are now Pulse-enabled packages and 100 percent of Vivint’s new sales include home automation capabilities.    

“That in and of itself is a big source of validation and then, of course, just look at the growth of Alarm.com. It has 2.3 million subscribers; it has been growing at 30 to 40 percent a year, that’s the best validation that you have for the growth of this industry is the scale and the growth of what Alarm.com is doing,” said Mack.  

Jay Kenny, senior vice president of marketing at Alarm.com, said the company, through its dealers, has been successful at bringing smart home solutions to the masses and that the IPO will better position them for future growth when the market really hits its stride.

“We are at the beginning of what we believe is a growing market,” said Kenny. “There is a lot of activity in the space and there is a lot of interest, so the IPO enables us to continue to invest in technology and resources we think are needed to position our dealers to be successful in this market and really take advantage of that growth opportunity.”

While the advent of smart home technology has obviously provided an injection of new enthusiasm to the residential security market, Kenny credited the company’s strong partnerships with its dealers as being one of the primary reasons for their growth.

“If you look at the IPO itself, our business has had some really solid fundamentals,” added Kenny. “We’ve been growing and a big part of that has to do with our partnerships with the security dealer channel and we continue to believe that’s the best channel to market for smart home technology.”

In addition, Mack believes the success of Alarm.com proves that independent dealers, which are able to provide a much more tailored service approach and deliver custom-designed systems for customers, are doing very well in the industry.

“Alarm.com, for the most part, represents all of the independent dealers in the marketplace because we know ADT and the cable companies, for the most part, are in an iControl or modified version of an iControl platform,” said Mack.

One of the immediate benefits of the IPO, according to Kenny, is that it will enable the company to funnel even more resources to research and development efforts, which he said have helped set the company apart from the rest of its competitors in the space.

“We can apply (those funds) directly to research and development to bring out enhanced products,” he said. “I think the other place it helps is with our services. We might do this through direct development but it also puts us in a position to potentially do it through acquisitions if there is the right opportunity out there.”

Mack added that the strength of the management and engineering talent at Alarm.com is another thing that really stands out about the company.

“They’ve got over 100 people in engineering and related roles at Alarm.com,” said Mack. “These guys have built engineering talent that rivals that of the best Silicon Valley companies or any other industry sector and it’s exciting to see that as part of our traditional physical security.”  

As far as the timing of the IPO goes, Mack believes that Alarm.com had reached a certain size where going public was one of their best options for growing the company.

“I think the timing came down to – certainly the market was right – and from our perspective, with the size and trajectory of our business, it just made sense,” said Kenny. “We’ve been the leader in this smart home security category, but there is a lot of interest that has been generated by our success, so by being able to go public now we arm ourselves with the ability to invest to make sure we’re going to maintain that leadership position.”

As of Monday afternoon, Alarm.com’s stock was trading just north of $18 per share. The company opened on the NASDAQ at $14 per share.