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Jeff Kessler

Imperial Capital: Growth in smart home market will benefit large security companies, but not smaller ones

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Tuesday, March 25, 2014

I recently wrote about a new ABI Research report that predicts professional security companies’ share of the smart home market will be cut in half by 2019 as telecom and cableco competitors leverage their own strengths in the space.

However, not all security companies will fare the same, according to a new report from Imperial Capital, a New York City full-service investment bank. Imperial Capital says that large security companies will do much better than smaller ones as the smart home market grows.

Imperial Capital’s latest prediction on the market for the next six to seven years was released today. It differs from the ABI report in that it drills down more on how size matters.

Simply put, what Imperial Capital predicts is that the top 30 residential security companies will do well over that time period, whereas “the bottom 80 percent of security providers” will see negative growth.

The report, authored by Jeff Kessler, Imperial Capital’s managing director of institutional research, says that Imperial Capital’s and ABI’s views on the market are “generally consistent.” However, Kessler writes, “our biggest difference with the ABI report may be that it does not separate out the top 30 security companies from the rest of the industry, which may very well have customer generation problems.”

Those big companies will do well, Imperial Capital says in its report.

“Our estimates are that the market for home services will grow about 10 percent annually over the next seven years to over 50 million homes, driven by new applications form the security industry, new home services offerings, and marketing from cable and telcos,” the report says. “We estimate the top 30 residential security companies will grow subscribers at about 5 percent annually, from about 11 million current users to about 16-17 million users, driven mainly by life-safety focused subscribers to whom professional response and service and the certainty of police, fire, and personal emergency response is more important than price and bundling convenience.”

However, the report says, “this is offset in our analysis by all other smaller security companies falling from 12 million to 5 or 6 million by 2020.”

When you add those companies—which Imperial Capital says comprise 80 percent of security providers—to the top providers, “we see the security industry as flat to down in this period. In fact, because of this estimated decline in the revenues of small companies, our aggregate estimate of market share is actually more conservative [in] stance than the ABI Study.”

Imperial Capital also believes the smart home market will grow even more than ABI predicts.

“Where we also diverge with the ABI report is in the size of the market six to seven years from now,” the Imperial Capital report says. “ABI estimates a market in six years that is 37 percent larger, and Imperial Capital estimates that it will almost double in six years. The difference, we contend, is new services and technologies from the likes of Alarm.com, Vivint, and iControl … [and also more] “PERS” (personal emergency response systems) home health care and emergency response users. These advanced PERS applications are also being developed.”

HID reportedly paid $60m for Lumidigm

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Wednesday, February 12, 2014

Updated 2/13/14

Identity solution provider HID this week made its second purchase in a month, buying fingerprint biometric provider Lumidigm.
In January,  HID announced that it had purchased IdenTrust, a provider of digital identities.

The Albuquerque Journal is reporting that HID paid more than $60 million for the biometric company. Through a spokesperson HID said that because this is a "private transaction" the company would not comment on the purchase price.

I was not able to speak to Jeff Kessler at Imperial Capital about the deal. (Imperial advised Lumidigm,) but I did get a look at a research brief Kessler published on Feb. 12, where he said this deal "continues to put distance between Assa Abloy’s HID Division and the competition in the way of interoperable, identity solutions for government and enterprise users."

Here's more from Kessler's brief:

In our opinion, Assa Abloy has made a concerted effort to become the undisputed leader in higher technology access control and identification solutions for not just enterprises and institutions, but for Government as well—the latter is an area in which it did not have a lot of traction until 2011. However, a series of acquisitions have turned the company into the leader in this segment from a revenue perspective. This is unlike Safran (which purchased L-1 in 2010), which is primarily involved in registration and border identification. The challenge remains for Assa Abloy and HID to integrate these acquired technologies and companies carefully, to let some of the more creative sectors provide both competitive advantage to Assa Abloy, yet still remain the leading providers of software and identity solutions to other companies in the industry as well.

Founded in 2001 and based in Albuquerque, N.M., Lumidigm has 33 employees. Its 2014 sales are expected to be $25 million, and the deal is expected to be accretive to earnings per share, according to HID parent company ASSA ABLOY.

Common problems with fingerprint biometrics include that fact that the technology will not work in harsh environments or when peoples’ fingers are dirty. In addition, some peoples’ fingerprints are simply not detectable. Lumidigm’s technology overcomes these problems, HID said, with its patented “multispectral imaging technology [that] uses multiple light spectrums and advanced polarization techniques to extract unique fingerprint characteristics from both the surface and subsurface of the skin.” The technology is also highly effective in detecting “imposter or ‘spoof’ fingerprints,” according to HID.  

Lumidigm’s products are used in verticals such as banking, healthcare, entertainment, and government services. HID is also interested in Lumidigm’s “premier global customer base,” HID CEO Denis Hebert said in a prepared statement.  

The opportunity for HID, according to a statement from Bob Harbour, executive chairman of Lumidigm is: “to apply multispectral imaging capabilities to credential acquisition and authentication, gesture recognition, and other image-based process control systems, making multi-factor authentication on a single, integrated device a reality.”

Brink’s getting back into home security?

Company’s CEO says it is considering re-entry
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02/06/2014

RICHMOND, Va.—Brink’s got out of the home security market in 2008 but may be reentering that market, the company’s CEO said recently.

ADT releases Q1 results—and stock price drops

But Imperial Capital maintains ‘outperform’ rating on ADT, saying it expects ‘positive catalysts’ from the company in 2014
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01/30/2014

BOCA RATON, Fla.—Although The ADT Corp. reported Jan. 30 that ADT Pulse take rates and recurring revenue were up in its latest quarter, it also said net income decreased 27 percent in that period—and its share price tumbled.

ADT working to ‘stabilize’ dealer program

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Wednesday, December 11, 2013

ADT officials weren’t available for comment when I wrote recently about an industry’s analyst’s report on how ADT had “culled” about 100 low-performing companies in order to improve its dealer program over the past year.

But in an ADT investor call last Friday, Alan Ferber, president of ADT’s residential business unit, confirmed much of what the analyst, Jeff Kessler, Imperial Capital’s managing director of institutional research, had said. Ferber also outlined ways ADT is working to “stabilize” that channel.

According to Seeking Alpha, which published a transcript of the Dec. 6 investor call, Ferber said:

So in 2013, we began to optimize our dealer channel to focus more resources on those that are [indiscernible] to evolving with ADT's overall direction and the trend towards automation. And while we're eliminating about 100 dealers, which obviously impacted overall net adds, our focus on the right dealers has resulted in the quality of the customers that come through that channel to remain high and actually have been improving. ARPU is about 10% above our average ARPU and growing about 5% over the past year and the creation multiple has actually come down even though there's been an increase in SAC. But we do remain focused on strengthening and continue to optimize this dealer channel to drive growth over time.

… In addition, channel growth was impacted by some changes among our largest dealers. We purchased 1, 1 had some cash flow issues that impacted their ability to increase adds and 1 left ADT for a competitive program. I'm very pleased, however, to report that, that dealer has now returned to the ADT family once he experienced the negative impact on his business of not having the powerful ADT brand behind him. So it's reconfirmed our dealer value proposition with that dealer and with many other dealers as well.

But more importantly, we're taking a number of actions to stabilize this channel. We are investing in enhanced funding to help drive further Pulse adoption, particularly higher end Pulse, where that higher level of automation has a very significant retention benefit as well. And increased funding will also enable some incremental sales and marketing activities by our dealers and also the recruitment of new high-quality dealers that are positioned to further drive automation.

… We're also investing in staffing and support to ensure success. We've added resources to provide better support for planning and performance management, and we've enhanced training and other tools to get new and existing dealers more productive, particularly with our new services. And while we certainly expect some noise in the next couple of quarters, we do believe these actions are establishing a very strong foundation for growth over time.

 

 

Growth prospects positive for IR spinoff Allegion

As a stand-alone entity, Allegion will have free cash flow of $150 to $200m solely for security
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12/03/2013

DUBLIN, Ireland—Ingersoll Rand spinoff company, Allegion, is now an independent, pure play security company, “a $2 billion startup” with potential for continued growth in North America and big growth outside of North America, according to Allegion executives Dave Petratis and Tim Eckersley, as well as security analyst Jeff Kessler, who all spoke to Security Systems News.

ADT culls ‘weaker players' from its dealer program

Imperial Capital’s Kessler predicts ADT dealer-based Pulse take rates should increase
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11/26/2013

NEW YORK—ADT’s dealer program has been one of the company’s “soft spots” for years but now is turning around after the company “culled” more than 100 lower-performing dealers over the past year or so, according to an industry analyst.

Tyco acquires Westfire

The $80 million company brings technical expertise, expands footprint
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11/14/2013

NEUHAUSEN, Switzerland—Tyco’s acquisition of fire protection company Westfire, announced this morning, “aligns well with the company’s internal strengths,” Jeff Kessler, managing director of institutional research at Imperial Capital, told Security Systems News.

Kessler and DeMarco: Professional monitoring, strategy bode well for DIRECTV/Lifeshield deal

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Wednesday, June 5, 2013

I had a chance to speak to Jeff Kessler, research analyst for Imperial Capital, and ESX chairman George DeMarco about the satellite television giant DIRECTV getting into security with the purchase of LifeShield.

Below is a summary of those discussion:

This deal is different from the string of cable companies and telecoms that have jumped into the fray over the past couple of years, Kessler said, for a couple of reasons.

First, DIY is built into the DNA of both DIRECTV and LifeSheild, Kessler said. “They understand each others’ way of working,” and that will make the combination more successful.

Second, LifeSheild, and now, DIRECTV, is using CMS, Protection 1’s professional monitoring arm to monitor security customers.

With the exception of AT&T, which is building two monitoring centers, the other cable and telecom players are not using professional monitoring centers.

“This allows DIRECTV to show off its feathers in front of other cable and telecom players,” Kessler said. Those companies are using “generic customer service organizations to do their initial [monitoring] service, [but DIRECTV has a acquired a company] that uses the largest independent monitoring company in the country with five branches.”

He pointed out that CMS has extremely experienced people answering phones who know about intrusion and life safety, including carbon monoxide. The company also has a group of people who are specially trained in health care for calls related to personal emergency response.

All of this is important, he said, because it will improve the customer experience for DIRECTV’s security customers. Going with a professional monitoring company will help convince customers that they can trust DIRECTV as their security provider because customers believe that the “police will be there in five minutes, or a health specialist will stay on the phone for 35 minutes with a customer,” he said.

In general, the public’s perception about cable companies’ service is not good. This is a hurdle for cable companies who enter the security industry. By partnering with CMS that has “proficiency and experience dealing with customer emergencies, whether it’s security or health,[DIRECTV] is in a better position to succeed,” Kessler said.

Kessler said there will likely more deals like this where an outsider like a satellite or cable company will buy a home security provider. In addition, Kessler expect to see more “partnerships as telcos and cable operators realize the value in having a high-quality partner on the service end of the business.

George DeMarco, chairman of ESX, and former owner of Greater Alarm said DIRECTV’s strategy is pretty straightforward.

“DIRECTV has 20 million customers. If the current market penetration for electronic security systems is approximately 20-25 percent, then their customer database is a gold mine.”

DeMarco said it’s all about finding new, complementary, recurring revenue streams that “boost their ability to attract a greater share of the customer’s wallet. Offering security and home management systems with interactive service capabilities, especially video, gives DIRECTV an opportunity to overlay additional home services for customers, while growing top-line revenues and increasing bottom -line profits.  
 
“With the advancements in product technologies, cloud-based services, and mobile devices, Multiple System Operators (MSO) and telecoms have been eyeing the electronic security industry of late. That said, I believe DIRECTV and other MSOs are looking for ways to augment their current offerings.” 

DeMarco said the those industries’ subscribers are willing to “cut the cord” from content packages because of the impact of Hulu, Netflix, and Amazon’s Prime Service. “In other words, MSOs can increase new phone and broadband subscribers while losing paid TV subscribers. Consumers have more choices today for content and delivery of broadband services. As a result, MSOs are exploring other sources of revenue for growth opportunities and the electronic security industry seems to be the likely candidate.”

 

Kessler on the multiple paid for Vivint

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Wednesday, September 19, 2012

Whenever a big company in the industry sells, there’s interest in the specific metrics of the deal.

I called Jeff Kessler at Imperial Capital to talk about the pending sale of Vivint to the largest private equity group in the country, Blackstone and the numbers.

It’s not every day there’s a $2 billion deal in the security industry.

While Kessler has high praise for Vivint, he says that certain metrics are not as off-the-charts as one might think, at least according to his calculations.

Kessler pointed out that the sale of Vivint for north of $2 billion includes not only Vivint’s home security/automation business, but 2GIG (a manufacturer of alarm/home automations systems) and Vivint Solar.

So while the total enterprise value for the is “north of $2 billion”, the enterprise value for Vivint home security/automation is less than $2 billion, he said.

Which doesn’t mean the valuation is not impressive, it just means “the multiple of RMR, EBITDA or steady state cash flow will be less than the total amount given for the entire company,” he said.

In terms of a multiple of RMR, Vivint has said it has $30 million in RMR. Kessler said RMR will be higher by the time the sale closes at the end of the year. “If you assume that RMR will be higher, and you assume that [Blackstone will pay] something less than $2 billion for Vivint [home automation/security], the multiple of RMR paid would be in the 50s.”

However, Kessler doesn’t like to talk about multiples of RMR. He prefers to look at multiples of steady state cash flow, because that “really gets rid of the accounting variance that really riddles EBITDA,” he said.

Based on his estimates of Vivint’s [home automation/security’s] steady state cash flow, he said the multiple to be paid is actually “at lower end of the 10 to 13 times [steady state cash flow] range paid for larger, quality companies over the past 18 to 24 months.”

Kessler based his assumption on certain transactions such as Bain & Hellman buying Securitas Direct; Ascent Capital buying Monitronics, Summit buying Central Security Group and Oak Hill Capital buying Security Networks.

(I'm quite certain I'll hear from others who's assumptions and math differ from Kessler's. Please leave a comment on this blog or contact me.)

The important thing is that if you're trying to figure out a mulitple of RMR, steady state cash flow or EBITDA, you need to back Vivint Solar and 2GIG out of the equation.

And if you're trying to figure out if your company's ripe for a sale, take a good look at what Vivint's doing, Kessler said. 

Kessler called Vivint is a “model company” that’s taking advantage of new technology and providing  “a value-added proposition at a premium.” The company’s average RMR per new subscriber is the highest at over $50, and they’re doing good things such as moving away from all summer-sales and increasing in-house sales resources.”

The Blackstone deal “should allow Vivint a lot of growth [with the] forward-looking ideas it has on its platter. … This will allow capital runway for projects like increasing the size of their non-summer sales force, increasing their ability to move into new markets such as small and medium sized commercial security, and to fund the growth and development of new products in home and business services, some of which are not even on paper yet.”

There will be lots more deals done in the security industry in the next year. The capital players are interested, but Kessler said it’s the security companies, like Vivint, what he calls the “haves,” those that are taking advantage of new technology and which have a finely tuned sales and marketing efforts that will be the most sought after.

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