100_2k5_index - SDM -- New Directions for Security Systems & Integration

For the past three years, the industry’s largest security firms have waited for the dam to break on pent-up demand for security systems. Last year, it did.

If one could characterize 2003 as a year of ups and downs, stops and starts – all tempered by the U.S. economy – then one also may recognize 2004 as the year in which sales flowed as nicely as water down a river. Since many of the largest firms in the security industry had spent the past several years cutting back, sharpening their efficiencies, and honing profits, they were in a good position last year to keep up with the steadier flow of sales. Pent-up demand finally made its power known in 2004 to the industry’s biggest companies – which are ranked here on SDM Magazine’s 15th annual SDM 100.

Firms on this exclusive report are ranked by their total gross revenue from security system sales/installation, service, leasing, and monitoring. They are also re-ranked by other indicators, such as recurring monthly revenue (RMR), and residential and commercial installations.

No. 22, ASG Security, Beltsville, Md., epitomizes the experiences of many firms by noting that “2004 was a strong year for organic sales growth in our three traditional markets: commercial, small business and residential. New commercial revenues were driven by increased demand for CCTV and access control systems. We also performed exceptionally well in the fire market. Residential growth was above-average, but not as robust as our commercial performance.”

ASG Security, which also completed six acquisitions in 2004, says that key factors in the commercial market were “greater awareness of digital video technology as well as a decrease in the cost of advancing technology.”

The economy was the biggest factor, observes American Alarm & Communications Inc., Arlington, Mass., “causing businesses to spend more. Residential was steady and commercial rebounded past our Sept. 11, 2001, peak for the first time,” states the firm, which improved by 19 percent and ranks as No. 37.

The objective of the SDM 100 is to measure consumer dollars captured by electronic security service providers. The majority of SDM 100 firms offer sales, installation, service, and monitoring. (A very few are considered “non-traditional” alarm companies in that they provide sales and installation only or monitoring only.)

Total 2004 revenue for this group increased by 9 percent to $6.43 billion. But notably, more than one-third of the firms ranked on the SDM 100 achieved double-digit growth.

Another way to measure performance is to review SDM 100 firms individually. Among companies with which two years of revenue could be compared, 84 percent experienced a revenue increase, and only 15 percent decreased, while 1 percent was unchanged. Individually, this is the best performance by SDM 100 companies since 1997.

The number of new residential units installed in 2004 was about 3 percent higher than in 2003. (Note that No. 1, ADT Security Services, did not report its residential installation activity in 2004, nor in 2003.) Still, companies that have cultivated relationships with new home builders found the residential market for security and integrated home systems to also be robust.

“Security systems for new homes were strong in 2004. Building contractors continue to be a large segment of our business. Integrated systems for large homes exhibited the biggest increase in revenue for 2004. Low interest rates for home building and a strong economy seem to have the most impact on sales,” notes No. 78, Acadiana Security Plus, Broussard, La., which improved 21 percent.

The challenges have not gone unmentioned by these operators: some markets continue to face legislation that restricts police from responding to alarms. Many security companies cite a very high level of competition. And all companies face the challenges that new technologies proffer – a need for re-educating technicians and salespeople.

“We have found success in the markets by promoting the new technologies and the addition of IT staff to adapt to the many networkable products our industry has to offer our customers,” notes Blue Ridge Security Systems, Anderson, S.C., No. 67.

By most accounts, the SDM 100 group of companies, as it leads the industry, should look forward to the remainder of 2005 with more of the same expectations in the residential and nonresidential markets.

The table, above, presents aggregate figures for the SDM 100 group of companies. In a $24.8 billion industry(2004 total industry revenues based on SDM’s Forecast Study), these top 100 firms captured $6.43 billion in revenue – about 26 percent market share – and counted 9.7 million subscribers in 2004. Most of the SDM 100 firms are privately held. Submitting total revenue is required for ranking, but other figures are not required. Most firms – but not all – also reported recurring monthly revenue (RMR), number of subscriber accounts, and installation volume. Therefore, one should exercise caution

Overall the SDM 100 grew revenues 9 percent in 2004 – a welcome change following just a 2 percent gain during the previous year. (In 2002 the SDM 100 revenues surged 26 percent, but that was primarily driven by a large gain by ADT Security Services. Putting aside ADT’s revenue would have resulted in just a 7 percent advance for the other 99 firms in that year. The SDM 100 slowed down considerably in 2003, gaining just under 2 percent – or 4 percent if ADT is excluded from the calculation.) Most notable in 2004 is that more than one-third of SDM 100 companies achieved double-digit growth.

In sharp contrast to 2003 – a year in which SDM 100 firms could not add any more subscribers than they had lost – 2004 was favorable, allowing SDM 100 companies to increase their subscriber base by one-half million customers to reach 9.7 million.

Above left, recurring monthly revenue (RMR) – a prime revenue category for SDM 100 companies – improved more than 8 percent in 2004, compared with just 1 percent in 2003. Total RMR in 2004 was $348.1 million. Above right, commercial fire alarm systems, as a percentage of total sales and installation revenue, increased three points in 2004 – from 13 percent to 16 percent. Many of the SDM 100 companies observed an increase in demand for fire alarm systems last year. And, as burglar alarms are now more often sold as part of a comprehensive integrated system, the stand-alone burglar alarm category continues to decrease – from 52 percent in 2002, to 48 percent in 2003, to 46 percent in 2004.

Above left, since the turn of the Millennium, there hasn’t been a better year than 2004 for SDM 100 firms in general. Eighty-four percent of the companies (for which prior-year data were available) confirmed revenue increases; 15 percent declined, and 1 percent were unchanged – a much better situation than the SDM 100 had in 2003.Above right, the SDM 100 earns a significant portion of its revenue – and best profit – from monitoring subscribers’ alarm signals. Approximately 8 in 10 companies operate their own central stations for monitoring those signals. Others outsource this service.