2013 SDM 100: Power Surge
The metamorphosis of the security industry into a services-based business capable of serving many sectors has taken hold, evidenced by the largest security providers — the 2013 SDM 100.
Many security providers seemed to have harnessed lightning last year, using it to successfully power their sales and deliver stronger security solutions to their customers. The effect was a significant surge in recurring monthly revenue (RMR) among the SDM 100 — a ranking of the largest U.S.-based security companies by their RMR.
SDM 100 companies’ RMR collectively improved 16 percent in 2012. Part of the increase is due to the first-time ranking on the SDM 100 of several large systems integrators with RMR. They include Tyco Integrated Security ($70.8 M, estimated by SDM); Diebold Security ($12.7 M); G4S Technology ($1.5 M); RFI Communications & Security Systems ($536,765); and Johnson Controls Inc. ($335,417).
Collectively, RMR grew from $552.3 million to $642 million among the SDM 100. The dealers and integrators also performed very well individually — 93 of 100 companies recorded an increase.
Most impressively, approximately four in 10 companies had double-digit RMR growth. Looking just at the 15 companies ranked, those with double-digit RMR increases are Stanley Convergent Security (51.6 percent), Vivint Inc. (26.5 percent), Monitronics (22.1 percent), Guardian Protection Services (11.9 percent), ASG Security (12.4 percent), Interface Security Systems Holdings Inc. (34.6 percent), Security Networks (42.4 percent), and Protect America (14.8 percent).
Sales volume increased only slightly by comparison among the SDM 100. Contracted services and retrofits led the way to RMR growth — offerings such as remote, interactive services (using a mobile device to control and interact with a security system); home automation features/services; central-station-managed access control; and cloud-based or monitored video surveillance.
“The markets we operate in were strong in 2012 and our best segments were remote services for security systems and hosted solutions for video and access,” concurs ADS Security L.P., No. 26 on the SDM 100. (See rankings beginning on page 49.)
“The market was stronger in 2012 than in 2011, especially in the adoption of home automation,” states Vivint Inc., ranked No. 4 on the SDM 100. “Seventy-one percent of our customers’ homes are home-automation enabled, and 53 percent of customers in 2012 adopted at least one home automation feature.”
All of these RMR-based services had a positive effect in the financial community: a sustained wave of investment in the alarm industry. (See related article, “The Financial Community Assesses Change in the SDM 100,” on page 52.)
This new wave of services not only helped dealers build a base of higher RMR per customer; it also drew a substantial number of new customers. The SDM 100 grew its subscriber base from 13.3 million subscribers to 18.4 million subscribers.
SDM 100 companies earn their revenues from the sale, installation, service, hosting and monitoring of electronic security systems, such as intrusion and fire alarm, access control, video surveillance, and related low-voltage systems. Now in its 23rd year of publication, the SDM 100 Report continues to prove that security is a significant concern of both homeowners and business leaders.
Business was not without its challenges and not all of the segments performed as well as others. The large-commercial-projects market still suffers from a lack of capital spending, according to some of the dealers.
“2012 was another challenging year for the larger commercial integrated systems business. It wasn’t worse than 2011, but about the same. There are still fewer projects, less funding and great pressure on margins,” reports No. 11-ranked ASG Security. “However, the low and mid markets performed very well for us again — specifically, a continued great resurgence in residential sales with excitement around our enhanced service platform. Small business was also a continued strong growth segment for the company, led by enhanced intrusion sales and cloud-based video services.”
Security Networks, ranked No. 14 on the SDM 100, also found the residential market to be strong for its Affiliate Funding Program.
Not all of the dealers found the large-commercial market to be flat and some even had opportunities in sectors such as new construction.
“There has been an overall improvement in the market over the past 12 months. Government and local municipalities are leading the way with system upgrades and new construction,” states No. 39, American Alarm & Communications.
“The market for security systems sales and integrated systems projects showed growth in 2012 compared with 2011. We have seen an increase in new systems demand as well as RFP activity, particularly in the latter part of 2012. Retail and restaurants, financial and banking, and industrial markets exhibited the best growth for us,” describes No. 6-ranked Protection 1, SDM’s 2012 Dealer of the Year. “Much of the business comes from upgrading existing systems and services versus new build activity.”
The industry’s largest security companies note that there still are lingering effects of the Great Recession on customers’ abilities to invest, to the extent they would like to invest, in security systems and services.
“Installation of fire and security systems remains strong,” notes AFA Protective Systems Inc., No. 23. “While budgetary concerns are still quite prevalent, companies remain willing to allocate sufficient capital to maintain the necessary level of protection needed to secure a safe working environment.”
There are, and always will be, factors in the general economy and influences among society that affect the rate at which the security industry grows. For example, one company, Electric Guard Dog, No. 30, noted that it experienced a “clear drop in demand” last September and October leading into the elections. “This problem appeared to correct itself in November-January, but there was a very steep drop during those two months,” the company states.
However, the metamorphosis of the security industry into a services-based business capable of serving many sectors with a wide variety of security offerings has taken hold, evidenced by the largest security providers – the 2013 SDM 100.
Key to Using the SDM 100
The 2013 SDM 100 ranks U.S. companies that provide electronic security systems and services to both residential and non-residential customers. This ranking is based on information provided to or, in few cases, estimated by SDM. Ranked companies were asked to submit either an audited or reviewed financial statement, or a copy of their income tax return showing total gross receipts for the stated period. The vast majority of the firms ranked are privately held.
The main table, which begins on this page, ranks 100 companies by their recurring monthly revenue (RMR) as of December 31, 2012. The company with the highest RMR is ranked as No. 1, and so on. For each of the 100 companies, the following information is provided, from left to right:
- Current year rank, which is based on December 31, 2012, RMR.
- Prior year rank.
- Company name, as used in the marketplace, and headquarters location.
- Amount of RMR billed on December 31, 2012.
- Percentage of RMR increase/decrease from December 31, 2011.
- Number of subscribers (recurring-billable customers) at year-end 2012.
- Amount of sales revenue from residential installations in 2012.
- Amount of sales revenue from non-residential system installations in 2012.
- Total gross revenue in millions of dollars. This number represents total revenue in calendar-year or (the company’s) fiscal-year 2012 from sales/installation, service, leasing, and monitoring.
- Number of full-time employees.
- Number of business locations, including headquarters.
Note: An e following the figure indicates it is an SDM estimate.
To find a company by name, use the alphabetical index on page 68.
The Financial Community Assesses Change in the SDM 100
In recent years, we have been witnessing a paradigm shift in the top tier of alarm monitoring companies due to the convergence of several key market dynamics. Access to both public and private equity and relatively inexpensive debt capital has spurred a sustained wave of investment in the alarm industry and corporate consolidation, which is leading to larger enterprises as seen in the SDM 100 annual rankings. For example, in 2006, No. 20 on the SDM 100 had $1.7 million of RMR. In 2012, No. 20 had $3.6 million of RMR. In addition to consolidation, the increase in company size is being driven organically by increased market penetration and average revenue per unit (ARPU) due to the introduction and adoption of enhanced services, such as remote video monitoring and Web-based home automation services.
Private equity investors have become more active as they seek to participate in a market characterized by a long track record of stable, recession-resilient cash flows, increasing ARPU from enhanced services, significant economies of scale, and a very attractive borrowing environment. This interest is clearly demonstrated by the fact that today, more than half of the SDM 100 top 20 ranked companies are private equity-backed, whereas there was limited investment just a few years ago. We are also seeing increased participation in sell-side processes by private equity investors as the combination of low interest rates, highly leveragable RMR, and a need to put capital to work has created a competitive environment relative to strategic acquirers that has helped push valuation multiples to higher levels.
This shift in ownership towards private equity is expected to continue as more alarm companies cross the threshold where they can access the institutional equity and debt markets as described below. The availability of capital among the top, middle, and bottom tier companies is significant. The market unofficially defines the tiers as follows:
|RMR Tier||Providers of Capital|
|Up to $500 thousand||Local bank and specialty lenders|
|$500 thousand to $3 million||National institutional lenders, limited private equity|
|$3 to $6 million||National institutional lenders, private equity, high-yield|
|$6 million and above||Public/private equity, institutional loans, high-yield bonds, securitizations|
Since the 2006 SDM 100 report, the top 100 companies have broken out as follows among the RMR tiers (see “RMR Regroups”):
Institutional senior credit facilities provided by national lenders typically begin at a minimum of $10 million, which implies that the borrower must have at least $500 thousand of qualified RMR (implying a 20x leverage multiple). Below this level, alarm monitoring companies typically borrow from local banks or specialty lenders at rates and terms less favorable than the institutional market.
Notably, at the $3.0 to $3.5 million RMR level, companies have begun to be able to access the institutional non-bank market, which includes syndicated term loans and high-yield bond markets. Historically, access to these debt capital markets required twice as much RMR; however, an appetite for yield coupled with a better educated investor base has raised the profile for alarm monitoring companies resulting in oversubscribed syndications.
At the top of the industry, the largest companies have aggressively accessed the capital markets including public and private equity, high-yield debt, securitizations, and large institutional credit facilities (revolvers and term loans). By example, Interface Security Systems, ranked No. 12 this year, recently completed a recapitalization in January 2013, managed by Imperial Capital, that included a new $230 million senior secured notes (high-yield bond) offering as well as a new undrawn revolving credit facility with Capital One. The offering was well received by the high-yield bond market and was significantly oversubscribed and widely distributed to approximately 100 debt investors. Other large alarm monitoring companies that have recently completed high-yield bond financings include Vivint, Monitronics, and Securitas Direct (Europe’s largest residential alarm monitoring provider). In addition, ADT completed a $700 million senior notes offering earlier in 2013 to repurchase outstanding shares of ADT common stock.
It is expected that the factors that have attracted investors during the last several years will remain in place during 2013 and there will continue to be an active mergers and acquisitions (M&A) market driven by inexpensive credit and strong equity investor appetite. For the industry as a whole, the influence of institutional investors is seen as a net positive with the implementation of best practices, a fresh outside perspective, and the investment of capital in new, innovative products and services. This new element of competition and investment is good, first and foremost, for consumers who benefit from the new products and services, as well as for the industry as a whole with stronger, better capitalized companies as the alarm industry continues to evolve and mature. — By John E. Mack III
John E. Mack III is co-head of Investment Banking and head of Mergers and Acquisitions at Imperial Capital, a full-service, middle-market-focused investment bank headquartered in Los Angeles. Previously, he served as CEO of USBX, a boutique investment bank he founded and subsequently sold to Imperial Capital, and CEO of Protection One Inc. He may be contacted at 310-246-3705 or email@example.com.
How to Purchase the SDM 100 Directory
Wouldn’t it be useful to have more information about each of the 100 companies ranked here? The 2013 SDM 100 Directory includes contact names, mailing addresses, telephone numbers, website URLs, branch office locations, product buyer names, installation data, revenue sources, and more. The SDM 100 Directory comes in Microsoft Excel format. To order the SDM 100 Directory, contact Heidi Fusaro at (630) 518-5470 or by e-mail to firstname.lastname@example.org.
SDM 100: Its Purpose & Approach
The SDM 100 has been published since 1991. Its primary objective is to measure consumer dollars gained by alarm companies, in order to present an account of the size of the market captured by the 100 largest security providers. SDM 100 firms are ranked by their recurring monthly revenue. RMR is the revenue associated with the contractual agreement between a security company and its subscriber — derived from customer billing for services such as monitoring, contracted service/system maintenance, security-as-a-service/managed solutions, and leasing of security systems — and is typically the basis for valuation of a security company. RMR is the language of security company executives and is meaningful in comparative analysis among industry peers. Of the 100 security dealers ranked, 39 of them earned more than $1 million in RMR in 2012.
Hear more from several of the SDM 100 companies about the factors contributing to their double-digit growth in SDM’s podcast series, “SDM 100 Executives Share Successes,” at www.SDMmag.com/media/podcasts
To find this article online, as well as previous years’ editions of the SDM 100, visit www.SDMmag.com/SDM100Report.
Register to attend SDM’s virtual tradeshow, iSecurity, taking place on June 13, 2013, to hear more about the SDM 100 in the webinar, “RMR Growth Among the SDM 100.” Visit www.isecuritytradeshow.com to register.