2014 Subscriber Market Forecast Study
Results of SDM’s Forecast Study coupled with an outlook from leading dealers and integrators, offers a very positive promise for the security industry’s 2014 performance: 12 percent growth.
Sometimes it’s good to be wrong. In late 2012, security systems integrators and dealers forecasted that their total annual revenue would improve only slightly — 1 percent, on average — during 2013. It could have been the dismal economy casting its shadow over their predictions, because a year later, they were proven incorrect. Among the integrators and dealers who participated in SDM’s 2014 Subscriber Market Forecast Study, their total annual revenue grew by an average of 9.9 percent. What’s more, they expect 2014 to offer 12 percent growth — even better performance.
“At the beginning of the recession, when the sky was falling, we had a big company meeting and said, ‘Hey somebody’s got to buy security, and it might as well be from us.’ Our sales have increased every year since then…” says Jeremy Bates, owner and general manager of Bates Security/Sonitrol of Lexington, Lexington, Ky., who attributes such success to being proactive with customers in all ways possible. Bates, featured on the cover of this issue, is one of SDM’s 2014 Forecast panelists who weighed in anecdotally on the Forecast survey questions. His business finished out 2013 with a 17.8 percent advance in total annual revenue, but he does not expect to maintain that rate in 2014 since eliminating some large security projects that added significant revenue to the books, but demanded too many resources, Bates explains. He expects a lesser increase of about 5 percent in 2014.
Forecast Study results show that while only 48 percent of respondents expected to see increased revenues in 2013 (at the time the survey was conducted in August-September 2013), as many as 59 percent expect increases in 2014 — a significant improvement in the channel’s business outlook.
Installation revenue varied in 2013, depending on the company, territory, markets covered and other factors. Respondents of the Forecast Study increased sales revenue by 38 percent, on average, which is higher than what our panelists experienced, but this could be due to a greater response rate among small companies; higher growth rates are more easily achieved when sales are smaller to start. For example, one-fourth of participants in the Forecast Study indicated their 2013 sales would total less than $100,000.
Average sales per-location among the study’s respondents were $1.6 million in 2012 and $2.2 million in 2013. Among panelists, however, installation revenue was either flat or only slightly improved, but not as high as the 38 percent captured by the Forecast Study.
“Our installation business from 2012 to 2013 was up just over 8.5 percent, which corresponded pretty closely to our total increase in revenue,” says Eric Yunag, president and chief executive officer (CEO) of Dakota Security, an integrator based in Sioux Falls, S.D. “Also, what we’re looking at right now is a record backlog for us at the end of this year moving into 2014, which is another signal of strength as far as the momentum we feel building in general economic conditions for 2014. For 2014, we’re forecasting just over an 8.5 percent increase just on installation revenue.” Dakota Security services some energy-development projects in its territories, as well as critical infrastructure markets.
At ASG Security, a strong regional security company with 23 offices and a national accounts program with customers across the entire United States, installation revenue grew 9.2 percent from 2012 to 2013, says Joe Nuccio, president and CEO of the Beltsville, Md., based company — “which is actually pretty significant given the fact that we started to shift our large commercial and be much more selective on some of the projects. For 2014, we’re still going to grow our installation revenue by about 6 percent,” Nuccio predicts.
For others, installation revenue was flat or down, but in some cases was offset by increases in recurring monthly revenue (RMR).
“Our installation revenues were fairly flat for 2013 over 2012, due to the fact that our large commercial integration business has been fairly stagnant,” describes John Jennings, CEO of Safeguard Security and Communications Inc., Scottsdale, Ariz. Looking out onto 2014, Jennings believes there is a lot of pent-up demand in the marketplace among customers. “They’ve just been holding back quite a bit, but we’re seeing some of that start to loosen up. Our commercial market has been in the tank. I think we have almost four years of inventory sitting on the books as far as vacant space for commercial office buildings, so that needs to get absorbed before we see a pick up there,” he says.
If sales and installations were lackluster for some, recurring revenue came out on top among both Forecast Study participants and panelists. Overall, 64 percent of those surveyed had higher RMR rates in 2013 compared with 2012.
“We’re estimating a 16.4 percent increase by the end of 2013,” Bates says. “The following year we’re hoping to do better, around 20 percent. The difference is basically not selling large jobs, but only jobs that involve RMR — and then an increased focus on the residential side of our business has helped increase those numbers for us.”
ASG Security grew its RMR by 11.4 percent in 2013 and expects to increase it by 13.6 percent this year — no small feat for a company of its size, which ranks as No. 9 on the SDM 100. Nuccio said ASG would likely end 2014 at approximately $10 million in recurring rate.
Rochester, Minn.-based Custom Alarm, which ranks as No. 92, experienced a 5 percent growth in RMR. “We mostly attribute that to interactive services,” says Melissa Brinkman, chief operating officer. “Our sales guys, especially in the residential market, have really bought into interactive services and backup systems and such, so our average RMR has gone up significantly. We look for 2014 to be close to 10 percent, and a lot of that coming from moving into offering managed services for access and CCTV,” she says.
One thing the Forecast panelists agree on is the source of sales opportunities in 2014: managed services and interactive services play a major role in growth, as do remote video monitoring.
“On the commercial side, video and access continue to play a major role for us; managed services on both sides. On the small business side, the full host of interactive services has been extremely successful for us,” Nuccio describes. “On the residential side, it’s really the interactive services and lifestyle enhancements on top of our life safety platform. For us, 95 percent of every residential system that we sell at least has one interactive service in it, which is really important for future growth on the platform,” he says.
This portrayal of growth opportunities supports what SDM’s Forecast Study shows, which is that video products and monitoring equipment are the top categories in which dealers and integrators expect their spending to increase this year. Seven in 10 survey respondents plan to increase their purchases of video equipment, and five in 10 plan to buy more monitoring devices. Even within the integrator community, there is greater interest in RMR-based services such as video guarding.
“We’re seeing increasing demand — particularly in remote and high-security critical infrastructure areas — for proactive video monitoring staffed by virtual guards, and so we have a fair degree of optimism for that technology as a way of reducing risk for our customers in 2014,” Yunag says.
Security awareness is also a factor that will give dealers a boost this year, particularly in the residential market where most of the panelists say they plan to put renewed emphasis. The panelists say they will benefit from the increase in advertising by newer providers such as AT&T and Comcast. The effect of these companies already has an impact on the Forecast Study results, as the price for monthly monitoring rose from an average of $26 in 2012, to $37 in 2013.
“We’ve always sold residential in our area, but now with a renewed focus on it and actually doing some advertising, I definitely know that we will be increasing our numbers. With AT&T and now the local cable company coming into town, the awareness of the products that are out there will increase,” Bates says. “All ships rise with the tide.”
The Forecast Panel: 2014
Jeremy Bates is the general manager and owner, along with his family, of Bates Security/Sonitrol of Lexington, based in Lexington, Ky. Bates Security received their local chamber of commerce’s Small Business of the Year award in September 2013.
Joe Nuccio is president and CEO of ASG Security, based in Beltsville, Md. By executing a well-balanced growth strategy equally emphasizing organic sales growth and acquisitions, Nuccio elevated ASG Security from a relatively unknown alarm security company into one of the most respected and top 10 largest U.S. security companies as ranked on the SDM 100.
John Jennings is chief executive officer of Safeguard Security and Communications Inc., based in Scottsdale, Ariz., a company he joined in 1975 as an alarm installer. During his tenure with Safeguard, yearly gross revenues increased from $500,000 to more than $36 million.
Eric Yunag is the president and chief executive officer of Dakota Security Systems Inc., based in Sioux Falls, S.D. The company is a leading independent security integration firm with seven regional offices throughout the country.
Melissa Brinkman is chief operating officer of Custom Alarm/Custom Communications Inc., Rochester, Minn. Celebrating its 45th year in business, Custom Alarm provides security, fire and integration solutions and takes pride in delivering the best service to its customers.
The Panel Weighs in on 2013 Total Revenue
Jeremy Bates: We are estimating a 17.8 percent increase based on where we finished for 2012. We had some large-scale projects that we were completing this year; we continue to have our strong commercial growth, and we began focusing more on residential than we have in the past.
Joe Nuccio: For 2013, the difference in total annual growth is about 11.8 percent. It was even larger [in 2012] but we started shifting some of our large commercial business into more smaller business and residential. That’s where we see a lot of growth.
John Jennings: We’re going to end up about 4.5 percent growth [in 2013] — nothing major. I think our commercial business is about flat; our residential business is up.
Eric Yunag: We saw just under 10 percent growth in 2013. We cover a number of geographies and saw just broad economic recovery across all of our customer demographics. Capital overall contributed to larger security outlays, across our core customer groups.
Melissa Brinkman: We actually are estimated probably either flat year-over-year or down 1 to 2 percent from 2012 to 2013. With large projects that we were involved in before, we are no longer in 2013. We’ve been focusing on smaller commercial and residential.
The Panel Weighs in on RMR Performance
Jeremy Bates: We’re estimating a 16.4 percent increase [in RMR] by the end of the year. The following year we’re hoping to do better, around 20 percent. The difference is basically not selling large jobs, but only jobs that involve RMR. An increased focus on the residential side of our business has helped increase those numbers for us.
Joe Nuccio: From 2012 to 2013, we’re going to grow recurring by 11.4 percent, which for us is pretty hard to do the larger we get. We ended 2012 at about $7.9 million in recurring rate, and we’ll end up 2013 about $8.8 million recurring rate. We’re going to exit 2014 at about $10 million in rate, so we’re going to be at about a 13.6 percent increase.
A lot of people think we’re an acquisition company and we’re not. Sixty-five to 70 percent of all our company growth comes from internal sales. The only reason we do some acquisitions are to leverage the current infrastructure or add a new territory to grow and build internal sales from. For us, 2014 is going to be robust. What’s driving that, which is very similar to 2013, are all of the subscription-based services — managed services, interactive services in both the residential and small business side — and our continued commercial platform.
John Jennings: We were at 8 percent before our disposal of my asset in New Mexico. We disposed of about $50,000 a month in October 2013. So, we’ll probably end up at around 3 percent. We should be at 9 to 10 percent [in 2014], which is kind of our average clip. It depends; if we do another acquisition it will be more than that, obviously.
But I agree with Joe — it’s managed services, etcetera, etcetera, etcetera.
Eric Yunag: Our recurring revenue 2012 to 2013 grew at about 5.8 percent. We’re forecasting almost double that in 2014 predominantly based around the idea that as an integration company we’re continuing to build and promote managed services as part of our recurring revenue platform for our larger enterprise customers. We anticipate significant growth there based on heavily incentivizing our sales teams across our regions to promote those products and services.
Melissa Brinkman: I’m happy to join the group and say that we are up year over year, about 5 percent in RMR and we mostly attribute that to the interactive services. Our sales guys, especially in the residential market, have really bought into the whole interactive services and the backup systems and such, so our average RMR has gone up significantly. We look for 2014 to be close to 10 percent — a lot of that coming from moving into offering managed services for access and CCTV.
The Panel Weighs in on What Keeps Them up at Night
Jeremy Bates: Controlling costs and keeping up with the customer demand, as in honoring our promises. But if I had to pick one, controlling costs would be the most challenging. John mentioned the Affordable Care Act. Healthcare uncertainties are a concern of ours; but regardless of what happens there, we intend to be successful.
Joe Nuccio: We’re really good operators — we’re efficient and we do all the things we’re supposed to do and we’re good at it. But the one thing that is always the same for me is attrition. Attrition is the key to it all, and that’s the one that I always worry about — it keeps me up at night all the time. Maintaining attrition is very, very important. It’s our No. 1 priority.
John Jennings: I’d have to echo Joe. I think managing attrition allows you to grow your business faster. No. 2 is eliminating the status quo from our business. I think we’re kind of plateaued at a certain point where I think we’ll do close to $38 million this year. Trying to break that $40 million mark has been a challenge for us. One of our goals this year is to continue our growth and not just accept good enough.
Eric Yunag: In the integration space, our challenge over the last couple of years is the same as what it will be in 2014, which is finding and retaining high-tech employees. With unemployment in our core territory as low as it is, that’s an increasing struggle for us to find and retain high-quality employees. Right behind that is the training as-pect: continuing to invest in the amount of training necessary to meet the demands of our customers.
Melissa Brinkman: Finding and retaining employees, especially as things have gotten more intricate with CCTV and access and finding qualified people that have that knowledge. That’s a challenge for us. Also, just keeping up with technology — those two kind of go together.