2017 SDM 100: 27th Annual Report
To stay on top of this ever-expanding market, SDM 100 dealers will need highly skilled technical talent.
The result of the 2017 SDM 100 was upbeat: Collectively, the industry’s 100 largest security dealers grew their recurring monthly revenue (RMR) 18.4 percent, from $612 million to $725 million, last year. They grew their subscriber base by more than 1 million customers; and they grew total annual revenue 6.2 percent in 2016. The SDM 100 is a ranking by RMR of the largest U.S. security installation and monitoring companies. Among the top 100, there were 88 dealers who individually improved their RMR rate in 2016 over 2015.
“The market remains strong as security remains a priority and the economy continues to grow,” remarks No. 97-ranked Sonitrol Security Systems of the Triangle.
There is a high level of optimism among most dealers, apparent especially since the second half of 2016 and into the first quarter of 2017. Some of that optimism stemmed from the demand dealers are seeing in the marketplace and from their companies’ sales performance.
“In general, we saw the market as strong — continuing a multi-year trend of growth through our organic sales efforts,” says No. 20-ranked ADS Security L.P. “Specifically, we would highlight our growth in the commercial (and light commercial) market, and would further highlight the success we have had in supporting market demand for video surveillance systems.”
For other security dealers, optimism stemmed from the prospect of the economy being stimulated by actions of the new presidential administration. (See related article, “How Dealers Feel About the New Presidential Administration,” on page 80.)
Among the top 10 ranked, there are three stand-out companies that achieved double-digit increases: ADT, which when combined with Protection 1 for this report had an estimated 24.7 percent RMR increase; Vivint Inc. with a 17.8 percent RMR increase; and Safe Home Security Inc. with a 19.6 percent increase.
A significant portion of RMR growth for the entire SDM 100 is due to Protection 1 being removed from the 2016 report due to acquisition and then added back in with ADT in 2017; and the merger between Tyco Integrated Security and Johnson Controls resulting in a single listing as Johnson Controls (ranked No. 2), which is significantly larger than when the two companies were listed separately in 2016. If both Johnson Controls and ADT were removed from the calculation this year, the collective RMR growth rate from 2015 to 2016 would have been just 9.8 percent — still very healthy growth but not as robust as the 18.4 percent increase when ADT and Johnson Controls are included.
There are key market movers in both the residential and non-residential markets, and dealers say that competition is forceful in both of those segments.
“Competition for market share will continue to be more challenging in 2017 with the continued growth of the DIY providers like SimpliSafe and the added competition from the large cable and telecom companies like Comcast and AT&T,” describes Fleenor Security Systems, No. 92. “One positive light with having new competition is the fact they will help educate and reach many potential customers traditional security companies were not reaching before. While large cable company competitors push the benefits of home automation, security remains the backbone service needed to make home automation products successful and I believe this need will leave a healthy space for companies like ours to operate.”
While only 2 percent of SDM 100 companies’ revenue, on average, is derived from hosted and managed services, SDM 100 dealers are involved in a good number of these non-traditional services, including managed access control (71 companies), video surveillance as a service (41 companies), and network management and health monitoring (24 companies).
The Internet of Things (IoT) may be the single trend with the greatest potential to change the structure of the security industry comprehensively. We asked SDM 100 dealers, “What issues and trends do you think will have the greatest impact on your business in 2017?” Approximately half of dealers mentioned the IoT in some context.
“The integrator must be able to understand the interoperability of these services which will drive value. Key to this will be the ability to leverage data from these interconnected systems,” says RFI Communications & Security Systems, No. 71. “Cybersecurity and the push for mobility, and wireless adoption are trending up and will continue to be disruptive.”
This is the crux of the matter: Corresponding with the market’s increasing demand for technologies such as these is cybersecurity. Only five of the top 100 dealers indicate that they provide cybersecurity services. To get to the top of the competitive heap dealers will need to place intense focus on the technical skills offered by their companies.
This challenge is perhaps best summed up by No. 51-ranked Supreme Security Systems Inc. “Supreme will be challenged on two fronts in 2017. The first is remaining cutting edge as technology evolves…. The second is securing adequate service and installation talent to deliver on the technology commitments in what appears to be an ever-expanding market.”
“Ever-expanding” is an apt description, as SDM 100 dealers are expecting business to be very robust in 2017.
SDM 100: 2016 Collective Strength
|Total recurring monthly revenue||$641.9 mil||$663.0 mil||$670.1 mil||$612.5 mil||$724.9 mil*|
|Total subscribers||18.4 mil||14.6 mil||14.3 mil||12.6 mil||13.9 mil†|
|Total annual revenue||$20.2 bil||$15.8 bil||$14.0 bil||$16.2 bil||$17.2 bil**|
|Total residential sales revenue||$171.9 mil||$184.7 mil||$139.5 mil||$136.2 mil||$128.0 mil††|
|Total non-residential sales revenue||$947.2 mil||$714.7 mil||$1.2 mil||$898.0 bil††||$2.4 mil††|
|Business locations operated||992||1,113||1,146||1,022||1,617|
|Full time employees||55,950||56,115||56,542||51,161||60,372***|
|Part time employees||1,950||4,846||604||6,101||8,169|
Source: 2017 SDM 100, SDM Magazine, May 2017
The table above presents aggregate figures for the SDM 100 group of companies, which are ranked by their recurring monthly revenue (RMR) — an industry standard of valuation of a security installation/monitoring business. Most of the SDM 100 companies are privately held. Submitting RMR is required for ranking; other figures are not required but mostly provided. Most companies — but not all — also reported their total annual revenue, number of subscribers, installation revenues, and employees. Therefore, one should exercise caution in using this information to extrapolate industry totals or to benchmark. Note that some figures — such as total annual revenue, subscribers, and residential and non-residential sales revenue — fluctuate from year to year due to both acquisitions and inconsistent reporting by the ranked companies.
* Total monthly recurring revenue, based on RMR of Dec. 31, 2016. Based on responses or estimates from 100 companies.
† Based on responses from or estimates of 95 companies. Not included: Johnson Controls, Kastle Systems Int’l; SSD Alarm Systems / Kern Security & Fire / Alpha Alarm & McNeill Security; RFI Communications & Security Systems; VTI Security.
** Total annual (2016) revenue from electronic security system sales, installation, service, leasing, monitoring, and sales of subscriber accounts, as reported to or estimated by SDM. Based on responses from or estimates of 100 companies.
†† Based on responses from or estimates of 77 companies. Note: Some companies either did not choose to report this figure or did not have sales/installation revenue to report in one of the categories.
Not included in Residential Sales Revenue are: ADT; Johnson Controls; MONI; Alarm Capital Alliance / My Alarm Center; Securitas Electronic Security Inc.; CPI Security Systems Inc.; Guardian Alarm Company; SAFE Security Companies; Kastle Systems Int’l; Protect America; Red Hawk Fire & Security; Electric Guard Dog; SafeTouch; SSD Alarm Systems / Kern Security & Fire / Alpha Alarm & McNeill Security; Select Security; Koorsen Fire & Security; Redwire / Sonitrol Tallahassee; Crime Prevention Security Systems LLC; RFI Communications & Security Systems; Gillmore Security Systems Inc.; VTI Security; Briscoe Protective Systems Inc.; LOUD Security Systems Inc.
Not included in Non-residential Sales Revenue are: ADT; Vivint Inc.; MONI; Alarm Capital Alliance / My Alarm Center; CPI Security Systems Inc.; Guardian Alarm Company; SAFE Security Companies; Kastle Systems Int’l; Protect America; Electric Guard Dog; NorthStar Alarm Services LLC; SafeTouch; General Security Inc.; SSD Alarm Systems / Kern Security & Fire / Alpha Alarm & McNeill Security; Select Security; AMP Security LLC; Redwire / Sonitrol Tallahassee; Acadiana Security Plus; Allied Universal Security Systems; Crime Prevention Security Systems LLC; Alarmco Inc.; Gillmore Security Systems Inc.; VTI Security; LOUD Security Systems Inc.
*** Based on responses from or estimates of 97 companies. Not included: SafeTouch, Crime Prevention Security Systems LLC; Mijac Alarm
New Challenges to Creating Value
By John Mack & Michael Barnes
It is a great time to be in the security alarm industry. As the data around the SDM 100 indicates, the industry’s larger players are growing, and there is plenty of support for the rest of the industry doing equally well. This is not surprising given the range of new technologies and applications, and the demonstrable appeal in both the residential and commercial market segments.
But there are reasons to be cautious when reaching for this growth. Much of the industry’s efforts are focused on using the recurring revenue pricing model. That is, a low upfront installation cost coupled with long-term, high-margin recurring monthly revenues (RMR) for the ongoing services. This RMR-centric (or “security-as-a-service”) approach has served the industry well for more than 25 years, and is an attractive arrangement for both the alarm company service provider and the end user. The details are important, as this pricing model typically requires a sizable financial investment on the part of the alarm company.
The 3-Variable Bet
Using the RMR-centric approach, security alarm companies will incur fully-burdened costs associated with originating a new RMR customer that can materially exceed the upfront revenues. These costs are effectively an “investment” which is subsidized by the security alarm companies in return for the RMR.
The returns on the investment made are governed by three variables:
1. the fully-burdened cost to originate the subscriber RMR (typically referred to as subscriber acquisition costs or SAC);
2. the margins realized on the RMR and related revenues; and
3. how long you keep the revenue stream (i.e., the attrition rate).
When your margins are high enough, and the time you keep the customer long enough to return the investment made in the arrangement and provide a return that exceeds the cost of your capital, value is created. The industry has evolved some well-established heuristics, or rules of thumb around this equation which are widely relied upon — and for good reason.
The RMR-centric model is more than 25 years old, and the industry currently has over $1 billion of RMR (in the U.S.). Most of the capital used to originate this has yielded attractive returns, which is one of the principal reasons highly sophisticated private equity investors are so interested in the industry. Today 68 percent of the top 25 alarm companies in the security alarm industry are backed by private equity investors.
However, most of the experience and data that underpins this pricing model is rooted in the classic monitoring-centric, traditional intrusion and fire detection RMR that comprises the majority of today’s base, and thus the majority of management experience among executives.
New Services — New Challenges
Research done by Imperial Capital and Barnes Associates clearly indicate that key variables are showing signs of volatility. While the overall performance of the industry remains on a relatively consistent footing, there is a wider array of performance issues, particularly when analyzing more aggressive efforts to capture new growth. In many cases, we are seeing potentially disconcerting increases in SAC, in both absolute dollars as well as a multiple of RMR, and a concurrent lowering of margins on the associated RMR. Most of this is associated with new(er) technologies and services, such as video and enhanced automation related system functionality, which have very large market opportunities, but not necessarily the ongoing margin potential of classic RMR — at least, not at today’s operating dynamic and cost structure.
Of course, these two variables can accommodate some negative movement if the third variable — attrition — compensates for them. A higher investment with lower ongoing margins is fine, if the life of the revenue stream is longer. Much of what we are seeing is, in fact, new RMR growth associated with products and services that appear to be potentially more persistent; that is, experiencing lower attrition rates and resulting longer customer lives. But, the data supporting these assumptions is small and since the technology is new, there is inherently not a sufficiently long-term view from which to draw definitive conclusions.
Additionally, the industry, like so many others, has to accept the new reality of shorter product and service cycles. Everything is more likely to require more upgrades, more frequently, and thus potentially more investment in order to stay relevant and competitive.
Data & Talented Management
This reality and its associated complexity require talented management that can carefully analyze these variables to make sure that investments made to create new RMR are yielding appropriate returns. Those that can fuse the lessons of the past with the emerging data surrounding the new products and services, and then assimilate and rationalize this into an effective investment strategy with the critical three variables will do well.
Industry RMR (in the U.S.) roughly doubled over the last 10 years, and market penetration is accelerating even with one of the worst recessions in history during this period. All signs point to a more than doubling over the next 10-year period. That is a lot of opportunity for creating value. The trick will be to keep an eye on the fundamentals, and avoid the pitfalls of a less than effective RMR-centric investment strategy.
About the Authors
John E. Mack III is executive vice president and co-head of Investment Banking at Imperial Capital LLC, a leading full-service investment bank to the security industry. See more on Imperial Capital services, conferences and research at www.imperialcapital.com.
Michael Barnes is the founder of Barnes Associates Inc., an advisory and consulting firm that specializes in the security alarm industry. Barnes Associates is also the co-sponsor of the annual Barnes-Buchanan Conference. See more on Barnes Associates at www.barnesassociates.com.
How Dealers Feel About the New Presidential Administration
President Trump continues to draw passionate views from people on a wide range of issues, so we knew security professionals would be just as opinionated as the general populace about his team’s effect on their businesses. We asked SDM 100 companies in February, “What effect, if any, do you think the new presidential administration will have on end user spending and security system sales in 2017?” As expected, they gave a mix of answers from negative to neutral to positive, but the overwhelming majority felt the new administration would be favorable to the security marketplace.
Keep in mind that because the security dealers were queried about this early on in the administration (mid-February through mid-March), their answers might be different today. Following are some of their responses:
“It is still early days into the new presidential administration, so it is too soon to tell what/if any affect this new administration will have on end user spending on security systems.” — No. 5, Vector Security
“The Trump administration’s overarching themes appear to be restoring the U.S. economy and position on the global stage as well as keeping America safe and secure. Much uncertainty remains about the precise actions he will take to accomplish these goals.” —
No. 18, Red Hawk Fire & Security
“Anyone who claims to know what the new presidential administration will do is fooling themselves. That said, it seems more police resources will be focused on terrorism and immigration. This will drive a greater need to invest to secure your own property.” — No. 22, Electric Guard Dog
“Some negative impact due to market volatility and uncertainty in economic impact of new policies, both residentially and commercially.” — No. 27, American Alarm & Communications
“We believe the new administration will be good for the country and for small business. The prospect of lower taxes and the elimination of Obama Care will be a very positive element for the economy.” — No. 28, Mountain Alarm
Since we do defense-related work, we wouldn’t be surprised to see a bump there.” — No. 34, First Alarm
“If he can accomplish the deregulation and tax cuts he promised it will free up business and thus free up monies to be spent on upgrades, expansions, and new enterprise which feeds spending.” —
No. 36, Kimberlite Corp.
“I believe that with a more business-friendly administration money will be freed up for growth and expansion necessitating additional security needs.” — No. 41, Security Equipment Inc.
“I believe we will see a heightened sense of security due to the election. I think businesses will want to protect themselves from domestic terrorism given the current state of mind of the people after the election.” — No. 42, Sonitrol of Sacramento & Orange County, Cybex Security Solutions
“The future of business in America looks much better under the Trump Administration.” — No. 46, Matson Alarm Company Inc.
“The left’s objections aside, the new administration has engendered an optimism that was not present during the past eight years. Once the election was over, Supreme enjoyed a material increase in lead flow and sales closing rates. If the administration can implement the promises and plans already made, it is reasonable to expect that the early increases will continue and expand.” — No. 51, Supreme Security Systems Inc.
“Increased infrastructure spending and security-related spending could result in increased demand for security integration and solutions projects.” — No. 63, Allied Universal Security Systems
“Security will continue to be a concern but most importantly with tax reform as well as healthcare cost controls, it will spur growth, expansion and therefore investment in more security as needed. Tax reform and healthcare cost reduction can also help us with having the needed resources to add staffing.” — No. 97, Sonitrol Security Systems of the Triangle
“I believe it will be business as usual and in my opinion the U.S. already sees the value in having your home and business protected by a security, video and access control system.” — No. 92, Fleenor Security Systems
How to Use the SDM 100 Tables
The 2017 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 main table, ranks 100 companies by their recurring monthly revenue (RMR) of December 31, 2016. The company with the highest RMR is ranked as No. 1, and so on. The following information is provided from left to right:
Current year rank, which is based on Dec. 31, 2016, RMR.
Prior year rank.
Company name and headquarters location.
Amount of RMR billed on Dec. 31, 2016.
RMR increase/decrease compared with Dec. 31, 2015.
Number of subscribers (recurring-billable customers) at year-end 2016.
Revenue from residential system installations in 2016.
Revenue from non-residential system installations in 2016.
Total gross revenue in millions of dollars. This number represents total revenue in calendar-year or (the company’s) fiscal-year 2016.
Number of full-time employees.
Number of business locations, including headquarters.
Note: An e following the figure indicates it is an SDM estimate.
SDM 100: Its Purpose & Approach
The SDM 100 has been published since 1991. Its primary objective is to measure consumer dollars gained by security companies, in order to present an account of the size of the market captured by the 100 largest 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/cloud solutions such as interactive services, 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, 37 of them earned more than $1 million in RMR in 2016.
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 2017 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 email@example.com.