YOU PROBABLY WON'T FIND AN INVESTMENT BANKER or financial analyst that covers the security and home automation industry more thoroughly than Imperial Capital, which has focused on these categories for a couple of decades. The crew was at CES 2016 covering public and private home-technology firms, and discerning trends that may affect their portfolio and the market in general. Managing director Jeff Kessler and VP Saliq Khan filed an extensive report on the show, covering such firms as ADT, Bosch, Alarm.com and Control4, Vivint and IC Realtime.
“We found it particularly interesting that several security and non-security companies placed an emphasis on understanding 'deep learning' (a new area of machine learning) and implementing artificial intelligence into their product and solution offerings,” say the authors in their top-line overview of CES. “Training high-definition cameras to detect objects (e.g., cars, people) and fusing the data from various sensors can help enhance detection accuracy and create a continuous loop of learning. We believe that security and home automation companies will need to place a greater emphasis on increasing computational horsepower and accelerate the rate of improvement.”
Indeed, “deep learning,” especially in terms of audio and video analytics, is a Top 5 Trend for 2016 in CE Pro's book.
Ultimately, Imperial predicts that “full integration of home automation services with healthcare, premises control, family safety, and more complex numbers of sensors will likely drive the 6-7% CAGR we continue to predict over the next five years for the Top 30 professional home security companies.”
With permission from Imperial, we present some highlights from their CES report.
Professional Security Monitoring; Pro vs. DIY
Security-as-a-service is a big new trend. “We believe that many of the leading providers of home security, safety, and automation devices are going to be offering similar flavors of applications … [but] which company will best be able to integrate these many devices into offerings valued by the end customer as well as which can provide the best service to customers?” the Imperial analysts ask. Who will be able to extend customer contracts and generate the best IRR (internal rate of return)?
Professional security monitoring is growing. In 2014 and 2015, roughly 21% of households had some active security system, according to research firm Parks Associates. The rate of adoption for professional monitoring is growing faster than the rate of adoption for security systems, a trajectory that will continue through 2016, according to Parks.
The trouble with the traditional wireline security business is that, based on our estimate, it really only applies to about 20% of the market going forward that wants a complete monitored alarm system. … Historically, the alarm monitoring market has been stuck at that lower penetration rate because the value proposition was lacking. This appears to be changing now with advent of total premises control, family communication, mobile health monitoring, and other related applications.
Professional install and support is advantageous, even for DIY products.
The advent of companies such as Google and Apple in the DIY and MIY (monitor-it-yourself) markets should increase the quality of these [new categories of] products and create opportunities for professional alarm companies to integrate their best-in-class products into their offerings. … However, the tech companies are not offering installation, field service, 24-hour customer service, or monitoring. We note that ADT and Vivint sell integrated Nest thermostats from Google and Alarm.com is integrated with Apple iOS. These increasingly 'core customers' want to have these products professionally installed and configured and, in particular, they want the alarm company to provide ongoing field service and 24-hour call center-based customer service which is not part of the standalone DIY and MIY options.
Pros and DIY/MIY.
We are already seeing most professional alarm companies using their own DIY and MIY product offerings to expand their penetration of the market into these market segments, previously mostly unpenetrated by the more professional expensive providers. Indeed, just like the migration from 'light beer' to premium beer, the larger integrated security companies can offer the DIY and MIY products with a migration path to professional monitoring, as the end users have children, become older, and increase their assets.
Audio and video verification. Continued improvement in video and audio technology for alarm verification can reduce false alarms (currently at 95%) and keep police response quick.
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Imperial's Take on Select CES Companies
The ADT Corp. (NYSE: ADT). ADT introduced a new SaaS (security as a service) solution called ADT Canopy and showcased select products which can now integrate with the ADT platform, including Samsung SmartThings, August Doorbell Cam, Ring Video Doorbell, and Roost Smart Battery.
Canopy’s professional monitoring service is ADT’s answer to those wondering how the company will address the potential competition from DIY providers. We are confident that the company will successfully leverage Canopy and the new partnerships to improve attrition, creation cost multiple, and steady state free cash flow (SSFCF).
Alarm.com (Nasdaq: ALRM). The SHaaS (smart home as a service) provider introduced integration with Amazon Echo and Apple TV.
While the company’s financials are encouraging, we continue to be more focused on the growth of partnerships and ecosystem with some of the most important providers of communication and security solutions. The partnership with Amazon Echo and the continued expansion of the relationship with Apple (via Apple TV integration) proves out our thesis.
Control4 Corp. (Nasdaq: CTRL). CEO Martin Plaehn says the company remains focused on improving the connected home infrastructure market.
With $84mn of cash and equivalents, it appears that the company could buy back shares and/or make an acquisition, likely of a similar size to the $9mn acquisition of Nexus Technologies Pty., Ltd. (Leaf) on 2/5/15.
FLIR Systems (Nasdaq: FLIR). Flir makes thermal-imaging cameras that have interesting applications for the home-integration market, especially with its support for the IFTTT engine. Introduced at CES:
TG130 handheld thermal imaging camera ($249): Find heat loss around doors; Discover electrical issues impacting appliances; Troubleshoot broad temperature related issues
Scout TK thermal vision monocular (an outdoor solution for $599): Keep an eye on property 24/7; Search for missing pets; Check for predators; Scan sidewalks, parking lots, and parks in the dark; 5-hour Rechargeable Li-Ion battery
Zenmuse XT (an unmanned aerial thermal-imaging camera): Search and rescue; Precision agriculture; Roof inspections; Power line inspections; Firefighting; Substation inspections; Cell tower inspections; Security; Surveying
Vivint Inc. (APX Group, Inc.). Vivint introduce voice control via Amazon Echo, and the new Vivint Ping, the company’s first indoor camera with a true two-way talk.
Honeywell International, Inc. (NYSE: HON). The company introduced the second-generation of the Lyric thermostat which can now connect with Apple HomeKit via a MFI (made for iPhone) chip.
We believe that Honeywell could continue to enhance its APIs and partner with lighting and life-safety solution providers.
IC Realtime (private). The company introduced the ALLie Go, its first portable camera. Like ALLie Home, it can stream live video to both the ALLie and Oculus Rift VR headsets.
iDevices (private). iDevices added to its Apple HomeKit portfolio with a compliant outdoor switch, thermostat, smart light bulb sock, wall and dimmer switch, and small wall outlet. Users can control these devices using Siri voice control.
Panasonic Corporation (6752-TO). Panasonic introduced its smart home software platform “Ora.” While the system mostly employs the DECT ULE protocol for its own devices, it can integrated with third-party devices like Honeywell thermostats.
Robert Bosch GmbH (private).
Bosch is a leader in manufacturing appliances, and Bosch home appliances is part of BSH (Bosch and Siemens Home Appliance Group. The company is focused on three core areas: smart city, smart kitchen and washer devices, and now the smart home. The company’s newly introduced subsidiary (Robert Bosch Smart Home GmbH) will become the cornerstone of Bosch’s expanding ecosystem of smart home solutions. However, management currently appears to be focused on the “comfort” aspect within the smart home, rather than alarm monitoring or automating all of the aspects of a home. While Bosch is not yet designed to integrate with alarm systems, we believe that the company could offer its own DIY alarm solution, largely centered around sensors which alert the homeowner of intrusion.
For continued coverage from Imperial Capital, visit www.imperialcapital.com.
