Imperial Capital

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In The Boardroom With...


Mr. Rick Juarez

Managing Director, Corporate Finance

Imperial Capital, LLC


We are pleased to present our new Cybersecurity industry report, “CyberTiles: Securing Information Pathways”.  Our inaugural edition focuses on our market thesis, the size of important market segments, key industry themes and market participants, and important valuation metrics.

CyberTiles is a graphical representation of our thesis for the Cybersecurity market.  We believe that information will increasingly travel along dynamic and user driven paths.  Historically, IT departments controlled information access. Specifically, this involves the devices used and the paths that users are  allowed to travel.  The considerable growth of the Internet and smart devices has ushered in the era of BYOD (Bring Your Own Device) and seemingly endless ways to access both productive and destructive content.

As shown in Figure 1 below, our CyberTiles graphic depicts how users and their devices travel across many tiles that in an “ideal” world would work together to provide a secure and safe environment. Unfortunately, no single solution exists today that can provide end-to-end security.  End users must build their own solutions that best meet the needs of their users and the paths that their information travels.

Figure 1: Imperial Capital’s Cybersecurity Thesis – “CyberTiles”

Source: Imperial Capital, LLC.

We have highlighted select tiles that comprise key security market segments.  We believe and anticipate that there will likely be new tiles added to address unforeseen threats.  We also see great opportunity for the merging of select tiles into more user friendly and more tightly integrated and secure tiles / solutions. We intend to provide periodic updates as events occur.  

  Cybersecurity is vitally important element of cloud infrastructure.  Global spending on cloud infrastructure is estimated by Forbes and Statista to grow from $50 billion in 2016 to more than $228 billion by 2026.  Cloud infrastructure is a broad term that includes IaaS (Infrastructure as a Service), PaaS (Platform as a Service), and SaaS (Software as a Service). Various solution providers can provide security, but securing content is the ultimate responsibility of end users.  

Given the complexity of deploying cloud solutions and the challenges around doing so securely, it is not surprising that a number of end users are turning to third parties for support.  By 2018, the demand for Managed Services will grow to more than $256 billion, according to estimates by Forbes and Statista. We believe that Managed Security Services will be in high demand. 

The need for greater security and advances in technology will likely drive the demand for more specialized “XaaS” type services.  We expect to see stronger demand for existing and emerging XaaS services such as Video as a Service, Identity as a Service, Access Management as a Service, etc.
As Verizon pointed out in its Data Breach Investigations Report in April 2016, approximately 89% of breaches had a financial or espionage based motive. As businesses and end users transition to cloud based solutions, security challenges must be properly addressed and mitigated.  If the security concerns remain unanswered, the cloud projections outlined above will likely be at risk. 

However, we believe there are great profit opportunities for existing and emerging security solution providers.  We expect that new and or improved security solutions will be developed to take advantage of these opportunities. 

For the complete Industry Report, please click here.

In The Boardroom With...

Mr. Jeffrey Kessler
Managing Director, Research

Imperial Capital  





Jeffrey Kessler is currently a Managing Director in the  Institutional Research at Imperial Capital, LLC in the New York City office.  Mr. Kessler has been the leading security industry analyst on Wall Street for 28 years. He began covering ADT, Sensormatic Electronics, and Checkpoint Systems in 1983 at Argus Research, followed by three years at Cowen & Co., and then twenty-one years as the senior security industry & business services analyst with Lehman Brothers. Mr. Kessler has brought a unique skill set to the security industry for the financial community — publicizing it, as well as prodding it to improve its financial profile with investors and its business profile with the critical link in security — enterprise end users. 

In 2006 Mr. Kessler was named in the first “Security Magazine” poll as one of the industry “25 Most Influential Leaders” — the only representative from the financial services industry in that original group.   At Lehman Brothers, Mr. Kessler published his industry-standard “Security Industry Annual” for 15 years and co-founded the “Securing New Ground,” conference.

At Imperial Capital, Mr. Kessler, and his colleague Saliq Khan, cover 20+ leading publicly traded security companies, publishes the semi-annual “Security Monitor,” selected White Papers on the industry, and is involved in one of the industry’s largest security conference, the Security Investor Conference. 

SecuritySolutionsWatch.com: Thank you for joining us today, Jeff. It’s a pleasure to chat with you again today. It’s been a lot of water under the bridge since Lehman Brothers. Before discussing the security space in greater detail, please update us about your background and your role at Imperial Capital.

Jeffrey Kessler:  I was originally hired at Imperial Capital in a desk analyst role to interact with security company management teams - many of  whom I’ve known for 20 years or more, participate in the publication of a unique, bi-annual review of the state of the security industry (Security Industry Monitor), and attract larger, publicly traded companies to our annual Security Industry Conference in December.   The Security Industry Monitor is now a fairly deep dive into the driving industry factors behind the leading trends in physical, identification and IT security.  The Security Industry Conference attracts over 500 attendees, and a “tight” list of 55-65 companies from around the world, about half of which are public.  Since the nature of security has rally morphed into premises and situational analysis and response, identification and verification, and of course, cybersecurity, my knowledge base ) as well as that of my associate) is constantly being upgraded with education, seminars, and trips to the major security trades shows and conferences as physical/logical convergence only accelerates.

Over the last three years my role at Imperial has changed somewhat in that I am now a day-to-day equity research analyst covering 20+ publicly traded companies, as well as collaborating with our head of research, Ed Mally, on some seven companies, mainly in premises monitoring and security services, which have publicly traded debt.  However the above tasks remain under my role, as well.  I am just a much busier person these days.

SecuritySolutionsWatch.com: What sectors are covering now? Not asking for recommendations here but who are you covering?

Jeffrey Kessler: Our Physical Security equity research team’s current coverage includes:

o     “the Connected Premises”, including Alarm.com, Ascent Capital (Monitronics), Control4,  (ADT and Nortek, previously under coverage were recently acquired).  On the debt side we do research on ADT/Prime Security, Vivint (APX), Monitronics, and Interface Security Systems.
o   Identification, Tracking and Anti-counterfeiting:  Digimarc Corp., Fleetmatics Group (being acquired by private equity), Identiv, NIC (state, federal web portals and payments processing), and Zebra Technologies.
o   Locks and Access Control:  Allegion plc, Assa Abloy, and Stanley Black & Decker
o   Integrators:  Stanley Black & Decker, Johnson Controls (Tyco), G4S
o   Physical Security:  G4S, Anixter International, The Brinks Company
Separately, Imperial Capital also covers the fixed income securities of several important security companies, including:
--ADT, private --APX Group (Vivint, Private) --Ascent Capital (Holding company for Monitronics International) --Interface Systems, private --Monitronics International --Prime Security (Apollo bonds used to acquire ADT), private --Verisure (formerly Securitas Direct), private
And clearly, we monitor 100’s of small public and private companies

SecuritySolutionsWatch.com: Today’s security environment has never been more challenging and, unfortunately, the daily headlines keep reminding us. The bad-guys come in many forms: foreign governments & terrorist groups, sophisticated hacker groups, home-grown terrorists, and, unfortunately, sometimes from within, from a disgruntled employee. The security threat might also result from an “unintentional insider” when an employee clicks on a phishing message, visits a dangerous website, or runs risky software. What is your perspective, Jeff, regarding today’s security landscape…any trends you want to discuss?

Jeffrey Kessler:  One of the reasons we are seeing constant M&A in the industry right now is because the bad guys come in so many forms. Therefore, point solutions from single product lines are making way to full line security solutions. We have written for five years about the “Likely Collapse of Horizontal Segments” in the video industry, and that has happened.  The only companies making margins are full solution providers that predict, analyze, and provide actionable intelligence to whatever vertical on which they are focused – or providing easy-to-use scalability in the cloud.  This stretches the definition of security five-fold to areas that never wanted to be called “security.”   Witness the rise of the anti-money laundering business at NICE, or the Cyber business at Verint, both related to the analytics they had been using in Customer Engagement for years.  The increased importance put on compliance managers up to CSO’s and CIO’s at enterprises, speaks volumes about the pressure being faced further up the line at the board level for making sure best practices in worker and premises control don’t result in missed incidents that could expose the board to legal and financial trouble. 

One of our key themes has been the necessity of integrators not just to increase their “IT IQ” overall, but to increase their commitment to long-term trusted partnerships with clients for multiple functions, who need a multiplicity of help in determining how to protect, monitor, and know what is going on in one or 1,000 buildings, taking seemingly disparate pieces of data collected from many thousands of sensors they are using, and creating an analysis that helps make the ROI case, and helps IRR for IT, HR, building services, logistics – not just security.  The amount of information needed to improve the operations of an enterprise may be different for a multinational, versus a small accounting practice.  But the base need to protect, analyze, improve operational performance metrics are all there.  Mobility is a major catalyst in this move towards total solutions, because it can serve as the repository for some many of the sensor-based data used to make the most minor personal lifestyle to the most major critical infrastructure decision.

Similarly, on the residential side, the emergence of the “automated” home – from one electronic lock or video doorbell, to a totally integrated networked system of heating, lighting, intelligence, health, family location functions that can all be mixed and matched, mean that what we had estimated for some years as a stagnant penetration rate of 20% with little customer loyalty, is now in our estimate going to grow 10%-12% for the total market and 6%-7% for that part of the market that is core, monitored intrusion – through  as far as we can see, 2020, and then beyond.

Ultimately, integrator or customer simplicity in installation and use, customer care and loyalty, leading to lower attrition and longer customer lives, is what derives IRR’s and cash flows in the recurring and SaaS segments of this industry.  This is followed by customer creation multiples, and ARPU growth as critical metrics.   While we have heard and read too much already about one point product or another great sensor, and a new way to get cheaper service being developed on both the commercial and residential segments in security, ultimately it is the value proposition and the trusted relationships that brings margin, cash flow and IRR to the company.  That means a lot of upfront investment sometimes in systems and programs that focus on making the security experience simpler, more effective, and more trusted to the end user.  We believe parts of the market already get this and as a result will gain share.  Some parts of the financial market accept this, but others continue to focus on new technology and price as totally disruptive events.  Unless you are the worldwide low cost producer of a product or service, the ease of use, efficacy and trust/brand factor created by a total solution to a set of problems is what will drive the industry.  We are quite bullish on certain areas of the industry for this reason.

What does this all mean?  It means the total available market for we used to call “security,” residential, commercial, institutional, government (and which some investment institutions were loath to cover), has now expanded its total available market to what we estimate in our recent Monitor as over $285 billion at the manufacturing level.  This causes a piling- on effect by large financial institutions which pushes the consolidation of the industry even further.

SecuritySolutionsWatch.com:  DELL-EMC, JCI-TYCO….do you see consolidation continuing…any recent Imperial transactions you care to mention?

Jeffrey Kessler: Although I am not in the firm’s corporate finance department, there are recent transaction which Imperial Capital has publicly disclosed:

o   RSI Video Technologies was acquired by Honeywell for €113,000,000. Imperial Capital advised on the deal. March, 2016
o   DVTELwas acquired by FLIR for $92 million. Imperial Capital advised on the deal  November, 2015
o   Johnson Controls sold its EnergyConnect Group to Johnson Controls, Imperial Capital advised Johnson Controls, April 2016
o   Acorn Energy sold 50% of its DSIT subsidiary to Rafael Defense Systems, April 2016.  Imperial Capital advised Acorn Energy
o   Brivo Systems was acquired by Dean Drako and MSD for $50 million. Imperial Capital advised on the deal , May 2015
o   Alpha Card Systems, LLC was acquired by Barcodes Inc.  Imperial Capital advised on the deal 12/2015
o   Alarm.com, initial public offering, June 2015
o   Interface Senior notes, Sole placement agent, July2015
o   Johnson Controls sold Johnson Controls Security Systems to Versar , September 2015
o   My Alarm Center, second lien term loan, sole placement agent, October 2015
o   Video Insight was acquired by Panasonic. Imperial Capital advised on the deal

SecuritySolutionsWatch.com: Congratulations on the branding, growth and success of the annual Security Investor Conference. What are some of the metrics and what can attendees expect to hear and learn at this years’ December conference?

Jeffrey Kessler: This conference, in its 13th year, has grown from its start as a meeting place for companies, private equity and lending institutions into the largest non-trade show conference in the industry, and certainly by far the largest conference of its kind in the investment community.  Last year we had over 500 attendees, with major attendance from public investment institutions in both equity and debt, private equity, C-level corporate attendees, financial and legal institutions to the industry and the press.  We continue to attract large international presenters, such as Verisure (Securitas Direct), of Stockholm, Sweden and Prosegur, of Madrid, Spain, and G4S of London.  The value of the conference in just its networking offerings, is probably worth the price of admission.  However, my focus is on generating value add for all parties.  I want to be getting the greatest number of investment institutions to see the best mix of the best companies in the industry, so that at least for once a year, those institutions can gain some context around the companies in which they only usually get quarterly  reports, or the rare site tour.  

SecuritySolutionsWatch.com: Thanks again Jeff for joining us today. Are there any other subjects you would like to discuss?

Jeffrey Kessler: We continue to believe that “steady-Eddie” access control will surprise investors on the upside in terms of importance to the integrator’s relationship with the client, the margins they generate, and how slowly standards are adopted (though they ultimately will be), as compared to video.  We agree that mobile capabilities will be critical to both “hooking” millennials at the bottom of a product upgrade relationship, but in overall functionality for the service provider.  We believe that Asian pricing of video cameras and other commodity level items will generate huge market share and hurt European and  North American manufacturers, but that high end, critical infrastructure, and solutions related offerings – where the value add and customer relationship is, will remain with European and North American providers.

Finally, for all of those public equity investors who were saying that the professional security monitoring industry and its largest company, would be seriously troubled by now, due to technological and competitive disintermediation by many outside parties – its’s NOT going to happen, at least not during our investment horizon.  Despite longstanding industry grumbling about industry leaders as “too big,” or “too slow,”  The industry leaders doing well is helpful for all the  major competitors:  effectively for nearly every premises control company in the industry with professional monitoring.  For those who wanted to make a profit believing that the industry leader and its stock would merely struggle with no suiters in the waiting – they were proven wrong.  Clearly there are large strategic players and investors who see the value in the improved recurring revenue base of the largest companies in this industry.
Disclosures related to the current coverage of the Imperial Capital, LLC research team:  (1) Jeff Kessler has a direct financial interest in the equity securities of Alarm.com Holdings, Inc.; and (2) during the past 12 months Imperial Capital, LLC has received compensation for investment banking services from, and had investment banking client relationships with, Alarm.com Holdings Inc. and Interface Security Systems Holdings, Inc./Interface Master Holdings, Inc.

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