Barnes projects first revenue downturn in 20 years, yet forecast is not all bad

Thursday, February 12, 2009
PALM BEACH, Fla.--Total revenue in the security alarm industry is projected to decline about seven percent in 2009, likely marking the first decline in 20 years. Sectors like new construction "are dead," and yet the outlook for the security alarm industry "compared to other sectors of the economy, it's not bad."
Boiled down, that's what Michael Barnes (and others) had to say at the Feb. 5 and 6 Barnes Buchanan Conference here. Barnes is a partner in investment banking firm Barnes Associates, which specializes in the security alarm industry, and is the co-sponsor, along with Buchanan Ingersoll & Rooney PC of Barnes Buchanan. The room was packed for Barnes' annual Alarm Industry and Market Overview on Feb. 6. And, interestingly, attendance was up this year, by about 10 people. 
The industry may not be "recession proof," but it is recession resistant, Barnes said. Why? "The underlying fundamentals are so good," he said. Alarm systems work well and "the advent of video is helping in a lot of ways"; insurance industry and regulators support use; technologies are improving, getting cheaper and broadening the market; penetration rates remain low and "there's lots of market share left"; the industry is becoming more sophisticated; and there is a lot of investor interest in the space. 
"It also helps that when times are tough and uncertain, people want safety and security in their work environment and their home," Barnes said. "We provide that."
In his primer on the debt markets, Bill Polk, managing director of CapitalSource Finance, summed up that point this way: "Evil persists and the capital markets know it."
Barnes identified the challenges: economic recession and turmoil in capital markets; managing attrition; positioning for sales ("this is a big challenge for a lot of alarm companies. It's of critical importance that they manage costs on the sales and installation side"); false alarms ("we can't hide from this ... and the trade associations are addressing it," Barnes said); and industry accounting--the fact that you must spend money to make money is still confusing to investors. 
Regarding attrition, Polk said, "that's the canary in the coal mine and everyone knows it." CEOs of numerous companies mentioned that they're paying special attention to attrition, working with customers (residential and commercial) who are having trouble paying their bills. 
Bright spots that Barnes sees in the residential market include the summer-model and door-knocking companies. "They proactively take alarm systems to the two-thirds of the market that's not penetrated," he said. "They get in front of the customer with a very simple message."
Barnes called the self-install and self-monitoring sector a "great growth opportunity," but tempered that, saying, "we don't have data on the stickiness of those services."
PERS got high marks from Barnes and others. "There's no question that the fundamental demographics of this country [the aging population] support this ... but it's not an easy business to get into." He and John Koch, ADT president, who participated in a CEO roundtable, both said that PERS is a definite focus for ADT. 
Barnes also liked the possibilities of increasing video and CCTV in the residential market, another point that was backed up by others during the conference.
On the commercial side, Barnes likes video and "all things IP": "There are tons of neat new things to do with video." Barnes and others said people seem to have more interest in video than access control, but everyone needs access control. He called the fire market "of paramount importance." He predicted that systems integration companies "will feel the brunt of the slowdown," saying that "in a Darwinian way that won't be bad" because it will weed out those who are not good at systems integration.