The NICE-Orsus deal: What's it mean?

Word travels fast in the security industry and it is very small. I learned of the pending NICE-Orsus buy on a call with the advisory board for TechSec Solutions. We were talking about adding a PSIM panel and one of the board members said, "Well, NICE just bought Orsus, so we should get them to come." "Huh?," I said (I'm very well spoken). "I hadn't heard that." "Yeah, I just heard that at lunch. It's a done deal." That was on Thursday. By Friday, the Israeli papers had it, and so did John Honovich. I called each company and got no comments. Today the deal was announced. Because it is basically the first acquisition of a pure-play PSIM maker, there is an inclination to use it as an industry benchmark. You can get the first part of John's analysis here. His basic take? $22 million is a bit cheap for a company that's raised some $70 million in venture funding, and Orsus is actually one of the bigger PSIM makers. If they can only sell for $22 million, where does that put everyone else in terms of value? Good question. It's definitely true that Orsus was one of the more active PSIM companies. They were actually acquisitive earlier this year, buying software company Cinario to get further into the UK/European market and grab some good customers:
Cinario’s CEO Charlie Sherlock and CTO John Breen will stay on board, joining the Orsus management team. “Orsus’ very strong financial position allows for a level of expansion which we simply could not have achieved by ourselves in Cinario,” Sherlock said in a statement. “My coming on board allows me to deliver significant additional business benefits to my Cinario clients through the use of Situator,” he added.
This is how Venture Beat saw that deal:
Orsus, a Mountain View, Calif. company that makes both software and hardware for risk assessment and security purposes, announced it has raised a round of capital and has acquired smaller rival Cinario. The financial terms of the deal have yet to be disclosed. All that is known about the financing round is that it was provided by existing investors. ... Previously, Orsus raised $70 million from Cedar Fund, Clal Industries and Investments, Comverse, ComSor, Infinity Fund, Koor Industries, Modgal-Tec, Poalim Capital Markets and Singapore Telecom International. Cinario, on the other hand, had only raised $3 million over the course of four rounds from Campus Venture Capital, Enterprise Ireland and Trinity Venture Capital.
So, by my reading of that, Orsus has actually raised even more than $70 million. Though the last round was probably just a few million to cover the cost of the acquisition, one could wonder why a company that's in such a great financial position would need to raise a round just to make the acquisition of a small company. It seems hard to believe that Orsus was cash-flow positive by April, that's for sure. And the thing is, Orsus had make some good partnerships in recent years, partnerships that should have had the company lined up for some good business. They teamed with Adesta in April of 2008 and then just a month later announced a deal with Johnson Controls in May. Both of those companies have been active and growing in large installations, where Orsus is apparently the PSIM of choice. Have customers not been buying? Is what Orsus does too complicated to install cost-effectively? Apparently, Orsus was doing something right:
We wanted to find out who had the best open API," said Adesta vice president of business development Rob Hile, "who had the best engineering support, who's going to help with marketing, who's going to help with PR, who can we partner with and still be product agnostic? Other companies, they want to be the sole provider of software. Orsus says they want to earn your business, let you work with other vendors." Plus, he said, "they're well funded, they've got a nice strategy, and they're committed to command and control."
And Adesta was clearly actually installing Orsus because they even got Verint to team up with them, and Verint generally likes to handle as much of a job as it can.
However, "the pressure from the market was high," said Marc-Aintoine Lamontagne, product manager for Verint. "Adesta came to us and said that their customers were pushing for this solution ... Looking at it, we found it was a great fit with our solutions and it does not compete with us." Rafi Bhonker, vice president of marketing at Orsus, said "one of the reasons Verint [was] at the top of [our] list is that they're open, they're moving fast. We have excellent relationships with them at a people level, and they have customers."
Yes, they have customers. That part's kind of important. Despite some people estimating the PSIM market at anywhere from $3 billion to $10 billion by 2012 (okay, okay, both of those numbers technically originate from Steve Hunt - no, I don't know how both a $3 billion and a $10 billion estimate can be attributed to him in the span of about two years), it seems as though there are still very few customers for the PSIM product. Few enough customers that when NICE announces it's buying Orsus, a market leader, it estimates, "Acquisition expected to generate non-GAAP revenues of several millions of dollars in 2010 and to be accretive on a non-GAAP basis, within one year after closing." So, not only is the acquisition of Orsus' assets going to generate only "several millions of dollars" (much less than $22 million), but it's not even immediately accretive, so there isn't even enough business in the pipeline to make the acquisition cash-flow positive, despite what must be a fair amount of personnel layoffs, overhead reduction, etc. I must agree with Honovich when he says, "The other PSIM companies (including CNL, Proximex and Vidsys) now have a fairly low benchmark for their own valuations." But it's also clear that the market has a lot of work to do if it's going to reach $3 billion by 2012. If we take "several" to mean no more than $9 million, and Orsus is certainly not the worst earner of the many PSIM companies, and is at least average, can the pure-play PSIM makers be totaling more than $100 million? If you add in OnSSI, Genetec, Milestone, etc., those video-centric software makers that seem to do much of what PSIM makers do, but maybe without the command part of the command and control, then the market size gets much larger. It wouldn't surprise me if just one of the OnSSI/Genetec/Milestone triumvirate did more in revenue than all of the "PSIM" makers combined. But in the grand scheme of things, the real question isn't what market size they represent, but what market demand there is and eventually will be. Is their value proposition such that end users see much more value in an over-arching PSIM than in a simple integration of, say, OnSSI and Lenel? With some jerry-rigging of the intrusion system, fire, and mass notification so they all basically can communicate? It's hard to know whether the demand exists, and there just isn't money right now for the end users to act on that demand, or whether there just isn't a big enough population of end users who see the need/value. To date, the vast majority of PSIM wins have been big cities or big ports or very big companies. There are a lot of big cities and ports. Maybe enough to support a robust PSIM market. Maybe not.