Meeting customer needs to drive growth for security manufacturers in 2014

Financial results for the major manufacturers of security products in the last quarter of 2013 and first quarter of 2014 show a steady growth in revenues and profitability. There is also confidence to forecast that this trend will continue for the rest of 2014.

Few are forecasting growth rates much above double figures through organic growth. Only those that are intending to grow faster through acquisition or have annual revenues below $100 million, are predicting growth above that. Sifting through their annual reports, there is little to find about major new innovative products that will allow them to rapidly increase market share; but there is a steady flow of incremental improvements showing that product performance will improve to meet customer needs.  

Our recent annual report on the security business showed that the first three quarters of 2013 well outperformed what most stakeholders had forecast, despite setbacks in economic fortunes in the western developed world. In the first three quarters of 2013, it grew by eight percent and this marginally increased for the remainder of that year.

This performance was built on the same factors that delivered growth in 2012 - a combination of strong growth in IP video products, buoyant markets in Asia, solid growth in North America and higher levels of penetration in vertical markets such as transportation, retail, healthcare and education.

A little more light at the end of the tunnel would suggest better trading conditions in 2014 right across the developed world causing security equipment buyers to have more confidence that now is the time to replace their old systems; provided they can be sure that their replacements improve the effectiveness of security, reduce operating costs and deliver an improved ROI on the investment.

So, 2014 is now the time for manufacturers to dig even deeper and increase their efforts to align the motivation of security buyers to invest in better performing systems through improving their offerings and educating and training those in the distribution channel in order to drive out all the benefits and making sure that the marketing message is delivered.

Let’s look at three leaders in their field; Axis Communications in IP video surveillance, HID Global in access control, and the current fastest growing video surveillance company Avigilon, showing how they have created strong robust companies through different business models that should deliver winning performances in 2014.

Axis Communications, founded in Sweden in 1984, pioneered the development of IP network video cameras, brought it to market in 1996 and has maintained a strong R&D program since then. It has so far grown solely through organic growth. It is the only company that we have identified in the security industry of its size that has achieved year on year growth without acquiring its rivals.

Even when it recently diversified into access control, it did not do this through acquisition. Throughout the last 10 years it has gained a reputation for reliable high quality products, which sell at a premium. Its products get to market through all distribution channels and it spends a lot of effort in working with those channels to make sure that the benefits of their products are delivered to the end customer.

With such a large number of manufacturers in the video surveillance business, it is hard to produce product differentiation across the whole range but Axis is regarded as supreme at the higher end of the market in the enterprise class where maximum security is vital. In the mid-market they face challenges where “ok” cameras at lower prices are regarded as good enough by a lot of end users.

Avigilon, founded in 2004 with sales currently running around $200 million, is approximately a quarter of the size of Axis but its growth in 2013 was 100 percent and it has a market capitalization of around $1 billion.

This is, to say at the very least, a remarkable performance. Currently they operate at the other end of the size spectrum to Axis with some 95 percent of customers being in the small-to-medium-size category with only five percent enterprise class clients. They do not sell direct and have a very strong relationship with dealers and system integrators. Their phenomenal growth has to be more than a good product and marketing. It is most likely to be a combination of faster growth in the mid market and building up loyalty through their distribution channels by not selling direct. They have forecast revenue of $500 million by 2016.

In 2013, they acquired two companies. In May, they acquired privately held RedCloud Security, Inc., an innovative provider of web-based, physical and virtual access control systems. Through the acquisition, Avigilon adds a complementary product line to its end-to-end high-definition surveillance solution and provides the company with access to a growing segment of the global security market. Despite it being a different product, it fits in neatly with their existing distribution network.

In December, Avigilon announced a definitive agreement to acquire the video analytics company VideoIQ, Inc. for cash consideration of $32 million. Founded in 2006, VideoIQ has grown to become a leader in real-time intelligent video analytics solutions for security and business intelligence applications. VideoIQ has a developed portfolio of video analytics intellectual property, with 23 patents granted or pending, trade secrets and know-how.

This fits in directly with their existing business. Both of these acquisitions should deliver much more revenue than both companies achieved in 2013 and, at the same time, will provide their system integrators with a more comprehensive solution.

Our third “winner” for 2014 is HID Global, a major subsidiary of Assa Abloy, which is a global leader in door opening solutions. Founded in 1994, Assa Abloy has grown from a regional company to an international company with annual sales of $7.2 billion (2012) a 12 percent growth on the previous year, mainly achieved through an astute acquisition program involving 150 acquisitions.  HID Global sales in 2012 are estimated at £3.3 billion having increased their contribution.

Assa Abloy acquired HID (Hughes Identification Devices) in 2000 and over the last 13 years has incorporated some 15 companies into the HID organization. Starting with access control products through Motorola Indala they have progressed to identification technologies with Active Identity being a major acquisition in 2010.

Since then, major acquisitions have included LaserCard, IdenTrust, Lumidigm and Codebench. The combination of the companies’ has made HID Global a worldwide leader in secure identity solutions that use multispectral imaging technology, software, and biometric fingerprint sensors to authenticate identities with a high degree of certainty.

HID Global has delivered growth over 12 percent in the last two years despite difficult trading conditions and now have a strong cash flow and good financial stability to continue growth through organic means and acquisition.

For more information about our research, visit http://www.memoori.com/portfolio/thephysicalsecuritybusinessin2013/.