1-on-1 with Imperial Capital's Jeff Kessler

Last month, Imperial Capital announced that Managing Director and Senior Security Analyst Jeff Kessler, who has headed up the organization’s security industry analysis for the past 13 years, would be retiring from the company effective May 14. Kessler’s career analyzing the security market spans nearly four decades and also included a stint at Goldman Sachs, where he served as senior security analyst.    

Like many people, however, Kessler did not start out with aspirations of becoming an iconic figure in the security market. After graduating from McGill University in Quebec, Kessler got a job as an economics reporter for the Montreal Star, the largest English language newspaper in the province. Following a labor strike at the paper, he returned to the U.S. and took a job at Argus Research which would lead him down the road to the security industry.

“Instead of working my way up to become the New York Time’s economics reporter, I ended up, starting in 1983, covering security companies and some other small technology companies, but essentially security companies and the three were ADT, Sensormatic (now a part of Tyco) and Checkpoint Systems (now a part of CCL),” Kessler says.

During his time covering the market, Kessler has bore witness to a number of different technology and business paradigm shifts that have upended the industry. SecurityInfoWatch.com (SIW) recently caught up Kessler to discuss the impact some of the changes have on the market and where he thinks it is headed in the wake of the Covid-19 pandemic.

Kessler: We went from installations being driven by proprietary systems and proprietary hardware driving what software would work for it to analytics and software systems now driving what hardware will work for them to create the types of systems the end-user and their advisors – specifiers and architects – want. We have been talking about convergence now for 20 years and the convergence is really happening. Hardware, while it is still important and still probably a larger percentage of the revenue pile… clearly the trends are moving in favor of 1) software driving the decisions that will be made with hardware and 2) someday, particularly with recurring revenues becoming a greater and greater part of the software solution, the recurring revenue business is going to be more important than hardware. The value proposition has moved away from proprietary hardware toward software that completes a solution and fills out the solution much more deeply and easily and you can build the hardware around it.

Kessler: It opens up the industry to all types of competition. Hardware for the most part at the beginning was proprietary. Whoever built the best keypad or whoever built the coolest cameras with the longest read ranges and the highest pixel rates, that was what drove the best sales. Now it is a matter of whoever can satisfy the end-user’s needs the most. It is a different concept from the end-user picking from what specifications in the hardware work best for them to the specifier making proposals to the end-user around various types of data and analytics-driven solutions. Clearly, they have to involve hardware because you still have to touch things and be able to control things and see them on a dashboard, but in these cases, it is data and the ability to use data for both preventive measures and reactive measures that creates the ability to make an easier decision around what you are going to buy and why you are going to buy.   

A good example is what we are seeing in the alarm industry in that for years, whoever could put the coolest panels and the coolest stuff up on the walls – glass break detectors and things like that – in lots of cases got sales. Companies like Ademco went out and dominated with a very large range of different types of panels and things like that and then there was competition from companies like Napco and other companies and there was a lot of consolidation in that part of the industry. What we are seeing now, when people talk about the smart home or the smart business, the hardware is important but ostensibly this hardware is collecting data for services centers like the monitoring station. It changes the value proposition of the industry dramatically from where it had been years and years ago as just purely sending alarms off and telling you that something is wrong to analyzing what is wrong and almost helping the police score whether immediate action is needed or whether some other form of response is needed.

Kessler: The most surprising thing that we saw happen with the pandemic was that, particularly in the residential sector, the leading smart home companies benefitted dramatically from people being stuck in their homes and becoming more familiar with their homes and getting more interested in doing things, getting more applications going at the touch of a keypad or, for that matter, a touchscreen device than ever before. As a result, you have had companies all around the world – from Verisure in Europe to ADT and Vivint in the U.S., as well as SimpliSafe and the big technology companies, Amazon being the primary one but Google now in conjunction with ADT – have big upturns in their business for smart home.

What we had expected was that nobody was going to let anyone into their home, but in turn, instead people on the residential side allowed installers into their home and we think that will moderate because there will be a lot more competition for wallet share as people begin to get out of their homes and start spending money in restaurants, the movies, baseball games or what have you. The growth we saw this past year was probably between 15% to 20%, which was just amazing in what was a down year for almost everyone else. The losers were essentially some of the smaller residential companies that did not have a marketing capability or the feet on the street or trucks to get out there and either door knock or advertise.         

Medical (requirements) were all over the place for certain types of premises and some were down significantly because they were not emergency businesses, but at the same time, there were businesses that needed access control and screening for Covid, which provided a lot of revenue for commercial and industrial companies. But in the main, talking about restaurants, retailers, and commercial enterprises, particularly where people can work from home, it was generally down between 20% and 30% during the pandemic.

We have not seen pre-pandemic levels reach almost any place, but we are seeing recovery in the United States right now and we have already seen recovery in certain southeast Asian nations. Europe is mainly down still, but there are still some exceptions in Europe. Depending on how badly Covid hurt the economy, there were several national exceptions in Europe and several national exceptions in southeast Asia where those countries had very low Covid rates, but in general internationally, Covid really hurt… the entire range of security businesses in the commercial/industrial market.   

What we are seeing now, and it ranges from companies like ADT to companies like Johnson Controls, is very large pick ups in backlogs and pipeline, which we would expect to affect revenue toward the end of the year. And toward the end of 2021 into 2022, we will surpass pre-pandemic levels that these companies had hit.

Kessler: Increasingly, we have seen acquisitions by larger companies to fill in technology holes that they have because technologies have developed around them and they do not have the premier expertise in them. The changes that I have been talking about, which have been accelerating over the past three or four years, have created holes inside some of the larger companies out there. The ability to provide services that your customers have been asking for that you have had to go out and put together as the installer or provider of the product - the integrator needs to put together something as easily as possible and as easily usable as possible, which involves tremendous complexity to be able to make something really easy to use for that end-user – that is where a lot of the acquisitions are coming from. Some of the acquisitions just simply take advantage of a competitor that has great technology but is in bad financial straights and we have seen those types of acquisitions as well. 

Joel Griffin is the Editor-in-Chief of SecurityInfoWatch.com and a veteran security journalist. You can reach him at [email protected].