FLIR Acquires Lorex

By John Honovich, Published Oct 25, 2012, 12:00am EDT

A stunning deal of a truly odd couple: Thermal camera leader FLIR has acquired home/budget surveillance specialist Lorex for $59 million. While not well known, Lorex has quietly become one of the biggest surveillance companies, on pace for ~$75 Million in revenue this year. Not only is this sizeable but the combination is extremely atypical. This deal has the potential to be a huge move for a FLIR or a comedy, I suppose. In this note, we dig into the details and analyze FLIR's plans.

[Note, for background, see the Investor's call transcript [link no longer available] which provides extensive details on the plans for this deal.]

Key Drivers

An overarching priority for FLIR is to move thermal downmarket. While the company is a powerhouse in government and critical infrastructure, it remains overwhelmingly an expensive offering for premium customers.

Lorex, on the other hand, has built the opposite business model. A high volume, low cost offering sold through mass market distribution, online and through big box retailers (e.g., Costco [link no longer available]).

In the best case scenario, opposites attract and they complement each other perfectly.

To that end, Flir identified 3 key drivers:

  • "Adding thermal imaging to Lorex's emerging Digimerge brand"
  • "A professional security-grade security systems (Digimerge)" that they plan to sell into the professional security market
  • "Addition of FLIR's international distribution to Lorex's strong North American presence"

The last point is strategically the most insignificant. Even if Flir can help sell more Lorex products internationally, it will not have much impact on the market overall. However, the other two are quite significant.

Adding Thermal on the Low End

Flir really wants to expand on the low-end:

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"This is right in line with what we've publicly stated as our strategy for a long, long time, introducing active thermal into places like Costco and other direct, if you will, marketing activities that these folks do, has clearly been in our strategy for forever so to speak."

Even today, a 'cheap' Flir thermal camera is $5,000 while a typically Lorex camera is a few hundred, at most.

They see Lorex as a vessel to deliever and distribute thermal into the lower end professional / consumer market:

"What we really see here are the ability to take our technology and insert it into their product line, which we think will be significantly positive both in terms of revenue growth and margin."

The clear plus is that Lorex knows how to move lots of cameras. Flir cites Lorex's annual unit sales at 500,000+ cameras, showing that Lorex can operate at far higher volume scale than Flir who is optimized for small numbers of extremely expensive cameras.

The best comparable we see is DRS Technologies who has stormed the surveillance industry with thermal network cameras that are far less expensive than what anyone else offers, including Flir.

Competing Against Axis, Bosch, Pelco Head On

Even more interestingly, Flir is gearing up to deliver an end to end array of security cameras, not just thermal:

"Many of those customers that we call on today, I think, would be more than happy to be buying a full suite of products from FLIR and not just a thermal camera from FLIR."

To do so, they are targeting Lorex's Digimerge brand:

"The area of focus, I think, an intersection with FLIR will be at the Digimerge side, which is the professional integrator series of product. And that's where our sales organizations, I think, have a convenient overlap, a beneficial overlap on the integration side."

While Digimerge is a 'professional' offering, it is certainly on the lower end of the market. Nonetheless, they are looking to take this to go head to head against the biggest players in the market:

"Today, an integrator might pick a FLIR thermal camera and then combine it together with a Pelco, Axis, Bosch, something like that, enterprise-grade camera. And we feel that we can offer to that integrator an enterprise class of a product that will have a compelling value proposition versus those competitors. And at this point, those aforementioned companies are companies that are starting to compete with us as well in the thermal space. So I think we're more than willing to take on that level of competition."

While Pelco, Axis and Bosch are all incurring into the thermal market, we are skeptical of Flir's ability to return fire in the conventional camera market through Digimerge anytime soon. While Lorex has very innovative products for the home market side, they need extensive development to truly challenge Axis, Bosch and Pelco.

Conclusion

While the strategic plan has risks, the price paid was reasonable. Flir is acquiring Lorex for ~$60 million USD, notably less than Lorex's projected 2012 revenue of ~$75 million USD. And given Flir's ~$3 billion market capitalization, it is a relatively tiny acquisition. However, it is a significant strategic gambit that, if executed, could greatly expand Flir's position in the market or could make them look foolish for such a gambit. Time will tell and this will certainly be an interesting one to watch develop.

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