IP Video Sales Rebound, Analog CCTV Continues to Fall
An important market shift for the video surveillance market is occurring. In the last 6 months, while IP video sales have rebounded, analog sales continue to fall. This is in clear contrast to the beginning of recession where IP dropped harder than analog and prior to the recession when trends for the two groups tended to mirror one another.
Here's a visual of the trend we see from examining financial statements:
The changing market dynamics are an important factor for all those who buy, sell and specify video surveillance solutions.
We focused our analysis on the audited financial reports of leading global security providers. With properly prepared financial documentation, our confidence in the accuracy of the numbers is greater than whisper or privately provided numbers.
In the chart below, we segment the companies into 2 groups: IP focused and traditional analog. Even a quick visual glance demonstrates the stark difference in growth rate between IP and analog companies. Compare this to our prior analysis of publicly traded video surveillance providers (from 6 months ago, October 2009) where the results of IP companies were notably worse and analog was generally better.
|Company||Annual Revenue (Approx)||Growth Rate (Q409/H209)||Notes|
|Anixter||$650 Million||9%||Security Solutions|
|ADT||Not Disclosed||-13%||System Installation|
|Dedicated Micros||$90 Million||-17.4%||Year End 06/09|
|March Networks||$80 Million||-15%||Neg currency exchange impact|
|Tyco Security||Not Disclosed||-10%||Product Sales|
The positive growth of the IP market is likely understated in this approach because:
- Dozens of small to medium IP video early stage companies are still growing revenue quickly.
- Analog companies are offsetting growth in their core analog products by expanding their IP video sales
We believe the video surveillance market can be segmented into 3 phases over the last few years:
- Mirrored growth: Prior to the recession, both analog and IP were growing. The IP growth rate was certainly higher but not especially accelerating 'away' from analog.
- Stalled IP growth: After the recession hit (09/2008), IP growth rates fell much faster than analog growth rates. With panic, massive stock losses, etc., large organizations postponed or cancelled large projects favorable to IP. Analog was hit less badly because it depended on more reliable (but slow growing) service/maintenance business.
- Divergent growth: As the recovery commenced (bailouts commenced, sharply rebounding equity markets, etc.), confidence was regained and larger projects favorable to IP started flowing again.
This trend is likely to continue though key points should be noted:
- It is likely that a global economy that continues to recover will decelerate the sales declines for analog CCTV providers. We do not suggest this will stop but it should help marginally.
- If the global economy was to 'double dip' or fall back into recession, IP's growth rate would be pulled back closer to analog. This is more than a theoretical concern as potential economic instability remains high across the world due to rising debt, excessive stimulus, etc.
- The analog CCTV incumbents could 'strike' back. The business model has not changed so there are no economic barriers for incumbents to lack motivation to attack. They could improve their approach and many are likely to do so as they realize their existence depends.
Performance of Individual Companies
The remainder of the report examines each publicly traded company in our table, providing a summary of results, links to the public documentation and commentary on key issues.
For Q4 2009, Anixter's revenue for their security solutions division [link no longer available] improved from the previous quarter, with 9% year over year revenue growth compared to only 1% year over year growth in Q3 2009. This specific growth metric was disclosed in their Q4 2009 earnings call transcript.
Key statement from the call: "Security sales continued to show more strength in the broader economy. Sales grew 9% in Q4 over prior year, with particular strength in EMEA and the emerging markets."
While Anixter did not disclose current revenue levels for security solutions, in previous statements they pegged security revenue at approximately $650 Million USD. We believe that in remains close to this number.
Reversing a year long negative trend, Axis's Q4 2009 financial results were very strong, raising the question, why?
Revenue was up 32% (Q409 compared to Q408). The results were even better in local currency terms - up almost 40% [Note: for most of 2009, currency exchange swings made Axis's financial performance look better than they were. Now, it's the reverse).
Despite the strong 4th quarter, for the full year (2009), Axis growth was nearly flat, with only 3% local currency growth compared to 2008.
Compare this to the previous quarter (Q308), where growth in local currency terms was negative. Also, Axis's stock price has shot up about 65% in 6 months (from about 65 Kroner in Summer 2009 to almost 110 Kroner on Feb 3, 2010).
Following monster growth in the last fiscal year, IndigoVision's revenue growth rate was positive but far more modest in the 2nd Half of 2009 [link no longer available] of 12% year over year.
By contrast, the 1st Half of 2009 witnessed a 70.6% revenue growth rate year over year. Given the overall industry growth rate and this half's rate for IndigoVision, the previous achievement may be an aberration. Also, revenue decreased from the first 6 months of 2009 to the second (15.7 GBP in H1 2009 to 12M GBP in H2 2009) (note: technically, their fiscal year starts Feb 1).
In IndigoVision's discussion of their H1 2009 results, they provide some details, including:
- "North America, Southern Europe and the Middle East performed at lower rates . . . primarily affected by the fall off in the construction market."
- "Significant investment in product development in the current financial year. . . 30% increase in engineering spend to 1.3m (2009: 1.0m).
Mobotix's financial growth has started to improve with a positive trend emerging from their 2009 end of year financial results. In Q309, their growth rate fell to only 2.8%. By contrast, for H209 (July - December 2009), they are reporting 8.7% revenue growth. This implies a Q409 growth rate of approximately 15%.
Other key metrics reported in the H209 financial statement:
- Revenues from dome camera sales rose by 22% from 8.4 M Euros to 10.2 M Euros (driven by Q24 panoramic cameras which they cite as their main growth driver/innovator)
- IP based door station to be released this year
- Employees increased from 190 to 218 during the period - 15%
- Key growth areas for coming months - North America, South America, Asia
ADT/Tyco Security Products
Weak results and a poor outlook for the integration business is a concerning sign for the physical security industry at large. The sharp decline in ADT's System Installation and Tyco Security's product revenue continues in Q409, entering a second year of declines.
As the Tyco Quaterly review (Fiscal Q109 / Calender Q408) shows, ADT's system installation and service revenue declined 13% between Q409 and Q408. Furthermore, Electronic Security Products (DVRs, Access Control, etc.) revenue declined 10% in the same time period.
This is especially interesting because the comparison is against Q408, the first quarter after the September 2008 market implosion and therefore reflects an already weak economy. For instance, Tyco reported weakened sales and declining revenue for these categories in Q408 [link no longer available]. This now makes two years of back to back revenue declines.
The good news for Tyco is not good for the traditional video surveillance industry. They attribute positive momentum to recurring revenue and costs cutting offsetting the declines in system installation and products. From the Fiscal Q109 analyst call transcript:
"Our results for the quarter continue to be driven by our cost management and restructuring efforts as well as the continued strength of our service and recurring revenue business which represents over 40% of our total revenue. It is these actions coupled with the growth of our service business which have largely offset the impact of lower revenue in our product businesses and in our systems installation activities at ADT and Fire."
Optelecom-NKF, a specialist in video surveillance systems for traffic monitoring and critical infrastructure security, announced a 21% year over year decline in revenue for Q4 2009.
From their financial documents, the key negative driver is the steep decline in their legacy fiber optics product offering. For instance, in their Q3 quarterly statement, revenue from fiber optics dropped 35% while IP video products dropped only 14%.
Given IP networks strength in transmitting video over COTS networking infrastructure, Optelecom-NKF's traditional fiber optics business faces great challenges. Optelecom has been developing and promoting their own IP video solution called Siquora as their next generation 'platform'. See a video overview of Siquora [link no longer available].
Vicon's Q4 2009 revenue plummeted, dropping 29% year over year from $15.7M in Q4 2008 down to $11.1 M in Q4 2009. Domestic sales were down 19&. International sales were down 40%. Gross margins dropped from 45.5% to 41.8%.
Vicon cited that, "the Company’s business has been impacted by the worldwide economic downturn as capital spending for new construction and renovation projects weakened."
This does not fit with the bounce we are seeing from some of the IP companies, such as Axis and Mobotix's results from the same period.
Vicon is believed by many to be a laggard. While they 'hung' in their for a long time, this is a steep drop even by the recession's standards and counter to improving conditions that more IP centric players are reporting.
This deepens Vicon's revenue decline that accelerated in the middle of 2009.
In calendar Q4 2009, March Networks revenue continued to fall, though at a slower rate than the previous quarter. This quarter, revenue was down 15% (though more than half of the drop is attributed to exchange rate fluctuations).
Their quarterly call slides [link no longer available] provide more details:
- Fixed systems were down only 8% but mobile was down 33%
- While Wal-Mart was only 8% of revenue a year ago, they are now 13% of March's revenue.
- Next quarter, they plan revenue will grow by less than 10% over one year ago (it's obviously unclear how much less it will be)
- March disclosed that they "experienced year to date revenue growth in the Commercial Industrial market." This is important because this is key to their IP growth strategy/Cieffe acquisition. However, since they do not reveal how significant the growth was, it's hard to determine how well March is doing in this market.
UK manufacturer Quadnectics, parent company of video surveillance supplier Synectics, reported continued decline in sales for the 2nd Half of 2010.
In their Interim Results for 2nd half 2009 (calendar year), Quadnectics discloses the following key data points:
- Security Systems Service division revenue fell from 22.8 GBP to 17.4 GBP from 2H 2008 to 2H 2009 (23.6% revenue decline). Despite the sharp fall, Quadnectics projects an uptick in orders in the upcoming period.
- Synectics Network video surveillance revenue fell from 5.8 GBP to 4.9 GBP from 2H 2008 to 2H 2009 (15.5% revenue decline). North American casinos project delays are cited as a key factor.
Dedicated Micros revenue decline has deepened over the last 2 years, demonstrating the company's ongoing struggles. For the year ending June 31, 2008, security monitoring service and equipment revenue declined 17.4% from 71.7 Million GBP to 59.2 Million GBP (at current exchange rates, that is approximately $110 Million USD to $90 Million USD). The declines were broad based as well with 20% decline in the UK, 23% in continental Europe and 13.5% in the rest of the world.
Records were obtained from the UK's Companies House statements.
The report also noted that employment was reduced from 641 to 576, a drop of slightly more than 10%.
Like other analog incumbents, DM has had difficulty adjusting to the shift to IP video, including a well publicized and strange anti-IP screed.
Taiwanese video surveillance manufacturer, Geovision, reports a significant sales decline in the year ending Q3 2009, compared to the year ending Q3 2008. According to their disclosed income statement, sales dropped 23% from 1.1 Billion NTD to .83 Billion NTD (at current exchange rates, this is approximately a drop of $35 Million USD to $26 Million USD.
While Geovision, like most manufacturers has a growing IP portfolio, its main revenue generating product lines remain DVR, DVR cards, etc. We did not find a breakdown in sales between analog and IP products in Geovision's publicly disclosed statements.
Revenue declines from Everfocus, one of the most widely used 'budget' CCTV suppliers, continue. For the 12 months ending 9/31/2009, revenue was down 15.4% from 1.6 Billion NTD down to 1.37 Billion NTD (approximately $51 Million USD to $44 Million USD).
However, according to the Taiwan stock exchange, 2010 revenue through Feb 28th was up 41.85% compared to the first two months of 2009. If this trend continued for the year, it would match Everfocus's highest selling year - 2007 (though it's certainly too early to make a strong judgment).
Major DVR component manufacturer, Techwell [link no longer available] is showing signs of recovery after a steep drop in H1 2010. By Q2 2009, surveillance revenue had dropped 39% [link no longer available] year over year (see p.15 of the 10k). Now, Q4 2009, show surveillance revenue up 11.5% over Q4 2008 ($15.4 Million USD in Q4 2009 [link no longer available] vs. 13.8 Million USD in Q4 2008 [link no longer available]).
Techwell's explanation of the sharp decline and rebound [link no longer available]:
"As end market demand failed rapidly our customers were left with a buildup of inventory in their channel and with little visibility on when demand for their solutions would return. As a result, our security business dropped significantly in the first quarter of this year ...Towards the end of the second quarter, we began to see our security customers’ forecast for the second half of the year improved significantly. Customers are now reporting that the end market demand is on pace to return to ’08 levels by the fourth quarter."
Techwell emphasized the growing strength of China [link no longer available] in its recovery:
"Our China customers are benefiting from the relative strength in the Chinese domestic economy and their access to low cost engineering and manufacturing. As a result, they are capturing the bulk of Chinese domestic security surveillance market as well as taking share in the European and North American markets."
An important question is whether Techwell's rebound presages a general increase for analog CCTV suppliers or does it reflect a shift/growth in the Chinese market? We are not able to answer this question with the information we possess currently.