Avigilon Acquires RedCloud Access ControlAuthor: Brian Rhodes, Published on May 30, 2013
Avigilon has acquired RedCloud, an access control manufacturer, for $17 million in cash. This post will fill in with details over the next day.
[Update: See our analysis of Lenel vs Avigilon for the potentially biggest impact of this deal.]
RedCloud Financials Background
Plasec/RedCloud announced a total of ~$7 million in funding in SEC filings (2011 disclosure, 2012 disclosure). Since the company has been in business for 5 years prior to those disclosures, certainly they raised other funding. Given their relatively small staff (maybe 10 to 20 people even now), we suspect that investment was fairly modest and that total all time funding would be in the ~$10 million range.
The 2011 SEC disclosure cited $1 to $5 million in revenue, which we suspect is where they are at today.
[UPDATE: We have obtained Redcloud's revenue and loss figures:
For the first half of 2013, RedCloud's revenue was just under $1 million, putting them on a $2 million annual pace. Given the $17 million price paid, that's an extremely high 8+ times revenue.
Also not surprising, but worth noting, is that RedCloud was losing a fairly significant amount of money. Expenses were roughly double revenue leading to a whopping 50% net loss. Despite being 7 years old, RedCloud was likely unsustainable absent an acquisition or new funding round. Given their position, RedCloud did very well with this deal.
Here's the excerpt from the financial report covering RedCloud:
From RedCloud's perspective, given total investment was close to the acquisition price, it is likely a solid outcome though not a significant return for their investors.
From Avigilon's perspective, they likely paid ~5x RedCloud's 2012 revenue, which for the security industry is fairly high (more common is 1x to 2x). However, given Avigilon's price to sales ratio is in the same range as what they paid for RedCloud, it is not high for their own valuation.
Avigilon Cash Impact
As an all cash transaction, the $17 million represents about 1/3rd of Avigilon's cash as of March 31, 2013. Though this is rather significant, given their current stock market gains, it would be fairly easy for them to raise more cash at attractive terms.
RedCloud enables Avigilon to expand their end to end video offering into access control servers. The greatest potential is targeting enterprise customers who value tight access / video integration.
However, from a revenue generation standpoint, direct sales of RedCloud appliances are unlikely to make a major difference. Avigilon is already at a $150 million annual revenue pace, so even if they could radically expand RedCloud's sales, it would still only be a fraction of their video sales.
Moreover, most enterprise access control customers are fairly locked into existing vendors (e.g., Lenel, Software House, Honeywell, etc.). So getting them to switch will not be easy, especially those customers with proprietary panels (that will not work with RedCloud).
On the other hand, Avigilon could be aggressive in packaging RedCloud at attractive prices to motivate some major customers to swap out their existing access control software to a full Avigilon offering.
Additionally, there are not many 'up and coming' access control manufacturers. NLSS and S2 are possibilities but they both have their own video side already (which Avigilon would not want) plus they are likely to want even a higher price to sell. RedCloud is likely the most attractive pure play access offerings available.
This marketing video gives a short overview of RedCloud's pitch:
A typical RedCloud system uses either Linux-based appliances or 'virtual' servers to host head end management software. The head end is connected to the ethernet, and both administrator access and controller communication is accomplished using a LAN/WAN. Three versions of product are offered, ranging from a SMB "Express" version, to the multi-site "Enterprise" and "Virtual" versions:
From there, all 'downstream' hardware like controllers, readers, and locks are manufactured by others. Regardless of the particular RedCloud head end version, the system is compatible with the same (ethernet only) makes of HID or Mercury based door controllers. Part of the installation process includes rewriting controller firmware to work exclusively with the RedCloud head end, and this must be done with every downstream controller installed into the system.
While most access control systems are positioned to be resold by the traditional security channels, RedCloud takes a notable IT Services bend in designing and describing its products. Instead of focusing on 'traditional' physical security aspects like compatible reader and door hardware types, RedCloud's strongest claims are made regarding IT management aspects like "OpenLDAP" support and "Auto-Failover" redundancy features.
Other notable aspects of a RedCloud system include:
- Web Based: The primary management UI is accessed via the browser, and installing a thick client is not necessary to access the system. However, no provision for serial connectivity is available, and all connected controllers and users must also have LAN access to be included in the system.
- Open Hardware: The claim is conditional, and does not indicate RedCloud is interoperable with any system hardware because it is open. Rather, only select 'open' Mercury Security or HID (Edge EVO) controllers can be used. Controllers or panels proprietary to other systems cannot simply be added to a RedCloud system.
- Appliance Server: Despite the IT-centric market message, RedCloud touts its appliance based system as an advantage, citing the ease and trouble-free use of a non-Windows head end. When coupled with its web accessibility, a RedCloud system only 'needs' one central appliance and can utilize existing workstations as clients.
- VMWare Appliance: For IT organizations standardizing on virtual machines, RedCloud departs from typical providers and features a 'virtual server' only version.
RedCloud is a relatively new player in the EAC market. In a market segment where installed systems last for decades, and where organic growth creeps against established brands/resell channels like Lenel, SoftwareHouse, and 'other' IP systems like S2 or Brivo, RedCloud's acceptance has been limited.
Because of the 'incumbent establishment' and the appliance based architecture, RedCloud is best suited for the SMB markets. Unlike large institutions that have security integrator relationships, a small company likely will hire a general IT Services vendor before an integrator. In this way, RedCloud is likely to have the greatest success being sold as a corollary offering through a general IT vendor to smaller organizations.
Structurally, RedCloud compares to NLSS that also offers appliance-based access control using Mercury and HID controllers. However, unlike NLSS, RedCloud does not have a tightly integrated video management or video analytics built into the interface.
Avigilon CEO's Interview
Canada's Business News Network interviewed Avigilon's CEO (see video). Key points made:
- Synergies because most surveillance users also use access control and most security dealers also install access control
- Avigilon wants to be a pioneer in integrating access and video from one console
- Expand Avigilon as a one stop shop and leverage their brand recognition to sell more RedCloud
All of these are reasonable and somewhat expected though many Avigilon competitors already integrate access and video from one console. It makes perfect sense that Avigilon will as well, though that will have to be developed.
Update: SSI has a print interview with Avigilon's CEO. It does not add any new important details but it emphasize the importance of sales synergies over technical ones (though it does reiterate the claim of further development and integration).
The $6 Billion Market
Avigilon is emphasizing that access control is (or will become) a $6 billion market. This is misleading on multiple levels. First, RedCloud only sells server software / appliances and does not offer readers, panels, credentials, etc. that constitute the bulk of access control revenue. Also, IMS estimated the 2010 number for this market at $1.8 billion with a rather modest growth rate. There is still plenty of upside for expanding access control sales, but the multi-billion numbers for RedCloud's address market are misleading.
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