Jordan O'BrienHow much is Alarm.com, one of the original Internet of Things (IoT) companies, worth?
That’s the million-dollar question – or maybe 900-million-dollar question – as the provider of SHaaS (smart home as a service) technology gears up for an IPO.
When it goes public, Alarm.com will be only the second (worthwhile) pure-play home automation company to do so, following Control4 (Nasdaq: CTRL), which went public in 2013.
Alarm.com provides only tiny hints as to valuation in its Form S-1, filed on May 22, 2015.
No price range was given for shares in the proposed $75 million public offering under the Nasdaq symbol ALRM; however, the filing does lay out outstanding shares, warrants, and options—in all about 77 million units come IPO time, taking into account that preferred shares will be converted into 35 million common shares (a financial person explains to me).
On March 15, the S-1 notes, Alarm.com did a clean-up of its programs and authorised options in preparation for an IPO filing.
At that time the company issued the options at $11.55, an amount that would have been calculated by an independent firm providing a valuation.
As such, it appears that Alarm.com values itself internally to be worth perhaps $850M to $900M.
Last year, the Financial Times reported that ABS Capital, the private equity group that has owned Alarm.com since 2009, was “talking to banks about the best way to exit its investment and is also considering the possibility of a sale, according to people familiar with the process.”
The report cited “people familiar with the matter” who expected Alarm.com to be worth $1.5 billion to $2 billion. Then again, that was the time of hyper-valuation for Internet of Things companies.
The Times rightly noted then: “There has been a buzz around the sector since Google paid $3.2bn for Nest Labs … (which) raised eyebrows among investors for what was perceived to be a high price.”
Nest went on to acquire Dropcam—a maker of nothing more than an IP camera—for $555 million. And then Samsung bought SmartThings for a slightly more reasonable but still hefty $200 million for an unproven start-up.
Alarm.com is neither unproven nor a start-up. But it’s not worth $3.2 billion either. Financial folks interviewed for this piece thought $1.5 billion was even a stretch.
Here are some thoughts on how the investment community might value Alarm.com.
In the end, of course, “The market is a funny mistress,” as one expert told me. “It will do what it wants at the moment.”
How much is Alarm.com worth? Whatever someone pays for it.
vs. Control4
Since Control4 is the closest comparable to Alarm.com, let’s start there.
Control4 makes professionally-installed solutions for the connected home, including subsystems such as lighting controls, multi-room audio/video, thermostats and a variety of interfaces from touchscreens to handheld remotes to keypads.
Like Alarm.com, Control4 enables remote home monitoring and control of cameras, thermostats, security and lighting. Unlike Alarm.com, Control4 also manages subsystems that Alarm.com does not touch – audio, video (TV) and motorised shades, for example.
Also unlike Alarm.com, Control4 enables rich integration, feedback and customisation that is infinitely more robust than Alarm.com’s offering.
Both companies go to market through independent dealers as opposed to large service providers such as ADT (Pulse), Comcast (Xfinity Home) and AT&T (Digital Life).
Alarm.com will authorise virtually any qualified dealer. Control4 maintains tight control over its dealer base.
Alarm.com sells software, including its cloud-based service and licenses for its SHaaS platform (although its hardware sales are increasing, now totaling 33% of revenue).
Control4 sells hardware, which is somewhat misleading as the company’s real deliverable is software that happens to be encased in black boxes.
Alarm.com enjoys a recurring revenue stream from more than two million end users. Control4’s recurring revenue is nominal through a remote monitoring service called 4Sight.
When Control4 went public, it had revenues similar to Alarm.com’s – over $100 million. Control4 at the time had never been profitable.
On the other hand, Alarm.com boasted 2014 net income of $13.5 million and EBITDA of $28.3M.
Below is a table outlining the similarities and differences of the two companies.
As shown, there are many similarities between Control4 and Alarm.com, but Alarm.com looks much more attractive now than Control4 did in 2012/2013: Alarm.com is profitable. Alarm.com is scalable because of its cloud-based platform.
Alarm.com has a steady stream of recurring revenue. Alarm.com had a higher trailing two-year revenue growth than Control4, although the trailing 12 months for Control4 fared slightly better.
Just looking at those numbers, it looks like Alarm.com should do better than Control4 did with an IPO. The big question is: How will Control4’s loss of value affect Alarm.com?
Control4 had a market cap of more than $500 million on day one of the IPO; the company has lost about half its value since then.
If you go with 4.56x revenues for Control4 in 2013, that would give you a $762M valuation for Alarm.com.
CTRL currently is trading at about 2x 2014 FY revenues after a disappointing Q1 2015. In Alarm.com terms, that would be a $320M valuation, all things being equal besides revenue.
Of course, all things here are not equal.
Alarm.com gets big bonus points for profitability, operating margins, recurring revenue, the lovable cloud and software, software, software.
The market is unlikely, I believe, to penalize Alarm.com for Control4’s uncharacteristically week quarter.
So if you give Alarm.com the benefit of Control4’s IPO valuation (4.56x revenue), plus an arbitrary $100 to $200 million in bonus points … we’re still looking at a valuation of $850M to $950M.
SaaS
Institutional investors might view Alarm.com like a traditional SaaS (software as a service) provider in the IT space. There is a wealth of data in that sector. See, for example, this aptly named piece, A Closer Look at SaaS Valuations.
The study looks at several SaaS companies with pre-IPO trailing 12 months (TTM) revenues of about $80M.
One chart shows that the median revenue multiple for companies with TTM growth of 10-20% (Alarm.com is at 13.3%) is 4.7x, putting a valuation on Alarm.com of about $785 million.
I am told that 4.7x could be on the low side for SaaS providers, which may see valuations of 4x to 6x.
The study referenced here provides additional, useful data on SaaS valuations for 2014.
Security RMR
There are many years of data for the value of residential security accounts based on RMR, the recurring monthly revenue of dealers who charge for security monitoring and interactive home automation services like Alarm.com.
Typical multiples for decent-sized security dealers with good accounts is about 30x to 40x RMR.
Exceptional multiples might be around 60x for a high volume of high-quality accounts (e.g., solid contracts, low historical attrition rates). Vivint, for example, fetched multiples of 50x to 60x RMR when it sold to Blackstone Capital in 2012.
Earlier this year, LiveWatch – a hybrid DIY/Pro security reseller that happens to use Alarm.com on the back end – sold for more than 70x RMR to Monitronics, a giant central monitoring station and subsidiary of Ascent Capital Group.
But Monitronics in that case was buying more than accounts; It acquired a scalable platform for DIY sales and service. Likewise, Alarm.com would be selling much more than paper.
Alarm.com would probably argue for (and deserve) the same 70x RMR, for a valuation of $700M for its software/licensing alone.
Then there’s hardware sales of $55M. Valuing hardware at 1.5x to 3x ($80M to $160M), we again arrive at a potential Alarm.com valuation of $850M to $900M.
Other Related Transactions
Since Control4’s IPO, several equity events have occurred that might inform a valuation for Alarm.com:
Savant
Savant is a newer home control company that started out at the high end like Crestron, but also like Crestron is coming out with more affordable systems that are easier to configure than ever. That puts it into a very similar category as Control4.
Last year, KKR acquired a $90M stake in Savant. That investment suggested a $215M valuation for Savant, according to the Wall Street Journal.
At that time, Control4 had a market cap of $350M, or roughly 2.7x revenues.
Savant revenues then were rumored to be about $100M but I’ve heard that the sales were more like $65M to $75M at the time, making the valuation about 3x revenues.
AlertMe
Earlier this year, AlertMe was acquired by British Gas for £44M ($67M).
AlertMe is the SHaaS platform that has powered Lowe’s Iris, which most likely has sold fewer than 100,000 units since its 2013 lunch. AlertMe also powers an energy management service from British Gas, currently deployed to about 100,000 customers.
AlertMe is quite similar to Alarm.com in the platform it provides, but unlike Alarm.com, it has sold its solution to major providers (only two that we know of), not thousands of independent dealers.
Alarm.com Customers and Direct Competitors
Alarm.com clearly is a pioneer and leader in remote home monitoring and management. The company’s top direct competitors are Icontrol and Honeywell Total Connect.
Icontrol, provider of a SHaaS platform very much like Alarm.com’s, is a fierce and direct competitor, with an estimated 2 million+ subscribers and a development platform for integrating with more third-party products than Alarm.com does.
But Icontrol differs from Alarm.com in a couple of ways: it allows Internet-based communications to the cloud (Alarm.com is all cellular through its security system partners), and it has deployed its service through giant mass-market providers such as ADT (Pulse), Comcast (Xfinity Home), Time Warner Cable (Intelligent Home) and most of the major cable providers that offer security and interactive home control.
Because Icontrol was never really equipped to service thousands of smaller independent dealers a la Alarm.com, the two companies did not necessarily butt heads.
This year, however, Icontrol launched a program, called Icontrol One, focused squarely on independent dealers, making it a head-to-head competitor to Alarm.com moving forward.
Icontrol recently scored a big win in the dealer channel by signing up Monitronics, a dealer network with more than 1 million monitored accounts.
Previously, Monitronics only acquired home automation accounts from Alarm.com dealers.
The acquisition of LiveWatch and its 32,000 monitored accounts is a good example.
Now Monitronics embraces Icontrol as well, which could be a big, big deal. The central station will both acquire Icontrol accounts from its dealers, and encourage its dealers to adopt Icontrol.
Alarm.com indicates in its Form S-1 that Monitronics accounted for 15% to 20% of its business over the past two years, up from 10% to 15% in 2012.
We most certainly will see some of the Monitronics business going to Icontrol in the future.
Alarm.com notes that its top 10 largest revenue service providers accounted for 65% of its revenues last year, and that number has been shrinking over the past few years, which is healthy.
In addition to Monitronics, Vivint is a top Alarm.com customer, accounting for 10% to 15% of Alarm.com’s revenues over the past three years.
As noted in the Form S-1, Vivint is moving to its own platform, so going forward Vivint will still pay licensing fees to Alarm.com but “we receive less revenue on a per customer basis from this service provider as compared to our SaaS subscriber base, which may result in a lower revenue growth rate.”
Alarm.com rightly explains, “We must also work to expand our network of service providers to ensure that we have sufficient geographic coverage and technical expertise to address new markets and technologies.”
Besides Icontrol, the only direct competitor to Alarm.com has been Honeywell’s Total Connect service for Honeywell security dealers.
Honeywell’s platform is as robust as Icontrol’s and Alarm.com’s.
Of course, Honeywell’s solution works only with Honeywell security systems, which limits its growth potential. Alarm.com supports security panels from Interlogix, 2Gig from Nortek Security & Control, Tyco’s DSC and start-up Qolsys.
Recently, another leading residential security provider Napco launched a cloud service of its own, called iBridge, to compete with Honeywell’s Total Connect.
Indirect Competitors
On indirect competition, Alarm.com says it best in its Form S-1. Pay very close attention.
Alarm.com will face serious competition from cloud-to-cloud smart home services with open APIs.
Additional Thoughts on Alarm.com
Investors and the general public love to say that professional security monitoring is dead or dying, but that simply is not the case.
In fact, we might expect the service to increase, as more and more jurisdictions are ceasing to respond to alarm calls that are not verified by video or an eye witness.
While Alarm.com is not itself an alarm monitoring station – it simply communicates with such stations – professional monitoring is nevertheless a critical element in the success of dealers who sell Alarm.com service.
Alarm.com lacks broad support for surveillance cameras – a huge and growing component of remote interactive services.
Currently Alarm.com only supports its own cameras, which are more expensive than others on the market.
Alarm.com could choose to integrate third-party IP cameras into its service, but has not done so.
Dealers are captive to Alarm.com’s hardware if they want to incorporate cameras into the smart home UI.
Hardware revenues comprised roughly one-third of Alarm.com revenues in 2014.
In addition to its camera, Alarm.com just began to sell its own thermostats and is planning to ship a NAS drive for local video storage this year.
On a related note, Interlogix parent company UTC accounted for 10% to 15% of Alarm.com’s revenues in 2014, mostly likely from the sale of Z-Wave and cellular radios that Alarm.com supplies for Interlogix security panels.
Intellectual property is a big, big deal for Alarm.com, which has patents for its interactive service. So does Icontrol.
The two companies sued each other in 2013 and came to a cross-licensing agreement in 2014.
It would not be surprising if the two leaders went after their competitors.
Speaking of patents, Allure Energy has sued Honeywell for the geo-fencing capabilities of Honeywell’s Lyric thermostat.
Alarm.com offers (and heavily touts) its own geo-fencing services, especially for its new thermostat.
Allure’s patent is quite broad in the geo-fencing department, and it is likely the company will go after other potential infringers in categories beyond thermostats.
Alarm.com’s wholesale prices to dealers are higher than competitors’. Margins there are not sustainable for the long term.
Wall Street loves DIY, and Alarm.com plans to play in that market, as noted in the Form S-1.
In 2015, the company says, “We have an initiative to develop smart home devices targeting the global retail market.”
Alarm.com has not spelled out that strategy yet, but it does follow Icontrol’s recent acquisition of Piper, a DIY camera with a home automation hub inside.
Icontrol also announced its first SHaaS partner in the DIY category: Peq from Smart Home Ventures.
ADT plans to launch a product similar to Piper for the consumer market as well.
A retail initiative by Alarm.com could be promising.
It would compete with the likes of Lowe’s Iris, Staples Connect, Wink and SmartThings, not to mention some DIY solutions offered by Xfinity and other cable providers based on Icontrol’s Touchstone platform.
We expect big things from Alarm.com on that front, as the company has acquired/is acquiring Building 36 Technologies, a start-up maker of a Z-Wave IP gateway that uses Alarm.com as the back end.
Founded by execs from the IoT thermostat maker Radio Thermostats of America, Building 36 will most likely be the basis of Alarm.com’s retail play.
It will be an important move if Alarm.com wants to spread to channels besides the professional alarm installer. Submitted to the FCC in April 2015, the Building 36 gateway bypasses today’s requisite alarm panel to provide home automation services via IP and the Alarm.com SHaaS.
We can only imagine that Alarm.com will launch this solution with something like an open API to integrate third-party cloud-based solutions for everything from door locks to light bulbs to irrigation systems.
Wall Street would like that very much.