Hail But Not Really Farewell To the Readers of TheSecurityAnalyst.com.

Published by Jeff on July 27, 2008 under Authentication, Biometrics, Homeland Security, Identification, Identity, Security Monitoring, Security Services, Security Technology, Uncategorized

I am gratified by the encouragement and response from the thousands of unique visitors to the site, TheSecurityAnalyst.com since I started it in May.  We also appreciate being picked up by Seeking Alpha at the end of June, which multiplied the readership.  I would note that since our last blog, two items of interest have popped up for investors who have been reading our missives:  (1) Brinks has announced the it will host its Q2 conference call on Thursday, July 31, at 11:00 a.m. (ET) to review second-quarter results – with keen interest focused on the pending spin-off of Brinks Home Security, and (2) the announcement by L-1 Identity Solutions on July 22 that its combination of Passport Card and U.S. Border Crossing card prime contracts had virtually doubled in value since the original announcement in March — to $239 million over five years—underlies our contention that U.S. driver license and border card programs are going to consolidate more rapidly and grow much larger than observers are expecting.

 

So with all these events developing, it with great anticipation that I announce, that as of tomorrow, I will be coming on as a managing director at Imperial Capital, a leading investment bank in the security industry.  This anticipation comes from joining a firm with such smart people, which has been so highly successful in the niches on which it has focused — one of them being the security industry.  Perhaps the one regret is in announcing that as of now, there will be no further contributions by me to this web site –TheSecurityAnalyst.com.  However, it is the intention that my current blogging can eventually continue at Imperial, as readers of TheSecurityAnalyst.com will be redirected to a special subsection of the Imperial Capital website, which will contain industry information and comments that are reviewed and approved by Imperial’s Compliance Group.  So wait and watch for the date – I will still be out there providing fodder for users of information and those thinking about the security industry.  I also look forward to working with all my new colleagues at Imperial.

 

Imperial’s New York office telephone number is 212-490-0004, and its Los Angeles headquarters number is 310-246-3700.  Their website is www.imperialcapital.com.

 

Thank you all,

Jeff Kessler

 

 

 

 

 

 

 

 

 

By Popular Demand: A List of Our Security Industry Blogs Since May

Published by Jeff on July 8, 2008 under Authentication, Biometrics, Homeland Security, Identification, Identity, Physical-logical convergence, Security Convergence, Security Monitoring, Security Services, Security Systems Integrators, Security Technology, Single-sign on, Video Surveillance

I am gratified by the encouragement and response from the several thousand unique visitors to the site TheSecurityAnalyst.com since I started it in May.  Since being picked up by Seeking Alpha at the end of June, I have been swamped with requests for a listing of the earlier blogs on the industry that are not currently on the website.  So here is the complete listing of our blogs in reverse chronological order.

 

07/02 – In An Economic Slowdown, Government Contracts Become Important for the Security Industry.  Four security companies demonstrating good growth in a bad economy, thanks to strong Government contract flow: FLIR, L-1, ICx Technologies, and China Security & Surveillance.  (Note:  ICx announced today yet another contract for its “Cerberus” surveillance towers, this time its first from the Secure Border Initiative).

 

06/29 – Has Single-Sign On Finally Hit “Prime Time” With Security End Users?  We may be at the inflection point of improved technology and enterprise end user demand for single-sign on solutions as part of the convergence of physical and logical security systems.

 

6/26 – China Security & Surveillance: Go-to-Market and Strategic Leadership in Security in China.  The leading domestic security company in China has developed a huge advantage (no channel conflicts between its manufacturing, installation, integration and monitoring businesses), in the world’s fastest growing security market (independent of the Olympics).

 

6/23 – “REAL ID” Controlled by a Foreign Entity?  Safran S.A. Bids Against L-1 for Digimarc’s ID Business.  With all of the hoopla over personal privacy and REAL ID, we just thought it a bit odd that an foreign entity, 30% owned by a foreign government would bid against L-1 for Digimarc’s ID (drivers license) business.  Oh well, at minimum they forced a competitor to pay $50 million more.

 

6/18 – Guest Blog: Risk of Critical Failure in Monitored Alarm Industry.  Guest blogger, and long-time monitoring industry consultant Lee Jones emphatically warns against industry laxness regarding false alarms and the looming threat of non-response without verification.  His point:  “The alarm customer and the police, the two most critical segments of the infrastructure, have been abused. We believe the alarm industry is losing the loyalty of both parties. Without the loyalty of the customer and the police, the entire infrastructure as we know it today, could collapse. “

 

 

6/15-6/16 –  Do Not Ignore L-1 Identity Solutions As the ID Market Grows.  The identification market (along with biometric technologies) is now sprinting in its growth and here is the undisputed market leader – like it or not.

 

6/12 – Stanley-Sonitrol: Strategically Smart, But with Franchisee Relationships to Fix.  Stanley Works is becoming a legitimate security systems integration threat to the likes of Siemens, ADT, and Securitas Systems (recently renamed Niscayah), with its acquisitions of HSM Security and now, Sonitrol Management (the leading brand for verified, quick response by police).  However, Stanley has also acquired some very frayed relationships with Sonitrol’s significant franchisee system, which will have to be fixed.

 

6/10 – ADT’s Growth Strategy Unveils its Underestimated Integration Business.  ADT now comprises the largest single entity of any of Tyco International’s revenues and over half of its EBITDA.  We think Wall Street analysts are missing a key development underlying ADT – its already well-regarded and now growing systems integration business.

 

6/4 – BHS Steady State Cash Flow Still High, per SEC Filings.  As a follow-up to our June 2 blog, with the SEC filing by Brinks Home Security on its proposed spin out from Brinks, several investors asked us to recalculate the 2007 steady state free cash flow of the company (SSCF being the most important metric besides attrition).  Taking on its own corporate overhead, BHS SSCD for 2007 falls to 178.5 million (36.8% margin) from our previous estimate of $191.3 million (39.5%).  However, that is still way above the margin of any other public monitoring company and virtually the highest of any public or private company.

 

6/2 – Sonitrol: Can the Vaunted Franchise System & Brand Hold Together?  With rumors in the industry that the Sonitrol business was close to being sold by its private equity owners, we issued a warning to any buyer of this verified alarm leader:  Fix the relationship with the franchisees.

 

6/2 – Brinks Home Security:  A Brief Look at “The Surprises.”  On May 30, BHS filed a “Form 10” with the SEC, representing its preliminary pro forma financials as well as its ongoing relationship with Brinks Inc.  Along with the financial pro forma’s, there are two “surprise” issues which popped up in the filing (you have to dig to find them):  (a) the loss by BHS of its “Brinks” brand in three years and (b) the royalties that BHS has been paying to Brinks – over $30 million in 2007 — which were formerly not reported (or at least never seen by me).  The ongoing royalty payments fall dramatically, however.

 

5/13 – Somebody Needed to Love Protection One.  Protection One has a great management that has fixed a disaster and stabilized the company, the third largest monitoring business in the U.S.   However, a thinly traded stock, lack of growth and a balance sheet that won’t allow a lot of acquisitions has investors snoozing on this name.  We still think investors may be asleep at the switch on this one.

 

5/13 – Video Standards That May Finally Mean Something.  On May 12, a consortium of Axis Communications, Sony and privately-held Bosch – three of the leading names in video surveillance, formed a group aimed at developing a standard for the interface of network video products. Currently, while there are video compression standards (MPEG-4, and the new H.260), there is no global standard defining how network video products such as cameras, video encoders and video management systems should communicate with each other.  Note: This blog actually generated a lot of comments around why it has even taken this long for open systems to emerge in video, along with skepticism that proprietary video systems (which are maybe good for individual companies, but bad for overall industry growth), can be “overcome” any time soon.

 

5/13 – FLIR Systems and Axis AB:  A Tale of Two Video Technology Companies.  Axis Communications (Axis AB, based in Lund, Sweden) and U.S. based FLIR Systems are the two leading companies in their respective technological niches in the $7 billion video surveillance industry.  Axis is the leading provider of IP network video cameras, while FLIR is the leading provider of infrared cameras for surveillance and thermographic (temperature control) use.  Unfortunately, for Axis, a couple of its key commercial markets are slowing due to the economy – and hurting its stock.  Fortunately for FLIR, its Government business is booming, as is the rapid expansion of infrared in non-military use – helping its stock.  We like both companies; investors will have to talk to their analysts to make their own timing choices.

 

The writer current holds positions in L-1 Identity Solutions, ICx Technologies, and is considering a position in China Security & Surveillance.

“REAL ID” Controlled by a Foreign Entity? Safran S.A. Bids Against L-1 for Digimarc’s ID Business

Published by Jeff on June 23, 2008 under Authentication, Biometrics, Identification, Identity, Security Technology

In one of the more bazaar moves we have seen, Digimarc has announced that it has received an unsolicited offer of $300 million in cash for its ID Systems division from Safran S.A., (the French parent of Sagem).  This tops a bid by L-1 Identity Solutions for $250 million, about half cash, half stock, in a transaction that was expected to close soon.  But, why is Safran S.A. (Paris:SAF) even bothering to make this bid for the ID Systems business of Digimarc (with nearly $100 million of revenues)?  With all of the grumbling about L-1 (or anyone, for that matter) controlling the information on “biometric” drivers licenses, and all of the current political fallout going on regarding the REAL ID program (based on Federal guidelines for information, authentication, and interoperability), it would seem insane to me for a foreign company to try to take over a company that will be involved in identifying U.S. citizens.  

 

Better yet, Safran is 30% owned by the French Government.  Won’t it be interesting for the Digimarc board of directors if someone were to poll the 30 states serviced by Digimarc — asking them how they felt about a foreign entity processing their drivers licenses, especially with the REAL ID program slowly, but inexorably making its way on to the scene?  If REAL ID is controversial now, is it even viable under this scenario?

 

While we can see some strategic reasons Safran might have for acquiring Digimarc’s ID business (diversifying beyond AFIS, building an international ID card business), the relative strategic benefit is far, far greater for L-1, in our opinion.   So is this bid by Safran just to just to make L-1 sweat and pay more, to sap its cash reserves so Safran can go after another target and NOT have L-1 as a competitor?  Is it because Safran believes that “money talks, nobody walks” and that a big cash offer at a premium will convince the Digimarc board to sell to them, take their money and run, and then leave all the inevitable political firestorm to Safran?   Anyone with a computer and the ability to receive “Google Alerts” can see the resistance by a vocal minority of state legislatures to REAL ID (granted, we believe that much of that opposition is related to money and not pure principle over privacy), and by individual groups over any one entity controlling personal privacy information.  If one thinks all of the articles screaming how “terrible” the REAL ID program is to privacy, or about how too much personal information is going to be on a drivers license (i.e., the “de facto National ID card”), think of what happens if under the threat of Safran S.A. manufacturing and servicing those cards.  All of a sudden, L-1 becomes a patriotic symbol and Bob LaPenta a hero, whether intended or not.

 

I don’t know if there are any “U.S.” only rules surrounding states’ drivers licenses and REAL ID, but I have to assume that a foreign entity owning the Digimarc ID business will create huge problems with some in the government, in the press (what happens if Lou Dobbs gets his hands on this?), and with special interest groups — even if Safran promises that all manufacturing and production in the U.s. will be done solely by its U.S. subsidiaries.  While I am not the biggest fan of one company (L-1) controlling 90% of the drivers license production, I certainly don’t see the rationale behind this bid by Safran. 

 

What does this all mean for L-1, which we profiled in a June 16 blog?  Yes, we believe that L-1 can muster the cash resources to fend off this bid.  And yes, we believe that L-1 is by far the best positioned company strategically to understand and integrate Digimarc’s ID Systems business and people, because they play and compete in the same space, and talk the same language when it comes to state drivers licenses.   But unfortunately, we now believe the bigger risk to L-1 is not Safran, but the possibility that another, larger U.S. integrator, noticing this “circus” for the first time, now becomes interested in Digimarc and pays its own “stupid” price (1) simply because it can, and (2) for the sake of its own strategic positioning.

 

L-1 Identity Solutions Erratum: Note Has Been Rewritten

Published by Jeff on June 16, 2008 under Authentication, Biometrics, Identification, Identity

Due to technical difficulties, the fifth paragraph of last night’s L-1 blog did not appear in full, missing several sentences (the paragraph immediately after the headline: Consolidation Seems Logical to us Among US Identification Programs).  The blog has now been edited to reflect the additional sentences to the paragraph which explains our views on the consolidation we expect to  see among some of the identification programs now making their way across the American landscape.

Jeff

Do Not Ignore L-1 Identity Solutions As the ID Market Grows

Published by Jeff on June 15, 2008 under Authentication, Biometrics, Identification, Identity, Uncategorized

 

As we move toward blogging on the identification, access control and biometrics space (delayed temporarily by events in the monitoring sector), we would like to remind readers that we still believe that when national and local governments, and prime contractors looking for a strong multi-model provider of their equipment services consider vendors, they are going to strongly consider L-1 Identity Solutions in many venues – maybe more than anyone else. 

 

This is not to diminish the importance of other identity companies ranging from the well-known big integrators, to the AFIS (automated fingerprint identification system) providers like Cogent, Sagem, Motorola and NEC, to “Live Scan” competitors like CrossMatch, and the smaller biometric companies like LaserCard, Imageware, Cognitec, Precise Biometrics, and my old friend Grant Evan’s new firm – ActiveIdentity. 

 

A recent report from the Forrester Group estimates the identitficaton market will grow from $2.6 billion in 2006 to $12.3 billion in 2014.  While we have sided with the International Biometics Group’s estimates over the years, which tend to be a little more conservative, the thesis is clear – there is significant growth in the market that appears to be happening now after nearly untold years of frustrating fits and starts (we covered Fingermatrix, Identix, and Digital Biometrics, beginning in 1994, so we know whereof we speak when it comes to having patience rewarded).

 

Deep Domain Expertise in the Broadest Base in the Sector. 

However, I want to set out a thesis based on two main supports:  No matter what one wants to say about L-1’s specific “scores” or comparisons in biometric access and software, registration and authentication and authorization of sensitive job positions, AFIS and ABIS capabilities, card production and printing capabilities, intelligence services, etc., we can’t name any other company with as broad a competitive brush, and with reasonably deep domain expertise in nearly every segment we’ve mentioned.

 

Consolidation Seems Logical to us Among US Identification Programs

We think there will be signficant consolidation among the various identification programs, enhancing the consolidation of who wins programs (as well as M&A) in the industry.  When we look at the lumpy, but inexorable progress of various national and local programs (both here and abroad), ranging from HSPD 12/24, to PassCard, to Western Hemisphere Travel Initiative, to US-Visit, to TWIC, Real ID, to Sarbannes-Oxley, to HIPAA, war theater and defense identification, to Gulf States national identity programs to Latin American voting and ID programs, to Indian tax card programs, there are as many similarities in the logistics of the of the technologies as there are differences.  As a result of these similarities, we would not be surprised to see identification credentialling from, say, the Western Hemisphere Travel Inititative and PassCard to begin to merge — and this could even merge further down the line to the state and local level with interoperaable Real ID credentials.  We also believe that varioius sensitive and Government worker registration programs not currently  associated with TWIC could eventually merge with that program, as well.

 

This past June 13, L-1 Identity Solutions Inc. received clearance from the Federal Trade Commission to acquire competitor Digimarc Corp.’s ID systems business(drivers license printing and authentication) in stock and cash valued at about $250 million in a move providing further evidence of consolidation in the industry programs (machine readable drivers licenses and Real ID).

 

As this is meant mainly to be our introductory blog in the identification and biometric space (and not an investment-based focus on our views on L-1), we will simply say that we strongly believe their will be consolidation among several of the U.S. programs, and that L-1 will have a hand either as a subcontractor or as a prime in some of these marquee programs (i.e. we refuse to believe that PassCard at the national level and Real ID at the state level are going to be limited to their current budgets in the $220-$350 million range..  We also strongly believe that this consolidation will also make it easier for the private sector to begin focusing on business processes and less on which technology is “the best” – something eloquently put forth in a recent white paper by financial advisory services leader KPMG. 

 

Yes, there have been holes in L-1’s portfolio – and earnings guidance:  Their AFIS does not have the “horsepower” of that of Cogent, their biometric access control had a big hole until the acquisition of Bioscrypt, and other companies provide better single sign on software capabilities for commercial/industrial enterprises.  The company does not have anywhere near the important political connections of the big integrators – some of whom are trying to add their own biometric capabilities.  At one point, we believed that the company was seriously behind in its Beltway insider relations and connection capabilities – something that has been helped dramatically by recent hires.  The integration over a year’s time of multiple acquired biometric and identification companies to go to market, theoretically under one brand, was always to going take a little more time and little more corporate focus than optimists (like us) would have originally admitted.  Oh, and yes, possibly to the delight of those who are not Chairman Robert LaPenta’s biggest fans, the company missed its second quarter and fourth quarter guidance in 2007.

 

With that said, we stand by our belief that this company’s broad spectrum of services, spread across various modalities in finger, palm, hand, face and iris that is simply too strong to avoid a significant role (and a profitable one) in many government programs – and eventually in the commercial/industrial arena as well.  This is just our opening salvo in access and identification comments ranging from Cogent to HID to Hirsch to CoreStreet.  But we did want to set out our belief in the most general way as to where the market is heading strategically and which company we think will most likely be in the middle of it.

 

See you all soon.

Jeff