The SDM Industry Forecast Panel: 2023

The Panel Talks Supply Chain

SDM: What has been the impact of supply chain issues to your business? Do you think the supply chain will finally normalize in 2023? Why or why not?

Oliveri: Supply chain remains our No. 1 business challenge. While we see continued sales growth with a healthy backlog across Pavion business units, supply chain related product delays have caused downstream impact to project completion and associated revenue recognition. Throughout 2022, our vendor partners communicated expectations of supply chain delays easing; however, we have not seen favorable improvements through 2022, and expect continued challenges through most of 2023. As a result, product availability has become an important metric as we assess technology and solutions for our customers. Our strategy during this time is to remain well informed of supply chain status by meeting with strategic vendors weekly and prioritizing project and material allocation based on required customer completion dates. During the engineering stage, we provide our teams with vendor lead times to enable further collaboration with our clients on alternatives if required. Maintaining accurate vendor product availability allows us to also forecast labor capacity, maintaining a level balance to meet demands in a challenging market.

Regarding when it will normalize, here is what we are hearing from suppliers:

• Leading indicators are positive, but recovery will be slow.
• Supplier backlog growth is starting to slow but complex finished goods relying on raw materials, microchips, etc. remain long lead time items.
• Suppliers are starting to see slight reductions in past-due orders.
• Labor shortage and transportation cost headwinds are starting to ease for key suppliers.

Cipoletti: We were fortunate with 80 percent of our business being residential and small business that our core products come from just a handful of suppliers we have great relationships with. We were able to avoid any issues in our core products for our residential and small business customers. Our issues were with larger commercial, so less of an impact overall. … We had to make some pivots along the way but we worked through it successfully without an impact to business.

At a macro level the pendulum is always swinging. It never stops at equilibrium. The market has a way of catching up. We have been smart in terms of looking at alternative products where we need to. We saw some things coming and purchased inventory well ahead. Short of risking obsolescence we were just risking cost of capital. We have been fortunate and not really lost any business as result of supply struggles.

Rao-Russell: 2022 was a year we had to pivot. … Sonitrol had a little backlog and challenges but between myself and our manufacturer/distributor we were well informed and planned for it. Certain manufacturers did a great job of telling us there were going to be lags in advance. I will give a shout out to Resideo. They were very honest about what needed to happen and how to stay ahead of supply chain shortages. Others I wasn’t as informed by. It’s about having good manufacturers and relationships and honest and open discourse back and forth. Those that were able to do that for us we had little disruption.

Looking ahead we will normalize but they may not. Many of us as part of our efficiencies after we got stuck with inventory in the great recession that we couldn’t move saw a shift. We decided we only wanted 30-60 days of inventory. Then lo and behold we started having supply chain issues. I have seen some loosening of issues. It is not as bad. I see it righting its way about 50 percent and see us righting our way the other 50 percent. It is just a matter as leaders of being cognizant and trying to plan as best we can. We have to be willing to modify and look at different products and how far out we forecast our equipment.

The Panel Talks Revenue Expectations for 2023

SDM: What is your revenue forecast/expectation for 2023?

Cipoletti: 2023 will be relatively flat. A lot of people will consider a security system when moving into another home. As the housing market slows down that reduces our opportunities for people to consider buying a security system and puts a damper on what otherwise would be a more robust outlook.

But we continue to increase our profitability despite flat revenue, RMR and customers. When things are flat in a stable business you spend a lot of time making operations more efficient and finding better ways to serve customers well and thus increase profitability. The more profitable you can be the more you can invest in growth when the time is right. … From a macro perspective high interest and mortgage rates will have the biggest single impact on sales in our largely residential business. We hope to offset that by growth in large commercial, but with 80-ish percent of our business being residential that is the biggest negative impact, unfortunately.

Rao-Russell: I think it will be a little down on installs because I believe capital expenditures will be down. Depending on how much of a blip [the downturn] is, 2023 will be flat or down. But if all projections are correct I would like to believe it will be back up starting in 2024. We are in a slow and steady race. Do it profitably and strategically; sustain 3-5 percent a year rather than 20 percent.

That said, flat, with every bit of disruption that has occurred in the last two years, while it doesn’t look sexy it is a good indicator of how wonderful our teams have done in providing a superior service. There has been a lot of chaos and trauma, even at home. In the last two years even if there wasn’t chaos in our business, some team members also overcame chaos outside of it. That [effort] has helped us sustain and keep attrition low.

Oliveri: We expect to continue our rapid growth trajectory in 2023. Besides supply chain, the most significant factors impacting security systems sales for Pavion for 2023 will be our continued focus of harmonization of our services portfolio and IT systems, cross selling security to our existing fire and integration customers, expanding existing security customer wallet share, and further investing in our top security industry verticals of FINS, utilities, data centers, healthcare, education and retail.

The Panel Talks RMR

SDM: How did your company’s 2023 recurring monthly revenue (RMR) change compared with 2021? And how do you expect 2023 RMR will change compared with 2022?

Rao-Russell: 2022 was up slightly with RMR because of a price increase and we realized a full year of monitoring from an acquisition. 2023 will probably be slightly flat unless we do more acquisitions. That will be the only way we will grow that substantially. That is where we see our RMR model going now. Once money loosens up we expect to grow both organically and through acquisition.

Cipoletti: Flat for us as well. These aren’t exciting answers, but that is our reality. Short of landing an acquisition we are pursuing, business in 2023 will not be dissimilar from 2022.

Oliveri: We realized 6 percent YOY services organic growth. Through ongoing business integration efforts, we are launching a standard Pavion portfolio of services across the fire, security and integration business units in 2023, ensuring consistent service delivery for our customers. Services include as-a-service, test and inspect, maintenance, managed services, cyber, MSP, and in-house monitoring and operations center services for security, fire, cyber, IoT, and IT infrastructure solutions. As a result, we anticipate accelerated growth for RMR in 2023 through new service offers and increased renewal rates. Our IT MSP and Cyber MSSP business growth was a particular standout, posting 70 percent organic revenue growth, 60 percent of which are term contracted RMR. We anticipate MSP/MSSP revenue growth to continue at a similar pace in 2023, as mid-market customers continue cloud migrations, outsourcing IT services, and investing in cybersecurity due to expanding IT security threats.

Podcast

SDM spoke with two of our panelists — Joey Rao-Russell and Bryan Cipoletti — about the three biggest issues facing security dealers and integrators today: the predicted economic downturn; supply chain issues; and recruiting and keeping technical talent.  

The Panel Talks Acquisitions

SDM: 2022 was a big year for acquisitions. Did you do any acquisitions in the last 12-18 months, or are you anticipating doing any in the coming year?

Oliveri: We acquired 12 companies in the last 18 months, expanding our reach across 22 countries and over 40 locations in the U.S. The M&A pipeline continues to be strong as the industry remains well positioned for continued consolidation. We anticipate continued acquisition growth through 2023. While expanding our capabilities to deliver Pavion services across the U.S., we also anticipate more significant M&A activity to expand our global footprint. Our pace of acquisitions for 2023 is likely to remain consistent or possibly a bit stronger than 2022. We continue to be highly selective in the M&A opportunities we pursue, ensuring proper cultural fit, fiscal, and customer satisfaction performance metrics.

Cipoletti: For the first time in a number of years last year we made an acquisition. It is now a deliberate part of our growth strategy. We have created the right organization with the right people to integrate companies well and leverage the infrastructure that we have. We have made our first one. Now we are looking at a couple others. It is a little bit challenging because we are focused on our geography. So if there is a company outside our footprint we often walk away. Acquisitions are more limited but part of what we want to do to grow. An economic downturn and higher interest rates, from our standpoint, create opportunities. Because when money is free and flowing and people are over-paying for businesses it is challenging for us to be a competitive bidder. As rates go up and capital availability dries up a bit, prices start to come down, and we are more attracted and attractive to potential sellers. It sounds bad but when things get bad that is an exciting time for us to use our financial strength and capacity to get out there and bring on some companies and help grow our base.

Rao-Russell: We actually did an acquisition at end of 2020. We are open to it again. It is a really great market. I am somewhat limited by geography as well but [thinking about] culture and wanting to retain good people, that is really the bigger challenges for acquisition because we want it to be a good fit for them as well as us. We look for targets very similar to ours: Family-owned, strong ties to community. That is a bigger indicator of success for us. I do see that prices might come down. When money was free and [some] players in the marketplace got extremely aggressive with their acquisition strategy, that was just unrealistic for us to meet as an employee-owned company. At the end of the day we are in the long game, but I have to look at it that all my employees’ retirements are part of what we are planning for, so it has to be a good strategic and financial match for us. Overpaying at 60 or 70 multiples wasn’t in our interest. I think those players may go away a bit and it will be a more even playing field for companies like mine to be a little more aggressive in our growth strategy for acquisitions.

The Panel Talks Opportunities for 2023

SDM: What are the biggest growth opportunities you see for your business in 2023?

Rao-Russell: For us it is the ever-waning resources for law enforcement and that violent crime is up. Having verification and being able to give both our customers and law enforcement information both through video and audio, that will be our best growth opportunity. … Technology-wise access control has grown a lot, as have intercoms. As more and more people are working from home we no longer have gatekeepers in our offices. Having those management reports for people working remotely I think will continue to grow as well as augmenting with video and analytics. As technology gets better, even on the commercial side we are getting demands for lifestyle benefits as opposed to just security.

Cipoletti: Video continues to be in increasing demand and I expect that to grow in 2023. With video becoming an increasingly desirable component and the evolution of the technology of video and analytics and the quality of hardware and software, our opportunity is to leverage that better than we have in the past. Thirty to 40 percent of our customers take some sort of outdoor camera. But we don’t do as good a job of making sure they understand the full functionality of the video capabilities we do offer. By enhancing awareness of what we sell to prospective customers and helping them upgrade and do all we can to make sure they engage with their system — the more they appreciate and stay with us.

Oliveri: Continued acquisitions expanding our capabilities to deliver Pavion services across the U.S. and globally; cross selling across our business units; service portfolio harmonization and expansion with focus on RMR sales and renewals; expansion of existing customer wallet share; compliance as a service for the fire business unit; and proactive system health monitoring.

As the cyber threat footprint has expanded outside of IT endpoint and servers to include the full spectrum of IoT and integration technologies, we anticipate continued expansion of our IT MSP and cyber MSSP business. Pavion cybersecurity, monitoring, and managed services offers are unique in that we not only support traditional IT and MSP customer requirements, but now our cyber capabilities are leveraged across the entire Pavion IoT ecosystem of solutions including physical security, life safety, fire, IT infrastructure, AV, collaboration, and critical communications.