The Edmonds Group State of the Industry

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Monitored Video Surveillance / Business Intelligence for Commercial End Users State of the Industry Sector

By

Henry Edmonds, President Doug Schultz, SVP

July 6, 2012

Industry Overview and Drivers Outsourced video surveillance is a rapidly growing segment as a result of broadening acceptance of managed access control. Key demand driver is lower cost of ownership compared to a purchased traditional system. Increasingly, integrators and end users are accepting and allowing access control to be outsourced to the cloud. Managed access control solution provides end user with a system that requires minimal time commitment from its employees. Advancements in cameras plug and play capabilities, incorporating internal diagnostics with reporting capabilities and the ability to be programmed via the network make deployment faster, while reducing installation and service costs. Market increasingly driven by IT community as the servers and cameras get more ITcentric. IP video systems are rapidly evolving, and improvements in system design options and compression technologies are making the systems more acceptable to IT decision makers as another piece of a companys technology infrastructure. Analytics are also driving growth of the industry segment. Integrating analytics with video is creating a management tool to optimize business operations. Allows for cost of video surveillance system to spread across multiple departments in an organization, such as retail. Hosted video surveillance also known as video surveillance as a service, or VSaaS Key advantages of hosted video include: better image quality improved redundancy less onsite installed equipment, and increased mobility and integration with alarm monitoring. Hosted video environments include: Passively monitored sites (no interaction with customers) Actively monitored sites, which include actively looking at and listening to events transpiring at a customer site, and through two-way audio communication, simultaneously conversing with people at the site.

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Actively managed sites provide greater intelligence and accuracy in calling for police response, thus reducing false alarms.

Managed video monitoring (also known as managed video as a service, or MVaaS). MVaas is the integration of VSaas with business analytics to provide actionable intelligence Service provider creates and then maintains the infrastructure required to supply the range of service options available to the end user. Integrated services include o Traditional security / alarm verification o Guard replacement and augmentation o Remote site management o Safety hazard monitoring o Retail sales optimization monitoring customer foot traffic / sales conversion o Loss prevention measures tied to point-of-sale integration o Human Resources time tracking, attendance, policy compliance o 24/7/365 coverage Market Size According to market researchers IMS and Frost & Sullivan, the current US market for the commercial video segment is $117 million in recurring monthly revenue RMR ($1.4 billion in annual recurring revenues). The potential market (greater penetration and new verticals) is $358 million in RMR ($4.3 billion in annual recurring revenue). This compares with a current market size of $1.1 billion in RMR ($13.2 billion in annual recurring revenue) for the North American security alarm industry as a whole (residential and commercial) according to SDM. Current verticals with meaningful penetration managed video services include auto dealerships, specialty retailers, jewelry stores, restaurants, quick-service restaurants (QSRs, gas station stores), construction sites and lodging and hospitality facilities. Verticals with small penetration and significant potential include remote automobile storage lots, banks, schools, chemical and food processing plants, governments, hospitals and healthcare facilities, manufacturing facilities and power/utility plants. Industry segment is in early growth stage - creating market environment for early entrants to capture significant new business. Improvements in bandwidth transmission and video analytics are key drivers to increasing recurring revenue.

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Figure 1 Commercial Monitored Video Surveillance vs. Security Alarm Market

$1,200 $ Recurring Monthly Revenue (in millions)

$1,100

$1,000

$800 Current Video $600 $358 Potential Video Current Alarm $400

$200

$117

$0

Current industry players number less than 50 Industry players offer a wide range of video system solutions. Major players include Archerfish, Axis, DTT, EMC VSaaS Service, Envysion, iVerify, NAVCO, Salient Systems, Vue, plus the largest integrated security alarm companies ADT, Diebold, G4S, Stanley, Black and Decker, Interface (Westec Interactive) and Protection1. Business Models and Valuations There are two primary business models: Product sale and ongoing service support (Sales Model) Recurring revenue model low upfront cost couple with contractual month fees (RMR Model) Many companies are moving to the RMR Model from the Sales Model to increase business and drive valuation. By lessening end user upfront investment, RMR Model is driving industry demand The companion challenge is that the RMR Model creates much greater capital needs for industry players Pricing per camera monthly fee ranges from $5 to $40 per month Time lag in ramp up of recurring revenue can create a capital shortfall for investment in new accounts
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Sales Model valuations are in line with systems integrators and are much lower than RMR Model valuations. 5x to 8x EBITDA for larger companies ($1M+ in EBITDA) 3x to 5x EBITDA for smaller companies (less than $1M in EBITDA) RMR Model businesses are generating much more investor interest, much stronger valuations and more investment activity. Deep secondary market for tradition security alarm accounts provides a benchmark for valuation o Valuations can be comparable to or potentially higher than traditional alarm monitoring valuations o Driven by metrics (see Chart 1) 10x to 13x steady state cash flow 30x to 60x RMR 6x to 20x Adjusted EBITDA o EBITDA is adjusted to capitalize all creation costs. o Neither EBITDA nor Adjusted EBITDA is a valuation driver in the RMR Model Figure 1 Figure 2 RMR Multiples Paid for Alarm Sale Transactions (minimum, average and maximum 2002-2012)
70.0x 60.0x 50.0x 40.0x 30.0x 20.0x 10.0x 0.0x < $50K $50K-$100K $101K-$500K $ RMR Per Transaction > $500K 38.0x 37.4x 32.8x 30.0x 25.0x 27.0x 30.8x 38.4x 45.0x 45.0x 42.9x 64.0x

Source: The Edmonds Group

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Lenders are much more comfortable with RMR Model resulting in higher advance rates and enhanced valuations. Key considerations are: Long term standardized contracts Predictable cash flow Business scalability Secondary market for customers For RMR Model businesses key metrics include: Growth rate Creation cost Margin on existing customers (after removing all creation costs) Attrition Steady state cash flow o Defined as the (i) EBITDA adjusted to capitalize all creation cost, less (ii) cost to replace attrition. Attrition replacement is the product of (i) creation cost and (ii) attrited RMR. Table 1 Key Metrics for RMR-based Video Companies Creation Cost as Growth Rate a multiple of RMR Strong 15%+ Less than 20x Average 8% to 15% 20 to 30x Poor Less than 8% Above 30x

Margin (Existing Customers) 60%+ $40% to 60% Less than 40%

Annual Attrition Less than 8% 8% to 12% Greater than 12%

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Table 2 Recent Transactions in the Video Surveillance Market Segment Date March 2012 March 2012 Seller Westec Interactive DTT Buyer Interface BV Capital Comments Westec was the largest and most diversified company in the space DTT is the leading video/business intelligence provide to the QRS vertical. The Edmonds Group was the exclusive advisor to BV Capital in this transaction. August 2011 December 2010 Eyewitness Surveillance Xanboo Channelstone AT&T Eyewitness is a leader in the auto dealership vertical. AT&T has announced plans to enter the security home security and automation services market with hardware developed by Xanboo.

Conclusions Growth prospects for the video monitoring / business intelligence space are strong Market size is increasing significantly and rapidly RMR Model is increasing market demand and has greatest investor interest and strongest valuations The Edmonds Group The Edmonds Group is a specialized investment bank focused on recurring revenue industries with a particular emphasis on the security alarm industry. Within the security alarm space (including video/business intelligence), our team has closed over forty transactions representing over $2.5 billion in value in the eight years since the founding of the firm. Recently The Edmonds Group was the exclusive M&A and financial advisor to BV Investments in their recapitalization of DTT. Through this transaction, and others, The Edmonds Group has developed expertise in RMR Model Video surveillance. Other commercial video/business intelligence clients have included ADT, iVerify, and Interface Systems.

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