SDM 2023 Industry Forecast: Cautious Optimism Prevails

Security dealers and integrators are a resilient and for the most part optimistic group — a general outlook that has served them very well in recent unprecedented times that saw a worldwide pandemic and major supply chain shortages. Now as they look toward what most economists are predicting to be a recession year, those skills they have fine-tuned to survive the upheaval that was 2021 and 2022 will help them survive — and possibly even thrive — when facing the next challenge.

The 2023 SDM Industry Forecast Study (a report published every year since 1982) finds a group of security dealers and integrators not quite as bullish in their expectations for 2023 as they were in 2022, but still with a majority optimistic for an increase in revenues. This year’s report has 59 percent of respondents expecting an increase, with 35 percent predicting revenues will stay the same. Just 6 percent are predicting a decrease.

Looking back, 67 percent of last year’s respondents were predicting an increase when polled in November of 2021. But the reality was closer to 50 percent that actually achieved growth, with 43 percent staying the same. One big reason for many was supply chain problems, which really started being felt early in 2022.

BRYAN CIPOLETTI joined Guardian Protection as president in May 2017. Prior to that he was chief financial officer at the Armstrong Group, Guardian’s parent company, where he also held various executive and board positions for over 30 years. Leading Guardian into the future, Cipoletti is committed to growth and profitability, reflecting the long-held principles of the Armstrong Group’s family ownership. He is a passionate believer in the power of leadership and company culture, viewing them as the most important factors in achieving success, despite competition in its many forms. Guardian Protection was ranked No. 8 on the 2022 SDM 100 and No. 47 on the 2022 SDM Top Systems Integrator’s Report.

“We will be fairly flat if not a little bit down [for 2022] due to some larger integration projects that are hampered by delays in the supply chain,” says Joey Rao-Russell, president and CEO of Kimberlite Corp., an independent Sonitrol franchise based in Fresno, Calif. that primarily serves the commercial market. “What has really hindered us in 2022 was when we could complete projects. Large integration is a big part of our install numbers and if construction couldn’t get lumber that slowed me down even if I had supply.”

Russell is one of three SDM Industry Forecast panelists this year— a group made up of security dealers and integrators of varying sizes and geographies.

JOEY RAO-RUSSELL has worked in the security industry for 20 years working in all aspects of the business including operations, sales up to her current position as the president & CEO of Kimberlite Corp., the world’s largest independent Sonitrol franchisee based in Fresno, Calif. She leads an award-winning team, including a central station specializing in audio and video verified security solutions for over 40 years. She is dedicated to improving police relations within the security industry. Rao-Russell serves as past president of the Sonitrol National Dealers Association; treasurer of Partnership for Priority Verified Alarm Response, and on The Monitoring Association board of directors. Kimberlite ranked No. 30 on the 2022 SDM 100 and No. 66 on the 2022 SDM Top Systems Integrator’s Report.

“I would say flat, too,” says Bryan Cipoletti, president of Guardian Protection, Warrendale, Pa. “The percentages are near zero plus or minus 1 percent.” Because of his company’s focus on the residential market and a group of trusted suppliers that helped shield them from supply chain issues, Cipoletti’s reason for a flat year is different from Russell’s. “Some of that was a bit self-inflicted. There are companies out there with different strategies and objectives and ways to grow therir businesses. We are about profitable growth; we open the spigot when times are good and when it isn’t turn it back a bit. We don’t want to bring on customers we don’t think will stay around; we don’t want to spend money on programs that don’t bear fruit. So sometimes we have to slow things down. That has been the case for last year and going into next year.”

JOE OLIVERI currently serves as president and CEO of Pavion, a Wind Point Partners platform company based in Chantilly, Va., which enables its customers to boost collaboration, increase life safety and security, and deliver enhanced communications. Oliveri joined the company in 2021 to lead the organization through accelerated acquisitive and organic growth, expand the company’s service portfolios and geographic reach, while improving business operations, customer service and financial performance metrics. Prior to joining Pavion, he held senior executive positions with Johnson Controls and Tyco International. He brings expertise in operations management, organizational growth, market penetration, accelerated revenue and EBITDA growth, M&A, innovation, and transformation. Pavion (as CTSI) ranked No. 7 on the 2022 SDM 100 and No. 3 on the 2022 SDM Top Systems Integrator’s Report, and was named SDM’s 2022 Systems Integrator of the Year.

SDM’s 2022 Systems Integrator of the Year Pavion (formerly CTSI), based in Chantilly, Va., but with offices around the country, is one company that had a very good year, in part because of a number of major acquisitions in 2021 and 2022, says president and CEO Joe Oliveri. “We anticipate 2022 global pro forma revenue to come in around $580 million as compared to 2021 revenue of $382 million, representing year-over-year growth of 52 percent. We saw increased wallet share from our existing customers as they respond to our cross-sell efforts. … Our base remained stable in a challenging year.”

This year’s Industry Forecast — illustrated in the graphs here and on SDM’s website at sdmmag.com/annual-security-industry-forecast — does show some good news, both for last year and the coming year.

For example, there continues to be double-digit growth in both total annual revenue and recurring monthly revenue (RMR) for security integrators and dealers who participated in the study. Their total annual revenue increased by an average of 17 percent, just one percentage point less than the previous year. RMR grew for more respondents than the previous year (73 percent reported an increase versus 59 percent last year); however, that growth was at a more modest average of 19 percent (down 10 percentage points from the previous year).

One of the biggest changes from last year to this year was the relative importance of the pandemic on business. While last year’s report still had COVID-19 in the top three predicted challenges for 2022, going into 2023 just 9 percent of respondents listed that as an expected issue. Not surprisingly a majority cited supply chain issues as the No. 1 business challenge they are facing (54 percent). Economic conditions were cited by 44 percent as far and away the top factor that will impact 2023 sales (the next two coming in at 10 percent each).

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.

While the impact question can be interpreted positively or negatively, given predictions by economists such as Phil Mackintosh, chief economist at NASDAQ who spoke at Securing New Ground in October, it is a safe bet that most respondents are expecting the economy to have a more negative pull on business this year.

“If you talk to CEOs today they are pretty negative,” Mackintosh said at the conference. “If you are in manufacturing or services you feel like business has been contracted for months. CEOs tend to be a kind of optimistic bunch so that is not a great reading. If you are running a company you are coming off a sugar high. The stimulus made things a little too easy. Then the spending slowed down.”

However, given that the No. 2 business challenge cited by SDM Industry Forecast respondents is still finding/retaining employees — coming in at 46 percent — indications are that employment is still at full capacity and it is possible that this will not be the worst recession we have seen in recent times.

“The outlook is definitely less positive … but most recessions aren’t as bad as the COVID or credit crisis,” Mackintosh said. “Most are much less impactful.”

Our panelists largely agree.

“I think the economic downturn, while not as widespread yet as it is predicted to be, will be significant,” Cipoletti says. “Increasing interest rates and decreasing demand will impact negatively our ability to grow our customers through [the builder] channel, but generally our business has proven to be pretty recession-resistant so we don’t deal with that like other businesses might. We will feel the pinch … but overall I expect it not to have a meaningful negative impact.”

Rao-Russell adds, “I remember other minor recessions. There is definitely going to be a decrease in demand no matter how you slice it, no matter how diversified you are. We are a consumer economy. Even my business, which is mostly commercial, when residential isn’t buying that floats up to small commercial, which floats up to large commercial. So we are bracing for the fact that we are expecting sales to be down. … However, we do tend to find that because we specialize in high levels of customer service this is also the time when customers want to stay with us. We will focus more on our attrition to keep the customers we have because there is not as much opportunity for new business.”

While Oliveri expects his company will continue its rapid growth trajectory in 2023, he too is keeping an eye on the economy. “An important factor, which we will keep a close eye on as 2023 progresses, is inflation, its economic impact and resulting influence on client budgets and spend throughout the year,” he says.

Where numbers are compared year over year, many of this year’s Industry Forecast numbers stayed relatively consistent or slightly down. But bright spots included revenue expectations in the video and video analytics space — up double digits over last year — and 2022 revenue breakouts for integrated commercial security systems, up 9 percentage points over 2021 in spite of supply chain issues and ranking as the No. 1 type of system for the first year (overtaking video surveillance in that particular chart). And education as a non-residential market sector moved up 8 percentage points to take second place in the top five strongest markets.

Looking ahead to 2023 the Industry Forecast panelists all agree that relying on both their inherent strengths as well as lessons learned over the past two years will help them weather whatever is coming next.

“2022 was a year we had to pivot,” Russell says. “In 2021 we didn’t have a backlog; in 2022 we started getting backlogs 10 weeks at a time as we were given everything but these five pieces. … We always tried to standardize on specific products so we could be experts on it; but our customers trust us to keep them working. … Thanks to supply chain shortages we opened that up quite a bit [to new offerings].”

One unknown she points to, however, is how the supply chain will impact traditional ways of coping with recessions for her business, particularly in the fire space, which has been hard hit with supply issues. “Fire is something everyone has to have, so if we can get the parts that tends to be one of the areas that grows during a recession because that is what people will be willing to invest in. That is my biggest unknown for 2023 — if I will be able to get the products that can help me pivot to other forms of business when the residential or homebuilding or construction may be a little bit smaller.”

The skills and efficiencies learned by both supply chain issues and the pandemic before that are what will help security dealers and integrators stay strong, Cipoletti says.

“What we have done at Guardian over the last few years is to streamline and right size our business,” he continues. “We have been deliberate about focusing on our footprint. We expect good times and bad times so we don’t go all in on the good times and we don’t get pessimistic on the bad times. We run our business always prepared to slow things down if we need to and ramp up if we have the opportunity to. What may come in 2023 may be a surprise to the prognosticators, but our business can still be profitable even if we slow down.”

Rao-Russell agrees. “There is currently a supply-based inflation that has to be overcome. We can’t control the world, and we are a world economy. We provide a level of service, a level of security and convenience and help to our customer base that becomes a necessity. … It may not be the best year, but if we stay true to what we are doing all of our companies will be just fine. Now, plan for it and be smart with your money, but my crystal ball says this is just a temporary blip and we have to proceed accordingly.”

EDITOR’S NOTE: This article is based primarily on a report produced by Clear Seas Research, “SDM Industry Forecast,” produced in November 2022. To see more of the charts, learn more about the report or to purchase, visit https://www.sdmmag.com/annual-security-industry-forecast.

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