Improved sales results as corporate activity in IoT sector heats up
Scout Security (ASX:SCT) is at the forefront of the DIY home security industry, having developed both wireless home security hardware and a software/service platform. The company has released a positive February sale update whilst in the wider Internet of Things (IoT) sector, Amazon announced the acquisition of Ring for around US$1bn. Highlights of the February sales announcement include the following.
Sales of $136k (unaudited) of connected home security products and home monitoring services in February.
Sales grew by more than 11% month-on-month (daily run rate).
Annualised recurring revenue stood at AU$878k at the end of the month, up more than 34% year-on-year.
Analyst comment: this is a good result for Scout, as the re-stocking of inventory that has occurred over the past number of months has quickly translated into increased sales once product is available. This indicates a clear demand and market for Scout’s hardware offering, and this is likely to increase further once the Company’s 1080p camera and verified video solution are launched later this quarter.
Potentially more important, however, is the fact that recurring revenue has also increased and is now just under AU$1 million per annum. We maintain our view that, for Scout, revenue derived from regular subscription fees (cellular backup or the company’s 24/7 police dispatch plan) remains the long-term driver for the company, since hardware sales are essentially a conduit to increasing subscriptions to Scout’s software platform.
M&A activity: continues in the ‘Internet of Things’ sector, with Amazon – Scout’s major distribution partner and one of its largest shareholders – recently acquiring video-doorbell maker Ring, reportedly for more than US$1 billion.
This is just one in a series of recent purchases by major players in the technology sector, which highlights the willingness of larger companies to pay up if what they buy is seen to increase their market presence and/or can be ‘bolted on to their existing suite of products. We expect this trend to continue in coming years, as the industry remains in the early adoption/rapid growth phase.
While Scout is at an earlier stage of development than Ring, Amazon’s acquisition of the latter highlights the potential for rapid growth in the industry right now (Ring was founded in 2011), provided a company’s business strategy is well executed.
Conference Call: in addition to this strong sales result, Scout recently provided a business update via conference call. Key takeaways from that call were as follows.
- From the initial purchase inventory, it takes about six months for Scout to break even on the initial amount invested.
- Within 12 months of the purchase order, Scout expects to double the original amount invested in hardware and software sales while a customer remains on the software platform.
- Scout expects to be cash-flow positive before the end of the calendar year.
- The Company is considering a credit facility exclusively for inventory purchases, which will smooth cash-flow movements.
Valuation: we maintain our valuation for Scout at $0.94 /share (share price $0.18/share).