Ann: Chairman's AGM Address, page-9

Here's the transcript from that interview.  Some good info here:

Dan Roberts is the CEO of a company called Scout Security. Scout Security is one of these global technology companies that are listing these days on the ASX. It’s based in Chicago where Dan Roberts lives and it’s basically a home security company. They sell devices averaging $400 a set, you install it yourself and there’s two subscriptions you can buy, $10 or $20 a month. What he is doing is disrupting the existing American home security market, which is a $23 billion market. He’s got recurring revenue of $55,000 a month, 90% profit margin, growing pretty quickly and putting on customers all the time. He’s also got Amazon on the share register, they’ve got about 2.5% of the company.
It’s a really interesting American company basically. I don’t think they’ve got any Australian customers at all to be honest and they haven’t got an Australian office, just an American technology home security business listed on the ASX and there’s plenty more of those going on these days. As you know we’ve been interviewing the ones in Israel but there’s also quite a few from America. I think they’re listing mainly on the ASX largely because they’re just simply too small for NASDAQ and the ASX is now presenting as a viable alternative for small companies to the NASDAQ.
Here’s Dan Roberts, the CEO of Scout Security.
Dan, tell us why you started up Scout Security?
Yeah, so we got started almost five years ago at this point and Scout was really a response to the traditional home security providers out there, so the ADTs and Monitronics of the world.  Basically we were looking at it and you have with the traditional guys three to five year contracts, $60 to $70 a month, really dated equipment.  I think just taking a queue from Apple and others that the modern consumer wants something that’s super simple, they want something they can install and manage through their phone, they don’t want a long term contract, they want to be reasonably priced.  So, that’s where we came up with the idea for Scout, actually it spawned out of me doing a renovation on a home and looking at security.  It was just time for the industry to be updated and we think we’ve infused that sort of Apple-esq experience into the home security space.
So, what did you invent, what did you come up with?
Yeah, so what we’ve got is a line of products that cover the core of home security needs.  So it’s all do it yourself install, we ship to the consumers home, they install it on their phone and they control it from their phone.  So, we’ve got four core devices that we produce.  We’ve got kind of the hub that’s the brains of the system, we have motion sensors, open close sensors which are typically going to go on like a window or a door and we also have an RFID entry panel.  So if you don’t have your phone or your grandma is not terribly tech savvy you just give her a little keychain fob that she can tap to the panel to arm and disarm.
Does that also open the door?
It does not although connected locks are something that we’re launching in the near future.  So we’ve been talking about that and that’s coming out say in the next three or four months here.  We have a number of sensors that we augment the system with.  So, water sensors, smoke and CO is coming, cameras and then we have a number of integration partners.  So, one of the thing with Scout, as I mentioned, we produced this core set of devices but we don’t want to be a hardware company.  We do that so we can control the experience but at the end of the day we want to integrate with all the best in class products that are out there.  So, Amazon is an investor in Scout, we also integrate with all the Alexa line of products, the Google Nest line of products, Google Home, [Life Deck 0:04:37.9] so on and down the list.  Basically consumers can create a really flexible way to monitor and automate the home with security at the core of it.
So, can I just take a step back a bit, what’s your own background, what gave you the expertise to do this?
Yeah, so I come from a business and design background.  My co-founder, Dave, is more the pure computer science guy.  We had been working at a technology incubator here in Chicago, that’s where we came up with the idea and got some of the initial funding to prototype it.  We did a crowd funding campaign that sort of verified that yeah, this is something people want and the market needs.  So, we kind of combined those two worlds with my sort of design expertise to hone not only the devices but also the installation experience and then Dave and his team building up the technology platform to run it all.  It’s a pretty big lift in terms of a technology stack which is actually one of the great benefits of what we’ve built over the last five years.  So, those two worlds kind of came together and we’ve been doing it for five years now.
So how much money have you raised in total and how much of the company do you and Dave still own?
Yeah, so we’ve raised about US$7.5 million US lifetime so it was about three and a half million prior to our IPO, we raised US$4 million in the IPO, that’s $5 million Aussie.  Dave and I have about 7.5% each right now and through performance shares can nearly double that.  As part of the IPO we agreed to re-vest some shares so we had a larger percentage but happy to re-vest some shares because we believe in the business and know what we can do over the next couple years.
Okay, so now you’ve got two sources of revenue, one is to sell the devices, the hardware, and the other is subscription.  Let’s take those one at a time.  So you’ve got four basic pieces of hardware, do you sell them all together, do you have to buy them all or do you sell them in bits and how much are they?
Yeah, sure.  So our average hardware order is about US$420.  Now, you can get in as low as $199 for like an apartment and they can go on up to $1,000 if you’ve got a really big seven or eight bedroom place.  So, on that hardware sale we make about 35% margin.  Our goal with that is really to cover the customer acquisition cost and then you get into the recurring stream.  But just before I get into the recurring piece of it I’ll just kind of detail on our website we allow people to build their own kits.  So, they can do it a la carte depending on what they want, pretty much exactly what they need for their home.  When we work with channel partners such as Amazon we have sort of a suggested kit for them and they can come to us to buy the ancillary devices to add to that.  That’s just a function of the purchase flow.  Then on the recurring side we have a $10 and $20 a month plan.
Just before you get on the recurring stuff can the customers install all the equipment themselves?
Yes, 100% done on your phone, half an hour or less.  One of the tests that most of our larger investors have used is can I give this to my partner at home who has no knowledge of the system or the research that’s being done from an investment standpoint and can they install it and is it as simple as Scout claims it is.  So, we consistently sort of pass that test and bring investors on board because it really is just something that you can set up on your phone in a matter of 20 to 30 minutes and then you control it all from your phone as well.
And how many sets of hardware have you sold now?
So, we haven’t put out exact numbers around exact numbers around the number of sets we sold.  One thing that is public is we’ve got over 3,600 paying customers on a monthly basis.  That’s about US$55,000 in recurring revenue on a monthly basis at 90% margin.
Right, but have they all bought hardware from you?
Yeah, absolutely.
Okay, so do the people who buy these sets of hardware, do they have to buy a subscription from you?
Well, yeah so when we initially started the company we actually did have a free plan, the thesis being that you get in someone’s home and as their life changes and they get more accustomed to the system they’ll sign onto monitoring.  But, we found that there’s a segment of customers that are looking for products that just never have a monthly fee and it’s not really a super profitable customer for us and also the relationship – you don’t have as close a relationship with those folks because they don’t value it as much.  So, starting in early 2016 we started mandating that everyone check out with at least one or the other recurring plans in our cart.  So, it’s still month to month, they can cancel any time but what we found was that that filters out the customers.  You’re getting those folks that value the security.  $10 or $20 is not a huge ask on a monthly basis for what you’re getting so it’s kind of a filter for us.  So, for the last almost two years we haven’t had a free option, every person that buys a system is signing up to a monitoring plan.
So you’ve got two monitoring plans, $10 and $20, tell us what each of them involves?
Yeah, so I’ll start just by saying the $20 plan is inclusive of everything you get in a $10 plan so that’s kind of an additive when you step up.  But, at the $10 plan the key feature is the cellular backup.  So, while our equipment is primarily communicating to our servers over the internet you still want to have home security if your internet goes out, right, because if it comes in and out you don’t want to lose security.  So, we have that 4G cellular chip in our hub, if the internet should ever go down you’re still going to have connectivity to our server.  So, you’re never going to miss an event.  So, you get that plus you also get all the notifications that are pretty standard, push, e-mail, text, we can even automate a phone call if the consumer wants.  So, that’s the $10 a month plan and then when they step up to the $20 a month plan the whole thing…
So, can I just say before you go on, the $10 plan you get a notification if there’s an event in your house somewhere, there’s a motion sensor detected or something.  It tells you on your phone, is that right, and that’s it?
Yeah, that’s correct, it would tell you and anyone else that you want to have notified.  So, it could be neighbour, spouse, kids – yeah, so you kind of define who should get notified, that’s absolutely right.
But not the police?
Right, so that’s when you step up to the $20 a month plan.
And so tell us how that works, sorry.
Yeah, sure.  So, the $20 a month plan again inclusive of everything in the $10 a month plan but now you’re introducing police dispatch.  So, we can dispatch in all 50 states here in the US.  So if you’re on a flight or sleeping or not able to get to your phone you might want to have the police come out and check it out regardless of whether you can verify if there’s an event or not.  So, we can dispatch police in all 50 states, that’s what you get for the $20 a month.  You just have that added layer where you know if an event happens that there’s going to be uniformed officers rolling to your residence or business, whatever it may be.
And does some of that money go to the police to make sure they come?
Well it’s actually a unique thing in the US.  So I know Australia it’s a little bit different where you typically need to have a third party security force respond initially and then they can contact the police from there.  In the US it’s kind of baked into the tax dollars that you’re paying.  So, now if you’re a repeat offender, if the police are coming out to your house five times a month, you’re going to get fined but on average if you have one event per year that’s kind of baked in that your tax dollars are going toward the safety and security of the community, and if there’s an alarm signal that will dispatch police.  They’re just using companies like Scout as sort of a conduit to let them know when there’s possibly an event.
Right, so the police in the US always turn up?
That’s correct.  There’s a couple of exceptions.  There are some cities and municipalities that will require that you have a third party show up first but it’s the vast minority.  So, I think Las Vegas and Milwaukee are two cities and there’s a municipality here and there around the US.  But, the vast majority of states and cities it’s just a direct dispatch to the police.
And what’s your average revenue per user?
So on the hardware sale we’re bringing in $420 on average for that initial purchase and then we see it split almost in half between the $10 a month and $20 a month plan.  So, if you want to call it 15 just for simplicity that’s kind of what we see on a monthly basis.  Then we expect people, based on our churn, to stick around for about five years.
Right, so what sort of lifetime value does that give for a customer?
Yeah, so that puts you north of a US$1,000 combined between lifetime value of the service, the hardware purchase and that’s kind of the attractive thing about this market, is because people understand security they value it, they’re paying for it.  It’s also something that you don’t switch out on a yearly basis like you might switch your phone.  Once you get this stuff installed if we’re delivering a service and the product is acting in the way you would expect it to these are products that can last 10 to 20 years in the home functionally if there’s nothing wrong with the devices and so there’s really no reason for people to switch it out.  Also one of the things that’s great about Scout is you can take it with you from house to house so if you’re a renter for instance who couldn’t get traditional security and you move every year you can take this with you and that’s one of the key advantages I think over traditional sort of wired installs, is that this moves around with you and we can cover all 50 states.
And what’s your cost of acquisition?
So, we’re saying $100 at scale cost of acquisition.  We’ve shown in the past we can do it for less than that but we know as we’re growing here that we’re going to do more marketing experiments, trying some different things and then once you get to a certain scale that tends to get slightly more expensive over time to acquire customers.  So, we’re saying $100 is our target.
And once you do it it’s a 90% margin?
Yeah, that’s correct.
And how many of the 3,600 customers are in the US, are they all American customers at this point?
Yeah.  So, we probably have a few folks on the $10 a month plan that are outside of the US.  During the crowd funding campaign we did allow international orders.  We have since decided to kind of roll it out country by country because if you don’t have in-country support and overlapping time zones, things like that, customer support gets a little bit hairier and the issues are a little bit harder to identify.  So, we’ve talked about expanding to Australia, we’ve talked about other English speaking countries that are likely sort of expansion targets and part of that is just wanting to have the customer support in-country, also if we’re going to do it we want to have the distributor relationships in place to really make a push and not just sort of dabble.
Yeah, I forgot to mention the crowd funding campaign.  That was your first capital raising where you crowd funded and presold services.
Yes.
How many customers did you pick up through the crowd funding and how many of them do you still have of them?
Yeah, so we did about $200,000 in presales, that’s US, in 30 days.  That was just under 1,800 individuals that pre-bought the equipment.  We kept the pre-order open from the time we did the campaign up until the point it was shipped.  Presold about half a million US in devices by the time we shipped in October of 2014.  I don’t know the number off the top of my head as far as a cohort of the crowdfunding backers that are still with us so I’m not 100% sure on that one but generally speaking our churn is right in that industry average of 12% to 14%.
Right.  The other thing I wanted to ask you, was you mentioned Amazon, they own 2.5% to 3% of the company, how did that come about?
Yes, so it was right around when they were launching the Amazon Echo and what has now become the Amazon Alexa line of devices, their suite that’s pretty extensive at this point but at the time there was just one device and they were looking to identify other smart home companies that had the same vision that they had of where things where headed.  So, as sort of an example you can completely voice control your Scout through Amazon Alexa products.  So, as you’re walking out the door say Alexa, arm Scout, you don’t have to pull your phone out of your pocket.  So, I think they saw where the smart home was going, we saw voice as a really compelling interface.  People don’t have the friction of pulling out their phone and messing with it, they can just kind of talk to their house which is pretty cool.  So, we got together and talked with them, we kind of aligned on where we saw things going, where they saw things going, and yeah, we were on the of the first five or six investments that they made out of that fund.  I think they’ve grown that substantially since but yeah it was just an alignment on where both parties saw the smart home going.
Of course, we had been a vendor to Amazon so they have a real advantage, I think, when it comes to retailers just understanding what consumers are buying and why.  Kind of like Netflix, they really understand the consumer and how to pull those levers in terms of what people might want to buy.
So, do you think that Amazon is a natural buyer of your business?  I suppose the best thing for you would be to set up an auction between Amazon and Google but I just wonder whether that’s what you’ve got in mind as an exit or do you have longer term ambitions?
Well, I think you never plan on an exit.  I think all the larger tech companies, all the larger home security players that are still doing the traditional way of things, are all potential acquirers.  But we’re running the business as though we’re going to be running it.  We never really think about who potential acquirers would be.  But I think that takes care of itself if you’re growing the business and making inroads from a market share perspective.  So, that’s really our goal and I think when you look at the traditional home security market in the US there’s a $23 billion a year business which is massive.  So, ADT owns 25% of that but there’s still another nine companies in the top ten that are billion-dollar companies.  Security is massive so we know if we’re taking care of business in terms of growing the business and grabbing market share then all the rest of it kind of takes care of itself over time.
So, what’s your current recurring monthly revenue run rate and how quickly is it growing?
Yeah, so US$55,000 a month is our recurring at present.  That growth is just a function of system sales.  So, one of the things that we said very blatantly with the IPO raise is that the majority of funds are going to be put towards sales and marketing.  So, the products aren’t second generation at this point.  So, the devices, the apps, everything is really baked and we’ve been establishing the brand over the past five years.  So, our goal is really just to put the marketing and sales dollars to work to grow that as fast as possible.  So, we haven’t released any numbers around exactly how that’s growing but I think from January or early February everyone will kind of see the growth percentage in the quarter over quarter, year over year.
Yeah, and why did you list in Australia on the ASX?
Yeah, so it was very interesting.  We had a connection toBuddy.com, I’m not sure if you’re familiar with those guys, but we share an investor and we met up at CES and we heard his story.  He said you know what, you should talk to guys in Australia and if it doesn’t go anywhere have a chat.  So, we talked with the lead manager that he’d worked with, talked to sort of their group of investors and those investors loved the story, we did a private raise with them before we even considered the IPO route.  It was always something in the back of our heads we knew we could do when the time was right.  I think at the end of the day the story just meshes very well with the profile that I think ASX investors want to see.  So, we’re not a company like some of the US tech companies where we’re trying to go grab 100 million users and hope to monetise them some day.  It’s a very clear simple story as far as how Scout makes money, how putting X dollars into marketing and sales brings back Y dollars in revenue.
So, from an investor profile standpoint I think it was a great fit.  A couple of comps, you look at ADT, they were bought for 6.9 billion last year,Alarm.com is trading at over – well, last time I checked it was 122 PE, and so you kind of just see the value of those recurring streams as you get it going and get that engine going.  That’s what I think is appealing hopefully to the ASX investor base.
It’s been great talking to you, Dan, I appreciate your time today.
Likewise, thank you so much for having me.
That was Dan Roberts, the CEO of Scout Security.