FLIR Systems has completed a sale of its Lorex subsidiary to Dahua for approximately $29 million in cash, ending its brief run in the consumer video-surveillance market.

FLIR, a long-time fixture in the commercial video-surveillance market, entered the DIY business in 2015 with the introduction of FLIR One, an app for turning smart phones into thermal-imaging cameras. The innovation, which allows monitoring of virtually anything that gives off heat, enables users to detect human and other presences in the dark, behind walls, inside pipes and other locations that aren’t visible to the human eye.

“This divestiture will focus our security business on critical infrastructure and enterprise segments of the broader security market, which are attractive customer bases for our differentiating technologies,” says FLIR President and CEO Jim Cannon. “As we assessed our position and opportunities in the security and surveillance space, we determined that this business no longer fits our strategy to build intelligent, turn-key security solutions that are based on multiple wavelengths.”

Dahua served as the primary OEM supplier of video surveillance products to Lorex prior to the acquisition. Lorex, which will continue to operate independently as an autonomous business unit, brings to Dahua strong relationships with leading North American retailers, according to a statement.

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“These are formidable assets that will complement Dahua’s already impressive strengths and resources,” the company states.

According to Dahua, FLIR-branded SMB products will continue to be marketed for sale and available for support. The SMB North American-based sales and marketing team will remain intact and will be expanding in the near future to provide further enhanced support. Also, new product development will continue under Dahua’s China-based engineering resources.

The transaction marks the end of FLIR’s efforts to build a presence in the DIY and small business markets. FLIR acquired Ontario, Canada-based Lorex in 2012 in a cash deal worth about $60 million. Lorex also sold a professional line of visible spectrum video surveillance products under the Toronto-based Digimerge brand.

Why a high-end thermal camera manufacturer that served military, critical infrastructure and enterprise markets would enter the DIY and SMB space was viewed curiously by some in the industry. FLIR’s then CEO, Andy Teich, told our sister publication Security Sales and Integration (SSI) following the Lorex buy that a major goal for the company was to eventually market lower-cost thermal technology that would appeal to consumers and small businesses.

FLIR Spokesperson Haley Ellison told SSI via an email the company had some success in achieving that goal.

“We have driven down the cost of ownership of thermal sensors quite meaningfully,” she stated. “The consumer security space is viewed as not strategic for our security business.”

Inside the Financials

Saliq Khan, a vice president with Imperial Capital, tells SSI that FLIR’s security division represents about 14% of its total revenues, and Lorex constitutes the single largest segment.

However, Lorex’s revenues and margins have been under pressure from inexpensive Asia manufacturers the past few years. The Lorex acquisition was intended to drive much higher volumes for camera sensors, “so high that the price of Lepton cores could come down to meet the mass market in security,” Khan explained.

That large volume increase did not transpire, with the exception of the most recently reported quarter. Ironically, Khan said, the success Lorex had been having on the top line was diluting the security division’s margins.

During FLIR’s third quarter in 2016, the company experienced reduced security segment revenues, largely a result of fewer shipments of its Lorex-branded products. This was partly due to a lost SKU in Costco stores, where FLIR was displaced by a lower-priced product offering.

“This retail softness was partially offset by improved revenue from the enterprise products and thermal security cameras,” Khan said. “Segment operating margin out of the security division fell to 5% from 12% during the same period last year.”

Management expressed optimism during a 4Q16 earnings conference call that the company could reverse its operating margin and earnings decline in the security division by shifting to higher value analytics and full video solution sets from its DvTel acquisition. This, along with the expansion of the enterprise division, could be expected to boost revenues of higher margin full thermal and combo thermal/visible light cameras, Khan explained.

By the end of the first quarter last year, security segment revenues continued to be pressured by softness in pricing in the retail channel. This offset improving results from direct e-commerce business and FLIR-branded, enterprise-class products. Although segment operating margin is seasonally the lowest during the first quarter, Khan explained, security margin during that period improved — largely a result of better gross margins as the mix improves toward more sophisticated video management and control and lower operating expenses.

“Security integrators and sophisticated end users want a full video solution with higher resolutions and predictive analytics. These users are willing to pay up for this value add, and that is where FLIR is investing in security,” Khan said. “Unfortunately, there did not appear to be an easy answer for the severe pricing pressures that has been adversely affecting FLIR’s retail Lorex-branded products.”

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