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29 November 2019

Smart Building market shows signs of renewed life, still muted

Two announcements in the smart building sector are indicative of a warming market, waking up to the immense commercial opportunity that awaits them. Johnson Controls has acquired EasyIO, the latest step in its bid to become a business aimed squarely at the smart building market, while ABB, the venerable Swiss industrialist, launched a new Building Management System (BMS) aimed at small and medium businesses – looking to widen its customer base.

For Johnson, this should be quite a cheap pick-up. Based in Kuala Lumpur, EasyIO does have global customers. Providing BMS hardware and services, including the HMI devices like touchscreens and thermostats, EasyIO aims to provide all the sensing and actuation equipment needed to connect the myriad systems in a building to a cloud-based automation application.

However, Johnson isn’t exactly lacking in that department, which makes this deal look a lot more like a play for the accounts EasyIO. There’s very little information out there about staff, intellectual property, or financials, which makes the acquisition difficult to gauge. Further muddying the water is the fact that Johnson won’t disclose the terms of the transaction.

“EasyIO provides a valuable addition to our already robust building automation system portfolio, which includes brands such as Metasys, Facility Explorer, Verasys and BCPro,” said James Burke, VP & GM BAS at Johnson Controls. “We look forward to bringing our collective customers new building automation products and services that create sustainable solutions.”

In October 2018, Johnson Controls announced it was buying Lux Products, a fellow specialist in thermostats that also had some tempting smart home products and services. Lux sold residential and commercial lines, and its smart thermostats, Kono and Geo, had gained some traction. It claims 16.3mn homes use Lux thermostats. You may also recognize the Lux kitchen timer.

For Johnson, the deal is a way to quickly shore up its nascent Glas thermostat line – a very luxurious looking unit that has suffered some mixed reviews, due to price, lack of remote sensing, and the Microsoft Cortana implementation. Lux could help improve Johnson’s offering, although the thermostats are just one piece of the Johnson Controls attack.

Meanwhile, ABB launched its new IoT Dashboard, aimed at small to mid-size commercial buildings looking to embrace automation via BEMS. A significant step down from the sorts of customers ABB usually targets, the expansion suggests that the technology has matured to the point where you don’t need very large contracts to offset the installation and support costs – opening the door to smaller firms that might not have represented large enough margins for the big dogs like ABB and Johnson Controls, or their installer and channel partners.

Targeted at lighting and HVAC applications, the IoT Dashboard provides pre-programed scenes and a new set of KNX tools, ABB is (of course) pitching this as a plug-and-play system. As part of ABB’s Ability cloud platform, the firm is hoping that an initial BEMS deal will lead to an upselling opportunity, and the chance to turn molehills into mountains.

However, returning to Johnson Controls, there’s enough weight to its recent financial performance to suggest that the smart building sector is still a long way off the mark. Johnson Controls published its figures, reporting annual revenue of $24bn – up 5% organically it says. If it is meant to be a bellwether of sorts,  then the signs are not particularly encouraging. These figures are fine, but not indicative of the firm making a killing in the near future, despite its prestige.

For the year, Johnson says net income was $1.41bn on GAAP grounds, which is down some 28% from 2018’s $1.95bn. On the Adjusted basis, Johnson says 2019 net income is $2.49bn, up some 9.8% from 2018’s $2.29bn. For Diluted EPS, GAAP accounting shows no change in the year, on $1.26. When adjusted, Diluted EPS has grown from $1.59 in 2018 to $1.96.

Q4 revenue was $6.3bn, which was up 1% compared to Q4 2018 but represents 3% organic growth apparently – excluding the impact of foreign currency and M&A. Johnson lists its net income for Q4 as $612mn on GAAP grounds, but $615mn when Adjusted. This gives it a GAAP Diluted EPS of $0.77, up from $0.64 last year, and the Adjusted ones are $0.78 for 2019 and $0.57 for 2018.

Unsurprisingly, North America is Johnson’s strongest segment, clocking in at $9bn in sales with a margin of 12.8%, up from $8.68bn in 2018 and the same margin. EMEA and Latin America clocked in at $3.66bn in 2019, and a margin of 10.1%. This was down slightly from $3.7bn in 2018, although the margin had improved from 9.3%.

APAC is the smallest segment, and is not showing encouraging signs of growth. Revenue was $2.66bn, up from $2.55bn last year, but margin has shrunk to 12.8% from 13.6%. As for the Global Products wing, 2019 managed $8.62bn, up slightly from $8.47bn last year. However, like APAC, the margin has shrunk, from 15.8% in 2018 to 13.7%.

Other financial tidbits include hiring a new CFO imminently (the old one has managed to oversee the Johnson-Tyco merger, and offloading the automotive seating and battery wings), spending $861mn on repurchasing 20mn share in the quarter, which followed a $6bn payment for 155mn share in June. As for 2020 guidance, Johnson Controls reckons it will achieve low to mid single-digit organic revenue growth, synergistic savings of $150mn, an EPS of $2.50-2.60, and share repurchases of $2.2bn.