Alarm.com Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 9 speakers on the call.

Operator

Good day and

Speaker 1

thank you for standing by. Welcome to the Alarm dotcom Q3 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

Speaker 1

I would now like to hand the conference over to your speaker today, Matt Zarman, Vice President of Investor Relations, please go ahead.

Speaker 2

Thanks, Kevin. Good afternoon, everyone, and welcome to alarm.com's Q3 2023 earnings conference call. Please note that this call is being recorded. Joining us today from alarm.com are Steve Trundle, our CEO Dan Kirsner, our President of our Platforms Business and Steve Valenzuela, our CFO. During today's call, we will be making forward looking statements, which are predictions, projections, Estimates or other statements about future events.

Speaker 2

These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our quarterly report on Form 10 Q and our Form 8 ks, which will be filed shortly after this call with the SEC, along with the associated press release. The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update forward looking statements or information, which speaks as of their respective dates. In addition, several non GAAP financial measures will be discussed on the call.

Speaker 2

A reconciliation of the GAAP to the non GAAP measures can be found in today's press release on our Investor Relations website. I'll now turn the call over to Steve Trundle. Steve?

Operator

Thank you, Matt. Good afternoon and welcome to everyone. We're pleased to report another quarter of solid results. Our SaaS and license revenue in the Q3 was $145,000,000 up 8.9% over the same period last year. Our adjusted EBITDA in the 3rd quarter was $41,400,000 I want to thank our service provider partners and the Alarm.

Operator

Thank you for their continued strong performance. During the quarter, we meaningfully outperformed our SaaS target despite some softness and difficult to predict hardware revenue. The diversity of our business is worth highlighting as our growth initiatives continue to make As many of you know, we typically conclude our Q3 call by providing a very early look and how we think the business will perform in the following fiscal year. I'm going to keep my comments brief today, but provide some context to the 2024 numbers that Steve Valenzuela will outline. I'm also excited to welcome Dan Kershner, The President of our Platforms business to the call to update you on a few product development initiatives.

Operator

Before I hand things to Dan, I want to Comment further on where we are strategically and what we see in the year ahead. Overall, I'm pleased with our growth in SaaS Revenue this year and our opportunity to maintain that momentum through next year. In 2023, we Successfully accomplished some belt tightening in the business and have been able to produce the same adjusted EBITDA on a real dollar basis as in 2022. We achieved this despite an unexpected setback late last year that impacted our IP license revenues and which generated material legal costs. Even as we made these adjustments, we continued to build strong businesses In commercial intrusion and access, residential and commercial video and energy management.

Operator

We've built an international business that now serves Over 60 countries globally and includes partnerships with some of the largest security companies in the world. We have also established toehold positions We expect these growth initiatives to continue to generate increasing contributions to our overall performance next year and become more efficient with scale. In 2024, we will continue to pursue our core strategy. We will invest back into the residential and commercial solutions We continue to see good results from the investments we have made in Video, Commercial, International and Energy Management and expect these areas will Certainly be drivers of our overall growth in the future. In summary, I'm pleased with our Q3 results and the execution of our plan, And I want to thank our investors for their continued trust in our business.

Operator

And with that, let me turn things over to Dan Kirsner to provide an update on our Video business. Dan?

Speaker 3

Thanks, Steve. I'm pleased to join our call today and speak with our investors and analysts. The Platforms business includes all product development for our core commercial and residential Platforms as well as sales and marketing for our largest market, North America. We drive profitable revenue growth across global markets through new product releases that expand our market opportunity, increase ARPU and build on our service provider partners' strong competitive position. While the team is focused on a range of technology domains, I'll use today's call to update you on several new enhancements to our user experience and video platform.

Speaker 3

Updates to our user experience have been motivated by the fact that the typical connected property solution on the alarm.com platform Has become increasingly sophisticated with more and different devices. This increase, particularly focused on video, has influenced how We continually refine and optimize our user experience to provide frictionless and intuitive access the information and commands that subscribers value most. During the quarter, we launched an enhanced version of our mobile app. The modernized navigation provides one tap access to high use features. Design also integrates a curated graphical activity feed that This is a crossover feature that both increases usability for residential customers and fits the commercial market.

Speaker 3

The use cases for commercial subscribers include quickly checking to see which employees opened or closed a store on time or tracking unexpected entries or exits to an office. Enhancements and new capabilities designed into the mobile app were informed by our extensive subscriber usage data. In a single month, earlier this year, nearly 100,000,000 live video streams were initiated in our app and over 50,000,000 swipes between video feeds. This data supports the new user experience design, which expands touch points for video content within the app experience. Now I'll shift to several new products that highlight the continued evolution of our video platform.

Speaker 3

The upcoming release of our new 729 FUDlite video camera product line Leverages our intelligent video based proactive deterrence capabilities into a new camera form factor that we believe will gain traction. The new 729 video camera includes a 4 megapixel sensor, wide area lighting, responsive multicolor LED lights and sirens And two way voice, which allows the central station operator to mic down through the camera to an outdoor location. It also operates Our enhanced video analytics software called PerimeterGuard, which seamlessly connects to our alarm response software. The 729 will be used by our service providers to detect potential bad actors and engage them with a series of escalated responses designed to proactively deter malicious activity. We've grown our video business to a significant scale.

Speaker 3

Our AI powered video analytics software has identified about 22,000,000,000 events for subscribers through the detection of either people, vehicles or animals over just the last 12 months. We recently added package detection to our video analytics offering. Since we began rolling out in September, we have alerted subscribers about package deliveries over 700,000 times. To summarize, our research and development program is enabling us to address opportunities in both commercial and residential markets so we can continue to deliver SaaS growth. We're leveraging the unique strengths of our channel to deliver a differentiated and difficult to replicate set of capabilities that align with the long term growth drivers of our service provider With that, I'll turn things over to Steve Valenzuela to review our financial results.

Speaker 3

Steve?

Speaker 2

Thanks, Dan. I'll begin with a review of our Q3 2023 financial results and then provide our guidance for Q4 and full year 2023 and conclude with our initial thoughts on 2024 before opening the call for questions. 3rd quarter SaaS and license revenue of $145,000,000 grew 8.9% from the same quarter last year. Excluding Vivint license revenue, Q3 2023 non GAAP adjusted SaaS and license revenue We were 13.9% year over year on a comparable basis. SaaS and license revenue includes Connect software license revenue Of approximately $5,700,000 for the 3rd quarter, down as expected from $6,500,000 in the year ago quarter.

Speaker 2

Our SaaS and license revenue visibility remains high, with a revenue renewal rate of 93% in the 3rd quarter, consistent with our historical trends. Hardware and other revenue in the Q3 was 76,800,000 down 7.5% from Q3 2022 as a year ago quarter benefited from heavy LTE cellular module sales In advance of the 3 gs cellular sunset that occurred at the end of last year and some slowing of hardware sales in the commercial enterprise market. Total revenue of $221,900,000 for the Q3 grew 2.6% year over year. SaaS and license gross margin for the 3rd quarter was 84.9%, up slightly quarter over quarter from 84.6%. Hardware gross margin was 22.6% for the 3rd quarter, up from 19.1% in Q3 2022, mainly due to favorable product mix and improved supply chain dynamics.

Speaker 2

Total gross margin was 63.3% for the 3rd quarter, up from 60.4% in the year ago quarter, mainly due to the improvement in hardware margins. Turning to operating expenses. R and D expenses in the 3rd quarter We're $61,000,000 compared to $55,600,000 in Q3 2022, mainly due to an increase in headcount and related compensation expenses. We ended the 3rd quarter with 11 16 employees in R and D, up from 981 employees in Q3 2022. Total headcount increased to 19 86 employees for the 3rd quarter, which includes employees from companies we acquired during 2023 compared to 1699 employees in the year ago quarter.

Speaker 2

Sales and marketing expenses in the 3rd quarter were $23,900,000 or 10.8 percent of total revenue Compared to $23,100,000 or 10.7 percent of revenue in the same quarter last year, mainly due to increased headcount. Our G and A expenses in the 3rd quarter were $31,500,000 up from $28,000,000 in the year ago quarter, mainly due to higher legal fees. G and A expense in the 3rd quarter includes non ordinary course litigation expense of $5,900,000 compared to $3,100,000 in the year ago quarter. Non ordinary course litigation expenses are part of our adjusted measures and are excluded from our measurement of our non GAAP financial performance. In the Q3, GAAP net income was $19,500,000 Compared to GAAP net income of $18,300,000 in the year ago quarter, non GAAP adjusted EBITDA in the 3rd quarter was $41,400,000 up slightly from $40,800,000 in Q3 2022.

Speaker 2

Non GAAP adjusted net income increased to 30,600,000 or $0.56 per diluted share in the 3rd quarter compared to $30,100,000 or $0.55 per share for the Q3 of 2022. Turning to our balance sheet. We ended the 3rd quarter with $680,000,000 of cash and cash equivalents, up $57,800,000 From our cash balance at December 31, 2022, operating cash flow for Q3 was $62,800,000 Compared to $10,200,000 in the year ago quarter and free cash flow was $60,900,000 up from $8,400,000 in Q3 2022. The increase in cash flow was from strong operating results and improvement in working capital, with collections driving down accounts receivable days sales outstanding The 45 days and a slight decrease in inventory. During the quarter, we used $6,200,000 To repurchase 105,285 shares over common stock at an average price of $58.20 Turning to our financial outlook.

Speaker 2

For the Q4 of 2023, we expect SaaS and license revenue Of $146,000,000 to $146,200,000 for the full year of 2023, We are raising our expectations for SaaS and license revenue to $566,900,000 to 567,100,000 Up from our prior guidance of $562,300,000 to 562,700,000 We are projecting total revenue for 2023 of $878,900,000 to $881,100,000 Compared to our prior guidance of $872,300,000 to $887,700,000 which includes estimated hardware and other revenue of $312,000,000 to $314,000,000 We are raising our estimate for adjusted non GAAP EBITDA for 2023 to $143,000,000 to $144,000,000 up from our prior guidance of $128,000,000 to $131,000,000 Adjusted non GAAP net income for 2023 is projected to be $103,500,000 to 105,000,000 or $1.69 to $1.73 per diluted share. EPS is based on an estimate of 54,600,000 Weighted average diluted shares outstanding. We currently project our non GAAP tax rate for 2023 To remain at 21% under current tax rules, we expect full year 2023 stock based compensation expense of $48,000,000 to 50,000,000 Finally, while we are in the initial planning stages, I will provide some early thoughts in 2024, Noting that these are preliminary, we currently estimate our SaaS and license revenue for 2024 Will be between $608,000,000 to $612,000,000 Total revenue for 2024 Could range between $908,000,000 to $927,000,000 We currently project our non GAAP adjusted EBITDA for 2024 to be between $148,000,000 to $150,000,000 We will provide our initial guidance for 2024 when we report our Q4 2023 financial results early next year.

Speaker 2

In summary, we are focused on executing on our strategic business plan and investing in our long term strategy while continuing to deliver profitable growth. And with that, operator, please open the call for Q and A. Thank you.

Speaker 1

Our first question comes from Adam Tindle with Raymond James. Your line is open.

Speaker 4

Okay. Thank you. I'm just trying to do the fast math here on that guidance here, Steve. And curious what it implies in terms of the The drivers of the SaaS line, in particular, obviously ADT has been a little bit more public about their roadmap here. It looks like if I did the math correctly, you're going to be guiding to about 8% or at least the initial thought for SaaS growth for 2024 is around 8%, which is Very healthy coming off of a 9% comparison, so not much deceleration and I know you tend to be conservative on that.

Speaker 4

So Maybe just some of the drivers that led you to this initial look on 2024 and in particular what the ADT assumption is in there.

Operator

Hey, Adam. This is Steve Tuttle. I'll start with the ADT assumption and then if Steve wants to pick up on anything else. But Yes, you did the math correctly, first, so that's right. And what we're using the same, I think, data points that others on ADT where public communication has been that they're going to initiate some activity by the end of this year with the transition.

Operator

So what In our model, we're doing is we have that activity meaning that transition modeled in to occur mostly in the Q1 of Next year, sort of, again, late this year and then roll through the early part of next year.

Speaker 2

Yes. And then Adam, you're right. It's about 8% growth we're projecting. And as we always do in the initial look, it's 15 months out. So We're giving ourselves some room here for hopefully some beat and raise.

Speaker 2

And there is a challenging macroeconomic environment out there. I mean, we've done quite well. But If you look at last year's initial look, we initially guided to about 6.3% growth and we're coming in at about 8.6% growth for the year. So we always have some room that we allow ourselves there to be able to do it being raised during the year.

Speaker 4

Great. Yes, that's clear and looks like a healthy initial look. I guess maybe a question on the quarter. You had alluded to the hardware piece and I know The story is more about the SaaS line here for Alarm dotcom, but do want to ask a little bit more on hardware. If you could unpack some of the drivers that led to the weakness in the quarter.

Speaker 4

And if I look at the Q4 guidance, it looks like it might be flat to slightly up sequentially, If I did the math right on there for the full year, I know Q4 is typically a little bit of a seasonally soft hardware quarter given weather and installs and stuff like that. So looks like maybe some temporary items in Q3 and healthier Q4 outlook. Wonder if you could unpack the drivers in the hardware piece and assumptions? Thanks.

Operator

Yes. So that's right. Pretty much flat Q4. The drivers there were and really even looking into next year. First, starting with this year, A little bit of weakness in the commercial enterprise space.

Operator

We just thought that we're seeing orders Kind of go away. We're just seeing the cycles taking longer than we expected. So in the last quarter, we saw a little weakness there. We had A couple of little supply chain issues that were more modest. And then even on the residential side, we're seeing Couple of things going on.

Operator

Fewer first, many, many fewer LTE modules being sold because the upgrade cycle From 3 gs to LTE is mostly over at this point. So that's kind of been drying up. And then The last on the hardware side would just be the macro conditions are creating a world which is sort of good and bad for us in a way where You're having fewer moves on the residential side. So you're not doing as many new installations necessarily, But you're also having less churn on the residential side where We expect probably revenue retention will trend up a little bit. So that's but you see slightly less hardware On the that side as well.

Speaker 5

Got it. Thank you.

Speaker 1

One moment for our next question. Our next question comes from Saket Kalia with Barclays. Your line is open.

Speaker 6

Okay, great. Hey, guys. Thanks for taking my questions here. Steve Trundle, maybe for you. Can we just talk a little bit about the growth businesses That you touched on last quarter, I can't remember if it was 30% of the business growing at 25% or vice versa, but it was a really interesting stat.

Speaker 6

I don't expect it's changed much in just 1 quarter, but curious if you could just expand on kind of what you're seeing in a couple of those biggest growth businesses?

Operator

Yes. The 1st year recollection is correct. That's I think what we communicated last quarter was 30% of the the gross business is represented around 30% of the SaaS and we're growing at around 25%. So that's continued. The drivers there are really EnergyHub being 1 where we did Recently put out a press release about this past year being really sort of a record setting year for us with the number of events called and the number of I think it was over 1800 events we've called year to date, meaning demand response events on behalf of utilities and moved around Quite a few gigawatt hours of power, I believe more than 200% more power we moved off the grid At key moments this year versus last year.

Operator

So you're just seeing a lot more usage there, which allows us Keep growing that business and then the team is focused right now on expanding into the broader resource space to include EVs, In particular, so a lot of work going on there, and we see that as sort of another growth vector in that business. The other couple of places are the international business, which continues to clip along at roughly that same growth rate In terms of their SaaS growth, it can be a little lumpy, but we still see mostly greenfields Internationally, where we're in the early days of a bunch of new relationships and trying to help partners get up to scale And to adopt the full platform to sort of move from the basic interactive security offering to a full offering that includes Video and elements of our automation solution. And then the next would be just sort of the overall commercial play, Both commercial intrusion, commercial access, and I guess I should say also commercial video, still Fairly early there for us, continue to make good headway there both in our core business and with the Open Eye Video segment. As I noted in my comments and as Steve noted, in the Q3, there was a little bit of a slowdown in the amount of Hardware being sold through that channel, but overall, SaaS growth rates were the same And we expect that to continue and to give us some tailwinds next year.

Speaker 6

Got it. Got it. Maybe my follow-up for you, Steve Valenzuela. So very helpful always very helpful to get a preliminary look at next year in Q3. And I know it is preliminary, but curious how you're thinking about legal costs for 2024?

Speaker 2

Yes, it's a good point. Clearly, we have factored in some legal costs. It's important to point out though that A good portion of the legal spend for the major programs are now adjusted out to get to a certain stage. So we factored that out That into our adjusted EBITDA guide.

Speaker 6

Got it. Very helpful. Thanks, guys.

Speaker 2

Thank you. Thank you.

Speaker 1

One moment for our next question. Our next question comes from Darren Aftahi with ROTH. Your line is open.

Speaker 7

Hey, guys. Thanks for taking my questions and congrats on the quarter. If I could double tap, Steve Trundle on the commercial comments. I'm just trying to understand the relationship between Is the sort of cycle for hardware a little elongated and that's what kind of contributed to maybe some of the weakness in the quarter, but the Underlying strength for the commercial demand is still there. Am I hearing that correctly?

Operator

Yes. That's Darren, that's what I was attempting to communicate. So we and again, this wasn't a major Pull back, but it was just enough that it was sort of noticeable. And we just from what we can tell, Really beginning sort of mid August, we started seeing some slower or delayed purchasing cycles Those were orders that were sort of in process might normally close in 3 or 4 weeks, seem to drag on, drag out of the quarter. So that's sort of what I think we saw in the second half of the quarter is just some tapering of intensity On the at the enterprise level primarily, meaning larger customers, large facilities, large Big box retailers, quick serve restaurants, places like that, that would typically be installing at a certain rate, It's pretty predictable.

Operator

That rate came down a bit in the second half of the third quarter. We assume we don't know, but we assume Like many people that folks are kind of trying to get a read on the overall economy right now and thinking about the velocity of their CapEx Expenditures and whether it's better to be in conservation mode or better to be in sort of growth mode at the moment. So that's our best guess, but we saw just a little bit Of a slowdown in the Q3 in that space.

Speaker 7

That's helpful. Thank you. And then maybe one for Steve Valenzuela. Your Free cash flow number is exceptionally strong. I'm just curious with the collections and the BSOs, I mean, is that a sustainable sort of Working capital sort of pass through beyond adjusted debt income.

Speaker 7

I mean, how should we think about free cash flow in the 4th quarter based on the implied guide?

Speaker 2

Yes. Q3 certainly was an extraordinary cash flow quarter. Everything came together. We can't expect that on an ongoing basis. Q4 typically would be When we hear cash flow quarter, there is seasonality in that as well.

Speaker 2

So Q3, we had very favorable DSOs. We had inventory come down a bit. Q4, we also have the potential tax payment related to the new Tax rules around R and D capitalization, which might have to be paid if Congress doesn't change that rule. And so, Yes. Q3 is certainly an extraordinary quarter for cash flow.

Speaker 2

But generally, if you look at the year to date cash flow of around 90,000,000 Generally, on a normal basis, the year to date or the year cash flow usually is around $90,000,000 to 100,000,000 It's just that Q3, everything came together and generate that amount of cash flow. Got it. Thank you. Thank you.

Speaker 1

One moment for our next question. Our next question comes from Matt Bullock with Bank of America. Your line is open.

Speaker 5

Hi, awesome. Thanks. Yes, I'm on for Mike Funk. Great to see the strong EBITDA performance. I'm curious if you could provide us an update with whether or not the Vyvan Impact to revenue, EBITDA and I guess legal expenses has tracked with the initial guidance provided, I guess it was about a year ago.

Speaker 5

Just trying to parse through whether or not some of this strong EBITDA performance is related to potentially lower legal expenses or how that's Thank

Speaker 2

you.

Operator

Sure. Hey, Matt. Yes, the EBITDA outperformance comes from A little bit stronger business than we expected at the beginning of the year. I would say success in executing on some belt tightening initiatives And driving more profitability in the business. But we also did get some benefit.

Operator

I think at the beginning of you kind of referenced about a year ago when that Private matter came up initially. We didn't really know. I think I probably said I don't know exactly How broad or how intense our legal burn would be, but I've got a budget for it at a reasonably aggressive level. So we did budget for it. We haven't burned at quite the level.

Operator

I think I telegraphed ballpark ish 16,000,000 On that at that time for this year, we haven't burned at quite that level, but we've burned a healthy amount and it's still an ongoing matter and the year is not Done, but I'd say it's been a little less intense than what I anticipated.

Speaker 5

Super helpful. Thank you.

Operator

Yes.

Speaker 1

One moment for our next question. Our next question comes from Matthew Fye with William Blair. Your line is open.

Speaker 8

Hey, great. Thanks. I'll just ask for one more clarification on the legal expenses. There was a Decent sequential uptick. What drove that in the quarter?

Speaker 2

There is a lot of legal activity going on as you can see. You'll be able to And so it's really hard to predict the legal expense, right, because depending on the timing of events and Circumstances, so it's very difficult to predict. But yes, it was up in the 3rd quarter. I think it was $5,900,000 compared to $3,100,000 a year ago. And so we will fluctuate quarter to quarter depending upon timing of certain events.

Speaker 8

Okay, got it. And then as we think about the hardware guidance for 4Q and for 2024, does ADT growing off to its own platform have any impact on the hardware line or is that just on the subscription line?

Operator

No. That also impacts the hardware line and that is in our initial look model that we provided. We would expect to see fewer devices, cameras, doorbells, etcetera, Being sold as they execute their transition, so it does have an impact on the hardware line.

Speaker 8

Okay, great. Thank you.

Speaker 1

Ladies and gentlemen, this does conclude the Q and A portion of today's conference and also concludes the conference itself. You may now disconnect and have a wonderful day.

Speaker 2

Thank you. Thank you.

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