NovoCure Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 9 speakers on the call.

Operator

Good day

Speaker 1

and thank you for standing by. Welcome to the Alarm dotcom Q2 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 Zarvin. Please go ahead.

Speaker 2

Good afternoon, everyone, and welcome to alarm.com's 2nd quarter 2023 earnings conference call. Please note that this call is being recorded. Joining us today from alarm.com are Steve Trundle, our CEO 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. 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 Form 8 ks, which will be filed shortly after this call with the SEC along with the associated press release.

Speaker 2

This call is subject to these risk factors and we encourage you to review these risk factors. Alarm.com assumes no obligation to Financial measures will be discussed on the call. A reconciliation of the GAAP and 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. You may begin.

Operator

Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report that our Q2 results exceeded our expectations. SaaS and license revenue in the 2nd quarter was $140,400,000 resulting in a non GAAP growth rate

Speaker 3

$36,400,000

Operator

I want to thank our service provider partners and the alarm.com team for their contributions to our results and for their ongoing performance. Our increasingly diverse business continued to grow despite uncertain macro conditions. Our SaaS outperformance was driven by our growing subscriber base and increasing contributions from our growth initiatives. Hardware outperformance was driven by sequential growth in the volume of camera sales consistent with solid account creation during the quarter and normalized channel inventory levels. Our stronger than expected adjusted EBITDA line was driven by an increased focus on controlling costs along with the higher performance in SaaS and hardware revenues.

Operator

In terms of our operations, we continue to focus on our growth strategies as we exploit the opportunities we see in commercial, international, Video and our Venture businesses. Collectively, SaaS revenue from these initiatives is growing faster than our total SaaS at about 25% on a trailing 12 month basis. We're carrying nice momentum into the back half of the year, and I believe we are well positioned to execute our annual plan. On today's call, I want to provide a Few product updates around our video services platform and the development of our commercial business. I'll begin with the video services platform.

Operator

In the Q2, we introduced a new video doorbell called the VDB-seven fifty. Now with 3 alarm.com developed products In the market, our video doorbell lineup offers our service providers unmatched choice, flexibility and performance options. This should allow us to drive up the attachment rate of our video doorbells through time. We believe the 750 is the first Battery free video doorbell on the market. As you may know, even wire powered video doorbells still embed and require a small battery that must be replaced periodically.

Operator

With no consumable parts, the 750 is the lowest maintenance Embedded batteries also restrict the typical video doorbell Operating temperature range. The new 750 has an operating temperature range that is as much as 70 degrees Fahrenheit wider than other leading video doorbell brands. That's particularly important to our service providers in both the Far North and the Southwest. The 750 became generally available in the Q2 and we expect it to be adopted quickly as our service providers integrated into their offerings. Our investments in video software and cameras are consistent with the opportunity we are seeing.

Operator

In the last 2 years, we've seen a double digit growth rate in the number of alarm.com video cameras that our service providers install monthly. Adding our video solution to a subscriber's account contributes to higher ARPU and supports an 8 to 10 year SaaS revenue stream. I'll now shift to discuss the significant enhancement we have made to our partner services platform so that our service providers As a reminder, our partner services platform is a broad suite of remote management software, Resources and Business Intelligence Solutions. We designed these capabilities to help our partners operate more efficiently while deploying more devices and services to their customers. We put a lot of effort into wrapping our consumer facing technology With back end services and software that enable service providers to be successful with their broad deployment of our products.

Operator

This quarter, we expanded the business intelligence component of our Partner Services platform to provide new insights into commercial account performance. 3 attributes that are closely associated with lower customer attrition and greater everyday system engagement. These insights were then rolled into a set of 6 specific best practices. Our service providers can implement these practices to increase customer lifetime value from their high ARPU commercial accounts. They can also monitor implementation in their commercial account base and identify opportunities for additional improvements using our business intelligence reporting engine.

Operator

In summary, I'm pleased with our Q2 results and our execution of our plan through the first half of twenty twenty three. We continue to expand our platform and market opportunity with the launch of innovative new products and the occasional position that aligns with our long term growth strategy. I want to thank our service provider partners and our team for their hard work and are investors for their continued trust in our business. And with that, let me turn things over to Steve Valenzuela to review our financial results

Speaker 3

Thanks, Steve. I'll begin with a review of our Q2 2023 financial results and then provide our updated guidance before opening the call for questions. 2nd quarter SaaS and license revenue of 140,400,000 Grew 8.5% from the same quarter last year. Excluding Vivint license revenue, 2nd quarter 20 23 non GAAP adjusted SaaS and license revenue grew 13.3% year over year on a comparable basis. SaaS and license revenue includes Connect software license revenue of approximately $5,900,000 for the 2nd quarter, down as expected from $6,900,000 in the year ago quarter.

Speaker 3

Our staff and license revenue visibility remains high With a revenue renewal rate of 93% in the 2nd quarter, consistent with our historical trends. Hardware and other revenue in the 2nd quarter was $83,400,000 at the same level as Q2 2022 and up $9,100,000 or 12.3 percent quarter over quarter, mainly due to an increase in sales of cameras and access door controllers. Total revenue of $223,900,000 for the 2nd quarter grew 5.2% year over year. SaaS and license gross margin for the 2nd quarter was 84.6%, down from 85.6 in the year ago quarter, mainly due to lower license revenue. Hardware gross margin was 22.4% for the 2nd quarter, up from 17.7% in Q2 2022, mainly due to favorable product mix with more commercial offerings.

Speaker 3

Total gross margin was 61.4% for the 2nd quarter, up from 59% in the year ago quarter, mainly due to the improvement in hardware margins. Turning to operating expenses. R and D expenses in the 2nd quarter were $60,900,000 compared to $54,200,000 in Q2 2022, mainly due to an increase in headcount and related compensation expenses. We ended the 2nd quarter with 10 53 employees in R and D, up from 9 19 employees in Q2 2022. Total headcount increased to 19 oh 9 employees For the Q2 compared to 1606 employees in the year ago quarter, sales and marketing expenses in the 2nd quarter were $23,800,000 or 10.6 percent of total revenue compared to $22,900,000 or 10.8% of total revenue in the same quarter last year, mainly due to increased headcount.

Speaker 3

Our G and A expenses in the 2nd quarter were $28,800,000 down slightly from $29,300,000 in the year ago quarter Due to lower headcount and compensation costs, partially offset by higher legal fees, G and A expenses in the 2nd quarter includes non ordinary course litigation expense of $1,300,000 down from $5,300,000 in the year ago quarter. Non ordinary court litigation expenses are part of our adjusted measures and are excluded from our measurement of our non GAAP financial performance. In the Q2, GAAP net income was $15,800,000 compared to GAAP net income of $10,800,000 in the year ago quarter. Non GAAP adjusted EBITDA in the 2nd quarter was $36,400,000 compared to $37,100,000 In Q2 2022, non GAAP adjusted net income was 26,600,000 or $0.49 per diluted share in the 2nd quarter compared to $26,900,000 or $0.49 per share for the Q2 of 2022. Turning to our balance sheet.

Speaker 3

We ended the 2nd quarter with 6 $627,000,000 of cash and cash equivalents, up from $622,200,000 at December 31, 2022. During the quarter, we used $6,700,000 to repurchase 134,255 shares of our common stock at an average cost of $50.11 Turning to our financial outlook. For the Q3 of 2023, We expect SaaS and license revenue of $141,400,000 to $141,600,000 For the full year of 2023, we now expect SaaS and license revenue to be between $562,300,000 to $562,700,000 up from our prior guidance of $555,900,000 to $556,500,000 We are projecting total revenue for 2023 of $872,300,000 $887,700,000 increased from our prior guidance of $855,900,000 to $881,500,000 which includes estimated hardware and other revenue of $310,000,000 to 325,000,000 We estimate that adjusted non GAAP EBITDA for 2023 will be between 128 to $131,000,000 up from our prior guidance of $120,000,000 to 125,000,000 We expect adjusted non GAAP EBITDA for the Q3 of 2023 to represent approximately 23.5% The 24% of our annual guide. Adjusted non GAAP net income for 2023 is projected to be $92,200,000 to $94,200,000 or $1.69 to $1.73 per diluted share, up from our prior guidance of $84,600,000 $87,500,000 or $1.55 to $1.60 per diluted share. EPS is based on an estimate of $54,600,000 weighted average diluted shares outstanding.

Speaker 3

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 $52,000,000 to 54,000,000 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.

Speaker 1

Our first question comes from Michael Funk with Bank of America. Your line is open.

Speaker 4

Hi. Yes, this is Matt Bullock on for Mike Funk. Thanks for all that color on the call. I'd love an update on international progress, specifically the progress you've made with signing new service providers and an overall update on how you expect international revenue growth to trend over the next couple of years. Thanks.

Operator

Hey, Matt, this is Steve Trundle speaking. So international, I think last quarter, We indicated that growth was around 25% in that business overall.

Speaker 4

That's right.

Operator

And that's We're not going to update this quarter, but I think we've seen that trajectory sort of continue. We in In terms of signing new service providers, we're out all the time and feel like we have a nice pipeline and some additional ones that are going to come on towards the end of this year. Can we sustain 25% sort of the next 2 years as a growth rate there? I think it's conceivable. That certainly will be our goal.

Operator

So business is going to continue to grow and become a more meaningful chunk of the Alarm dotcom revenue base. If If you look at international today, it's between 4% 5% of total revenue. And our long term target there is something probably in the 30% Plus range. So we think there's plenty of runway and we're out building that business every day.

Speaker 4

Excellent. Super helpful. And then one more if I could. Could you provide a little bit of additional context on what commercial ARPU looks like Today versus your standard residential ARPU and then as we move through 2023 2024, maybe even 2025, How that ARPU could increase as you add more products and services?

Operator

Yes, good question. So the rule of thumb today is that commercial ARPU is around 2x, the residential ARPU. You have to remember in our case that the place where we're currently strongest commercially is really small business. So The average site, if we're doing access control, may have 3 or 4 doors that we're doing today on average. That doesn't mean we can't Take down installations where we're doing 80 to 100 doors.

Operator

But on average today, we're probably stronger on the SMB side than we are on the larger Enterprise side, as we continue to build out and deploy with OpenEye, With SDS and with our commercial the rest of our commercial platform, I would expect that we'll have Some gradual lift in that ARPU and over time commercial would probably be closer to there will be accounts, there will be outliers where it's 25, 30 times our standard residential ARPU, but on average, you'll probably see it drift up to something closer to 3x Over a long period

Speaker 3

of time.

Speaker 4

Super helpful. Thank you very much.

Speaker 1

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

Speaker 5

Okay, great. Hey, good afternoon, guys. Thanks for taking my questions here and nice revision to the guide.

Operator

Thank you.

Speaker 5

Absolutely. Steve Trundle, maybe to start with you. On the back of the last questions, I want to zoom out a little bit. You talked about growth initiatives on the whole growing at about 25% in your prepared remarks. I think that's really interesting.

Speaker 5

Can you just maybe talk about how big that business is in total and maybe rank order the components of those growth business of that growth business as we just think about the drivers. Does that make sense?

Operator

Yes, absolutely makes sense and good question. In terms of the overall scope of what we describe as the growth initiatives, it's today around 30% of our Total revenue and we bucket into that bucket commercial, video, EnergyHub And international. So those are really the 4 key pillars of what we today Characterized as growth initiatives and we talk about that particular growth rate that I mentioned in my prepared remarks. So In terms of and that gives you a feel for sort of the scale and it's getting sort of bigger that bucket every quarter obviously. In terms of ranking them, it's hard for me to rank in terms of preference because I like each of those areas As long term growth drivers in the business in terms of where we are today, I would say, in terms of size that Video and commercial are the 2 larger components of that mix.

Operator

After that, it would be EnergyHub, which It's growing nicely and is probably in the number 3 spot there and then international not far behind in the number 4 Spot in terms of rank ordering them on today's contribution. Don, that helps, yes.

Speaker 5

Yes, that does. That's really helpful actually. Steve Valenzuela, maybe For the follow-up for you and somewhat related, is there a different margin profile for these growth businesses? I mean, I know that those are all Very different and of course they're all SaaS. But I'm just curious as we think about that 30% inching up to 35% into 40% in the quarters and years ahead, How might that increasing mix impact margins here as those growth businesses get bigger?

Speaker 3

Yes. Steve Turner talked about most of those growth businesses are in the alarm.com segment. We have SaaS gross margins in the mid-80s. In the other segment, which includes EnergyHub, generally that gross margin is a little bit lower, generally in the 65% to 69% range in the mid to upper 60% range. So as the growth business continue to grow, we might see a little bit of a drop in the gross margin.

Speaker 3

Matter of fact, if you look at Q1 versus Q2 2023, gross margin did come down a little bit on SaaS, Only about 80 basis points. Some of that is because the other segment actually is now 9% of our revenue, which is great news. It was 8% a year ago. And so there'll be a little bit of an impact, but I wouldn't expect more than 100 basis point to 200 basis point impact on the SaaS gross margin.

Speaker 6

And then

Operator

just to pile on, Steve is talking about the SaaS. On the hardware piece, these Areas, particularly the commercial side tend to generate a little higher margin on hardware revenue. That's just sort of normal course is that Hardware and the commercial sector is at least today we're driving margins more in the 30% to 40% range there.

Speaker 3

Yes, that's a good point. So what I was talking about was all SaaS gross margins. Hardware gross margins generally in commercial are in the 40% range As Steve was talking about.

Speaker 5

Got it. Super helpful guys. I'll get back in queue. Thank you.

Speaker 3

Thank you. Thanks.

Operator

One moment

Speaker 1

for our next question. Our next question comes from Jake Nordstrom with Raymond James. Your line is open.

Speaker 6

Okay, perfect. Thank you guys for taking my question. Just a couple from me. If you could provide more color on the renewal rate, I know it's sort of hovered near that 93%, 94% for a few years now. How high could this go?

Speaker 6

Do you have any long term targets? And what would be the puts and takes for driving that number up?

Speaker 3

So generally, it's It's been 92% to 94% has been the renewal rate and that's the revenue renewal rate. We did see it at one point during COVID at 94 And that's when there was fewer moves. I think it's important to point out generally when there's fewer moves there's less attrition. So that does contribute to a higher renewal rate. Also I think that as we have video analytics, those are very sticky.

Speaker 3

And think about that those really came out about 4 years ago and the lifetime of a customer is 8 to 10 years. So over a long period of time with these Enhance Services, I would expect that we would see a higher retention rate. Now it takes time because you've got 9,000,000 subscribers over a long period of time, it's like moving a large boat, right? It takes a while to shift over. But over time, we should see an increase in that retention rate as all of these value added services really Cause even a longer lifetime.

Speaker 3

Already today we have an 8 to 10 year life which is pretty long. So over a long period of time, I would say I would be surprised if the retention rate It doesn't go up.

Speaker 6

Okay, perfect. Appreciate that color. And then last one for me. Just from a higher level, could you talk about the puts and takes of Turning to that 20% plus EBITDA margin range and maybe how we should think about that for fiscal 2024?

Operator

Sure. I guess higher level means me. This is Steve Trundle speaking. Sure. I think you've seen us In the last quarter, we were able to come in a little better on adjusted EBITDA than we expected.

Operator

There was some Increased focus on cost and they had some outperformance on both SaaS and hardware revenue that contributed to that. In terms of the margin profile in the business, It's a little early for us yet to really forecast exactly what we're going to do in 2024, I don't want to shy away from the question, but I would say, generally, I look at What are the items that what do we have on our stack and where are we in the growth cycle and the various initiatives we have underway and what sort of investment makes sense? We don't want to get so enamored with investment that we don't deliver EBITDA, but We're looking more in the we'll kind of move towards that direction, but I think our internal guideline That we shoot for is more in 17%, 18% range right now.

Speaker 6

Perfect. That's very helpful. Congrats on the quarter guys. Thank you.

Speaker 3

Thank you. Thank you.

Speaker 1

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

Speaker 7

Great. Thanks for taking my questions. I wanted to ask on the Gopher product You released in some of the AI functionality that you're incorporating with your service providers. Does this help you on the Cost side at all? And if so, is it meaningful enough to help you out from a margin perspective at all?

Operator

I would hope that through time, this helps us on the cost side. Right now, our focus is really on enhancing the services and the experience that our service providers have when they seek support or help from us. But One can imagine that as the service providers become more comfortable interacting with Gopher, when Gopher delivers results faster and as Good as a person that we may see some shift to the AI interface and that could help us on the Support side of the cost equation. That said, we've built our business around doing the best we can to provide High quality support to the service providers, it's important for us to do that if we're continuing to ship new products. They need to feel like If we work with alarm.com and we're out there with a new product that we can get great support on it.

Operator

So we're going to continue that as Sort of the number one priority, but I can imagine that with what we're doing with AI that over time we could see some reduction In person call volume, I think there also are opportunities though with the large libraries to do some additional things internally. And we've got A number of initiatives that are maybe not as customer focused, but just in terms of our own processes and things we work on every day To take better advantage of some of the AI capabilities there. And then of course, the other piece of AI is what we do is video analytics. We've been doing that for a long time. But there we're productizing the capability of putting it out in the market.

Speaker 7

Got it. And wanted to circle back to your comments around the new video doorbell that you released. Maybe if you could just give us some sort of idea what attach rates of video doorbells to subscribers have been? And then what the release of this Product, is that going to move that up meaningfully in your view?

Operator

Yes, good question. That's our So we have good product today out in the market with video doorbell. We have taken feedback from service providers that in some markets, Particularly those that have a lot of temperature extremes, they're challenged when they install a video doorbell. If you have a South facing exposure on a home and you have a front door there and it's 130 degrees outside with Or even 110 with a lot of direct sunlight, it could be a challenge. So 750 solves that.

Operator

Our goal would be to drive up attachment. Attachments been in the 25% to 30% range and closer to the 40% to 50% range. Some homes already have doorbells. The nice thing is Even if they have a 3rd party doorbell today, it doesn't exclude us from providing the smart home experience. It's just we may not replace the existing doorbell.

Operator

But We're seeing cases where the existing doorbell is usually not our own. So when I refer to existing doorbell, I mean, 3rd party products, Where those are broken as well or not working well, etcetera. So hope is that with the 750, we can drive up that attachment. Also reduce the likelihood, I mean, we're constantly focused on ways to reduce attrition. So if you have a product in the market That causes a problem for the consumer.

Operator

There's a risk that you no longer are able to build services associated with that product. So we want to drive down any sort of revenue attrition that may come from doorbells that go dormant because either their battery is bad or

Speaker 7

Perfect. Thanks for taking my questions.

Operator

Sure.

Speaker 1

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

Speaker 8

Hey, guys. Thanks for taking my questions and congrats on the results. Question for you, BT, maybe, I I think at ISE West, you guys announced the LTE cell connector and Steve Valenzuela, I think you made some comments about strength in hardware being related to door controller access. I guess, Can any update there and are those 2 connected?

Operator

Yes. So we got Cell Connector out in the Q2. It's now being installed. Has it been a primary driver of the beat on hardware? No, it wasn't a primary Driver, but the access control business is growing nicely in the mid-40s range and that's continued now.

Operator

And I think Cell Connector is contributing to that growth. It's one more way that a service provider can attack an installation With our products and bring a new subscriber onto our services. So the product is out, it's selling it. I just can't say that it by itself Was the primary driver? I think Steve mentioned the door controllers probably were a bigger driver because they're a bigger chunk of the average installation.

Operator

And then video cameras We're the 2nd driver on the hardware beat.

Speaker 8

That's helpful. Thanks. And then just kind of big picture, Given the housing market with interest rates and lack of supply, I'm just curious like Is that having a beneficial effect to your retention rate? And then on the inverse, are you seeing A slowdown in residential sort of new gross adds.

Operator

Yes, 2 part question there. In terms of the interest rates impacting attrition, traditionally, You're exactly right that if you have fewer moves in a market, then You will have typically lower attrition and you may have a slightly subdued Creation rate as well, because there are fewer new homeowners being originated. We haven't really seen that yet on either front. As far as we can tell, the builder channel for us looks pretty strong. Builders continue to build a fair number of homes.

Operator

There's been a nice backlog there. So we haven't really seen yet A decline in terms of production going into new homes. Now it's not a huge chunk of our business, but it's 50,000,000, 60000 new installs a year, so it's meaningful. We haven't seen that rate really drop. In terms of attrition due to higher interest rates, I don't think we've necessarily seen A positive tailwind there, yet it's been sort of steady state as evidenced by our revenue retention metric.

Speaker 1

Fair enough. Thank you. Sure. One moment for our next question. Our next question comes from Jack Cordero with Maxim Group.

Speaker 1

Your line is open.

Speaker 4

Hi, guys. This is Jack Cadera calling in for Jack Vander Aarde. Thanks for taking my questions. I kind of want to elaborate on that last question that was asked. Last quarter, you guys talked on some macro trends, one being, activation seems strong, but consumers in some areas, some regions Had maybe a slightly smaller footprint on number of devices year over year.

Speaker 4

Given your guidance for us, it seems like that maybe that's not the case anymore. But Are you still seeing that trend play out? Are you able to quantify that at all? Thank you.

Operator

Yes. Good memory. So I think that we've seen over the last quarter, I mean, we were a little surprised ourselves By the outperformance on hardware during the quarter, again driven heavily by video camera sales. So So it seems like the consumer has there's really possibly two explanations there. 1 is the consumer has Kind of return to normal, if you will, a bit in the Q2.

Operator

The other is just that the inventory levels being held by service providers normalized some during the quarter. And I'm not sure we have an update on exactly which of those 2 Is the more likely contributor, but could we measure it? Yes. Do I have the measurement in front of me right now? The answer is, Unfortunately, I don't.

Speaker 4

No worries. That's helpful color. My apologies if this is another kind of non question, but I'd also be interested to hear on a regional side, you guys mentioned that Canada was performing like Kind of strangely well, but you didn't really know why that is. Have you guys been able to figure that out at all?

Speaker 3

Canadian market, you're talking about Canadian market has been a good performer for a while, so not surprising to us.

Operator

I think he's referring back to prior quarter maybe where we had a Q and A on that or something. But no, Canada has continued to be Strong for us. I think if I were to say why, it would be that We have the right service providers in Canada. We've been in the market a long time. The consumer appears to have been resilient there.

Operator

We haven't really seen any drop off, I would say, in contribution coming From Canada, so it continues to be a good market.

Speaker 1

Yes. Thank you.

Operator

Thanks.

Speaker 4

I'll hop back in queue.

Operator

Thank you. Thank you.

Speaker 1

And I'm not showing any further questions at this time. So this does conclude today's presentation. You may now disconnect and have a wonderful day.

Speaker 5

Thank you.

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Earnings Conference Call
NovoCure Q2 2023
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