Alarm.com - Q2 2024

Transcript

Operator (participant)

Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Zartman, Vice President, Strategic Communication, Investor Relations. Please go ahead.

Matthew Zartman (VP of Strategic Communication and Investor Relations)

Thank you, Kevin. Good afternoon, everyone, and welcome to Alarm.com's second quarter 2024 earnings conference call. Please note that this call is being recorded. Joining us today are Steve Trundle, our CEO, and Steve Valenzuela, our CFO. During today's call, we'll be making forward-looking statements, which are predictions, projections, estimates, and 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 our Form 8-K, which will be filed shortly 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 other information which speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. 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?

Steve Trundle (CEO)

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report financial results for the second quarter that exceeded our expectations. SaaS and license revenue in the second quarter grew to $155.9 million, and adjusted EBITDA was $42.8 million. During the quarter, Alarm.com and our service provider partners continued to drive organic growth in the commercial, international, and Energy hub businesses. We also increased our balance sheet flexibility with a $500 million convertible notes offering. I wanna thank our service provider partners and our employees for their contributions to our results. On today's call, I'll cover recent developments in our residential and commercial businesses. In the second quarter, we continued to see that churn in the residential account base remained below the historical averages.

This is consistent with our expectations and in line with our experience in prior periods of economic softness. With mortgage rates remaining elevated, people are moving less. Instead, they are investing into their existing home and staying put. We believe that an additional factor contributing to lower residential churn in the last few quarters has been the fact that a higher percentage of systems today include a number of capabilities that are used routinely by the consumer. System engagement and the attachment of advanced devices or capabilities like video and video analytics, smart Alarm.com thermostats, and smart locks, significantly increase account survival and lifetime value over time. So we are pleased to see that the attachment rate of video services on new residential accounts nudged higher to 53% during the second quarter. This followed several quarters of the rate hovering around 50%.

Since launching our video analytics solution in the fourth quarter of 2018, the video attachment to new accounts has increased more than 2.5x. Several recent new products, including our 750 video doorbell and our new Floodlight Camera, combined with our enhanced remote video monitoring central station integrations, appear to be well-received by the residential markets we serve. To better service our partners who are delivering these more advanced systems to the market, we recently introduced a Generative AI capability to our service provider support platform. We trained a large language model on our complete database of product information, support, installation, and training content. The chat-based interface we created is accessible to technicians in our MobileTech app.

This allows technicians to seamlessly access synthesized information from all our support resources while they are in the field, actively engaged in installations or supporting subscribers. Nearly 2,000 of our partners have adopted and used this capability since its release. Now, let me shift to an update on our commercial business. We believe that the commercial market remains fragmented and is in the early stages of a significant transition to cloud-based solutions that are more capable across the enterprise, less expensive to maintain, and easier to install and use. As this market shift unfolds, we are leveraging our competitive advantages in SaaS software, reliability, and our service-oriented partner business model to capture share. Our commercial offering is a purpose-built, end-to-end solution that unifies intrusion, access control, and video capabilities. We're also enabling integrated solutions for fleet management and active shooter response.

I'm particularly pleased with the progress we have made with our access control solution, which we brought to market several years ago. The team has worked closely with our partners to drive a steady cadence of enhancements, like mobile credentials, which allow users to access a property using just their smartphone. We also added elevated enterprise management so that larger commercial customers can create and manage access plans that align with their more complex organizational structures. And we launched Cell Connector so that our access control solution can operate without the challenges of deploying connected devices on the customer's IT network. This quarter, we also began to introduce elevator control with our access control solution.

The steady work by our access control team has expanded our product fit, and our partners have successfully introduced our solution in more sales cycles. As a result, we surpassed a few nice milestones in the second quarter. Our access control platform now powers over 100,000 doors and 2,000,000 active user credentials. We have a diverse base of access control customers across approximately 30 different worldwide markets. They range from small businesses with two to three doors, to large-scale enterprise customers with hundreds of doors to manage. One of our multi-location accounts includes nearly 1,000 doors. Another commercial account manages over 15,000 employee access credentials through our service. We are pleased that our service provider partners and our platform can serve such a wide market, and are excited to continue advancing our solution and driving growth in this area.

Before I hand things over to Steve Valenzuela, I want to touch upon the convertible senior notes offering that we closed during the second quarter. We took advantage of what we felt was a strong convertible bond market to put more dry powder into our business, so that we can continue to be opportunistic in our corporate development initiatives. We're pleased with the strong market interest in our bond offering and the terms we secured, including the 2.25% interest rate. As I have indicated in the past, our corporate development strategy is to be deliberate in pursuing acquisitions that are consistent with our strategy and support our partners. The convertible bond transaction included a $75 million stock buyback and a capped call transaction to reduce future dilution. We anticipate continuing buyback activity from time to time, consistent with our board's authorization.

In summary, I'm pleased with our quarterly results and the growth we continue to see across the business. I want to thank our service provider partners and our team for their hard work, and our investors for their continued trust in our business. With that, I'll hand things over to Steve Valenzuela to review our financials. Steve?

Steve Valenzuela (CFO)

Thanks, Steve. I'll begin with a review of our second quarter 2024 financial results, and then provide our updated guidance before opening the call for questions. Second quarter SaaS and license revenue of $155.9 million, grew 11% from the same quarter last year. Our SaaS and license revenue visibility remains high, with a revenue renewal rate of 94% in the second quarter, at the higher end of our historical range. Hardware and other revenue in the second quarter was $77.9 million, up from $72.9 million in Q1 2024, mainly due to some strengthening in video camera sales. Total revenue of $233.8 million for the second quarter grew 4.4% year-over-year.

SaaS and license gross margin for the second quarter was 85.8%, up about 120 basis points year-over-year. Hardware gross margin was 24% for the second quarter, up from 22.4% in the year-ago quarter, mainly due to product mix with increased commercial hardware product contribution. Total gross margin was 65.2% for the second quarter, up from 61.4% for Q2 2023, due to increased SaaS and hardware margins and a higher mix of margin-rich SaaS and license revenue. Turning to operating expenses, R&D expenses in the second quarter were $65.7 million, compared to $60.9 million in the second quarter of 2023. We ended the second quarter with 1,155 employees in R&D, up from 1,053 employees in Q2 2023.

Total headcount increased to 2,033 employees for the second quarter, compared to 1,909 employees in the year-ago quarter. Sales and marketing expenses in the second quarter were $27.8 million, or 11.9% of total revenue, up from $23.8 million, or 10.6% of revenue in the same quarter last year, mainly due to conference expenses and more marketing program spending. Our G&A expenses in the second quarter were $26.1 million, down from $28.8 million, mainly due to lower legal expenses. In the second quarter, GAAP net income was $33.5 million, up from GAAP net income of $15.8 million for Q2 2023. Non-GAAP adjusted EBITDA in the second quarter was $42.8 million, up 17.8% from $36.4 million for Q2 2023.

Non-GAAP adjusted net income was $32 million, or $0.58 per diluted share in the second quarter, compared to $26.6 million, or $0.49 per share for the second quarter of 2023. Turning to our balance sheet. We ended the second quarter with $1.1 billion of cash and cash equivalents, up from $697 million at December 31, 2023. During the quarter, we issued $500 million in convertible notes that mature in June 2029. As part of the transaction, we used $75 million to repurchase 1.1 million shares of our common stock at $67.14.

We also used $63 million to purchase capped calls to bid up the convertible bond conversion premium from 30% to 100%, for an effective conversion price of $134.28. As a reminder, our original $500 million convertible bonds mature in January 2026. Turning to our financial outlook. For the third quarter of 2024, we expect SaaS and license revenue of $157.3 million-$157.5 million. Our third quarter guide includes a $1.25 million reduction in SaaS and license revenue, resulting from the CrowdStrike outage that temporarily impacted some of our operations.

For the full year of 2024, we are raising our expectations for SaaS and license revenue to be between $626.8 million-$627.2 million, up from our prior guidance of $624.5 million-$625 million. We are projecting total revenue for 2024 of $920.8 million-$931.2 million, increased from our prior guidance of $914.5 million-$931 million, which includes estimated hardware and other revenue of $294 million-$304 million. We estimate that Adjusted EBITDA for 2024 will be between $165 million-$167 million, up from our prior guidance of $164 million-$166 million.

non-GAAP net income for 2024 is projected to be $119.5 million-$120.5 million, or $2.06-$2.07 per diluted share, compared to our prior guidance of $118.5 million-$119.5 million, or $2.14-$2.16 per diluted share. As a reminder, our new convertible bond issuance increased the total number of diluted shares outstanding. EPS is based on an estimate of 58.1 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2024 to remain at 21% under current tax rules. We expect full-year 2024 stock-based compensation expense of $51 million-$53 million.

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

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one, one on your telephone. If your question has been answered, or you wish to move yourself from the queue, please press star one, one again. We will pause for a moment while we compile our Q&A roster. Our first question comes from Adam Tindle with Raymond James. Your line is open.

Adam Tindle (Managing Director)

Okay, thanks. Good afternoon. Steve Trundle, I wanted to ask on the topic of GenAI, as you get more insight. You mentioned in your prepared remarks, the concept of utilizing it for techs, which makes a lot of sense. Just curious, is that something that you are monetizing separately, or are you bundling that into the app? And then on a broader topic, as you kind of think about GenAI, where does it go from here, and areas that you think you could potentially monetize, and how Alarm.com can differentiate? Thanks.

Steve Valenzuela (CFO)

Hey, Adam. Good question. Yes, on the implementation that's there to support our technicians, that's bundled into the MobileTech application, and it's really intended to help them, sort of, while they're on the go, more quickly get answers to, at the moment, more routine types of questions. If someone's on a job site, and they've got a super complicated issue, it's a technician, we'll still get on the phone and we often do, and hold their hand for, you know, one or two hours sometimes to get them through a complex type of commercial installation. But for routine stuff, the Large Language Model really helps them get sort of quick and easy expedited answers, and we've seen pretty good usage there.

More generally, in the offering, I think where you'll see us go is tying the capabilities that are becoming available to what we're doing with video and specifically with what we're doing with remote video monitoring. So you can imagine that a number of the operator actions, when I'm, you know, if I were an operator today, and I'm watching camera activity, at some point, I may need to speak to a potential perp or someone who's doing something they may not, maybe shouldn't be doing, or maybe I'm not sure. You can imagine that we can leverage a lot of the work we're doing in this world to make that entire process more efficient for the operator in the central station, and that's one of the several areas where we're headed.

Adam Tindle (Managing Director)

Got it. Makes sense. And, congrats on the convert. You know, you're now flush with cash, I think, near $1 billion, even after some of the things that you had to do with the convert. So I wonder if you could maybe just, in light of that, talk about, priorities and, in particular, you know, if we were to potentially even use that in one fell swoop, for example, for a larger acquisition. You know, as you kind of think through, that potential, what would be the key criteria that you would need to look for? Or do you think it's more likely this would be kind of piecemeal and, maybe do more tuck-in type? Thanks.

Steve Trundle (CEO)

Well, we want- we wanted to be in the position to do more than just tuck-ins. We've had, I think, a nice track record with some of the smaller, by today's standards, some of the smaller acquisitions over time, like we did with ObjectVideo, like we did with EnergyHub, and OpenEye was a bit larger. But we want to be in a position to even potentially look at things that are still larger than those. So, that's you know, that's what we're doing. We're being optimistic.

We're watching the market. We think that now is a good time to have some cash available. We think we're probably the acquirer of choice in the security industry anyway. And the range of things we may look at are sort of any place in the IoT space, particularly if those IoT applications are consistent with our mission of providing people more safety and convenience in their everyday lives. So we're looking at a lot of things. We're not ruling out larger opportunities. We'll continue to do a trickle of tuck-ins as the right opportunities present themselves.

I'd say the primary criteria, I mean, one that we're careful about, is we attempt to look at things the way, you know, I, as a shareholder, would look at things and make sure that whatever we're doing is, on a long-term basis, accretive to our shareholders and supportive of the metrics that we want to deliver. So those are. That's a little bit of commentary there. I can't speak to any specific opportunity, but we're active, opportunistic and deliberate in how we look at things.

Adam Tindle (Managing Director)

Yep. I think investors certainly appreciate that mindset. Thank you.

Steve Trundle (CEO)

Thank you.

Operator (participant)

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

Saket Kalia (Managing Director)

Okay, great. Hey, guys. Thanks for, thanks for taking my questions here. Steve Trundle, maybe just to start with you. Really appreciated the, the commentary just on commercial in, in your prepared remarks. Can you just maybe go one level deeper into, you know, what would a, what would a dealer have to rip and replace to, to, to, to bring their platform onto Alarm? And how do you sort of think about that, that TAM that you're going after?

Steve Trundle (CEO)

Good question, Saket. So the amount of rip and replace is actually declining somewhat. The team we have at OpenEye has for a long time supported a wide variety of cameras on the video side. Some of that support is enabled via a standard that is known as ONVIF. So we support a pretty wide range of cameras, not just our own. And what that enables is for us to go to a potential commercial customer and get them on platform, get them all the value of our cloud services without ripping out everything they have. Obviously, newer cameras and newer models enable more functionality, and especially on the analytics side, more of the analytics is being done on the edge, you know, on the camera.

So more capabilities are possible with newer equipment, but you want to sort of land and then expand, and that's what we're trying to do. We've brought that capability back into the full Alarm.com platform, by the way, meaning broader camera support. On the access side, and I talked a little bit about the access control market. There, we're using fairly. In most cases, we're leveraging what are fairly common market standard readers, which are the devices that you actually see next to a door that someone scans in or out with. So we can go in, we, in this case, I mean, of course, our service provider partner can go in and take over a lot of those existing readers and begin to deliver, you know, enhanced new services without a ton of rip and replace.

So we're increasingly trying to avoid having to always work in, especially the commercial customer, these bigger ones. You just can't go in with a rip and replace message and be successful very often. So we try to avoid that as much as we can. To your comment about the TAM, I mean, I think we think we're sort of early days in our penetration of the TAM. The TAM is generally regarded as every, you know, every small business or enterprise in North America, if we at least look at the North American TAM. Number of sites there, I'm trying to think, do we have sizing? Four, you know, roughly 4.5 million-5 million sites we think are available, and we're sort of steadily chipping away at that.

Got it. Yeah, that makes a ton of sense. Steve Valenzuela, maybe for you, and apologies if I missed in the prepared remarks, but did we sort of give an update just on sort of the mix of the business or of the SaaS business that comes from, you know, some of those higher growth areas like commercial, like video and international? That's always just a really useful sort of lens given the mix shift that's happening in that business.

Sure, Saket. Yeah, the growth initiatives continue to do very well. We've actually refined it a bit. We've looked at North American residential video and actually pulled that out of the growth initiatives because it was actually understating North America. So if you look at the growth initiatives, which we include in commercial, international, and EnergyHub, those represent about a quarter of our total SaaS, and they're growing about 20%-25% year-over-year.

Saket Kalia (Managing Director)

Very helpful. Thanks, guys.

Steve Trundle (CEO)

Thank you.

Operator (participant)

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

Darren Aftahi (Managing Director and Senior Research Analyst)

Great. Can you hear me?

Steve Trundle (CEO)

Yes. Hey, Darren.

Darren Aftahi (Managing Director and Senior Research Analyst)

Hey, how are you? Thanks for taking my questions.

Steve Trundle (CEO)

Good.

Darren Aftahi (Managing Director and Senior Research Analyst)

Just two, if I may. On the Gen AI initiative, I'm curious if that's going to result in cost saving relative to some of the kind of help you said you'd have to provide longer term. And then, on international, I know you guys have made some acquisitions in the past, and I'm kind of curious how those acquisitions kind of play into kind of manifesting some new international markets as we get, maybe go forward into 2025? Thanks.

Steve Trundle (CEO)

Hey, Darren. Sure. The Gen AI, in theory, over time, should drive some amount of reduction in in-person call volume. As I was mentioning on the prior question, what we're seeing right now are most of the calls that we can handle with AI, those are fairly routine calls that might have taken us one or two minutes with a human support person otherwise. We do expect, and one of the things we actually pride ourselves on is really laying out great support for our service provider partners so that they're confident in their development of new products or in their adoption of new products and technologies.

So I don't think we're gonna see a massive reduction in our capacity, you know, the capacity we have to maintain to support our partners, but there's probably a bit of a positive tailwind there over time. With regard to international, yeah, you're referring back to an acquisition we did a year and a half or two years ago, which was EBS. And we've had a lot of work underway there for the last you know since the acquisition, and we're just getting to the point where that product, which is a much lower cost communicator that will work with a wide variety of international panels, is coming to market. So it's gonna start showing up in the second half of this year, sort of just starting right now.

It's a good reminder, something we should probably watch and hopefully talk about an update further on towards the end of the year. But we are now beginning to get to market with the integrated version of that technology.

Darren Aftahi (Managing Director and Senior Research Analyst)

Great. That's helpful. Thank you.

Steve Trundle (CEO)

Yep.

Operator (participant)

One moment for our next question. Our next question comes from Danny Hoffer with JPMorgan. Your line is open.

Danny Hoffer (Analyst)

Hey, guys. Thanks for the questions. For the first, can you provide us with some color on the macro front, maybe what you're seeing with existing home sales bouncing at all-time lows? And then on the second, in your prepared remarks, you noted commercial contribution was greater on the hardware side, which led to the margin improvement. Can you maybe elaborate on whether you're seeing varying behavior from residential versus commercial customers on the hardware side? Thanks.

Steve Trundle (CEO)

Yeah, sure. Good questions. On the macro side, to us, things looked sort of as expected in the second quarter. As I noted in my prepared remarks, we're seeing you know, higher revenue retention because we think there are fewer moves on the residential side. Certainly, your housing data supports that. So, but those consumers who are buying in the second quarter anyway, we saw a little bit of a move back towards what we had planned in terms of the size of systems that they're purchasing and the amount of hardware going into each installation. Same thing on the commercial side, actually. If we go back in time, you know, following our Q1 report, we indicated we'd seen a little bit of softness on the commercial side and the SMB side.

In the second quarter, we saw basically those installations right at plan. So, a little bit of a recovery on the hardware side, a little bit more access control, more cameras going into the average install. So macros look to us, on an overall basis, to improve a tad, on both the residential and the commercial side in the second quarter.

Danny Hoffer (Analyst)

That's helpful. Thanks.

Operator (participant)

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. One moment for our next question. Our next question comes from Stephen Sheldon with William Blair. Your line is open.

Stephen Sheldon (Research Analyst)

Hey, thanks for taking my questions. Just one for me. I just want... You know, if you guys think about Alarm.com's commercial capabilities, how should investors really think about the rank order of opportunities there that could really move the needle over the next two to three years as you think about monetization? Which applications, I guess, let me frame it another way, which applications are you the most optimistic about?

Steve Trundle (CEO)

Hey, Stephen. I would rank them video first and foremost, including analytics, you know, upside on the SaaS line with improvements constantly on the analytics level and then with remote video monitoring capabilities. So I'd rank that first. I would then rank in terms of our growth, access control as the second piece of commercial that is growing nicely. A little further down would be intrusion and then active shooting detection and fleet monitoring are all things that, you know, have promise. But I probably think the bigger drivers are really what we're doing with video and access control. And then over time, we may, you know, introduce additional products into that category.

But the big two right now, and the big one is really video, and then after that, a lot of the other pieces sort of support the video installation.

Stephen Sheldon (Research Analyst)

Very helpful. Thank you.

Steve Trundle (CEO)

Sure. Thank you, Stephen.

Operator (participant)

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

Steve Trundle (CEO)

Thank you. Thank you.