Q1 2020 Earnings Call

Ladies and gentlemen, thank you for standby and welcome to the alarm Dot Coms first quarter 2020 earnings conference call.

At this time all participants on the listen only mode. After the speaker presentation, there will be a question and answer session.

To ask a question during this session you would need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

Now I'd like to hand to conference over to your Speaker today, David Trone, Vice President of Investor Relations. Thank you. Please go ahead Sir.

Thank you good afternoon, everyone and welcome to alarm Dotcom first quarter 2020 earnings Conference call. As a reminder, this call is being recorded.

Joining us today from alarm dot com or Steve Trundle, President and CEO and Steve Valensuela CFO each from their separate offices as we are following social distancing practices.

Before we began a quick reminder to our listeners.

Management's discussion during the call today will include forward looking statements, which include projected financial performance for the second quarter and full year 2020, and key assumptions underlying the guidance.

Including the timing and amount of installation activities by the fourth quarter 2020.

Anticipated impact of the global economic uncertainty caused by the Cobot 19 pandemic on our business.

Including on our hardware sales and our SaaS and license revenue growth rate and on anticipated market demand for our offerings.

Our business strategies plans and objectives for future operations.

Opinion enhancements to our platform and offerings opportunities for growth in our current market and other forward looking statement.

These forward looking statements are based on our current expectations and beliefs and on information currently available to us.

Statements containing words, such as began the leave continue estimate expect indicates may project will and other similar words are intended to identify such forward looking statements.

These statements are subject to risks and uncertainties, including those contained in the risk factor section of our most recent annual report on form 10-K filed with the Securities and Exchange Commission on February 26, 2020, and in subsequent reports that we filed with the Securities and Exchange Commission from time to time, including Yep.

Stated risk factor section of our quarterly report on form 10-Q that we intend to file with the Securities and Exchange Commission. Shortly after this call that could cause actual results could differ materially from those contained in the forward looking statements.

Please note that the forward looking statements made during this conference call speak only as of today's date and alarm Dot Com undertakes no obligation to update these statements to reflect subsequent events or circumstances.

Except to the extent required by law.

Also during this call managements commentary will include non-GAAP financial measures and provide non-GAAP guidance.

Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in understanding the company's performance and trends.

But note that the presentation of non-GAAP financial information is not meant to be considered in isolation, whereas the substitute for the directly comparable financial measures prepared in accordance in accordance with gap.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the financial statement tables of our earnings press release, which we have posted to our Investor relations website at investors that alarm dot com.

This conference call is being webcast and is also available on our Investor Relations website.

The webcast of this call will be archived on a telephone replay will also be available on our website.

So with these formalities out of the way I'd now like to turn the call over to Steve Trundle, you may begin.

Thank you David.

Good afternoon, and welcome to everyone. We're pleased to report solid Q1 results to start off the year, our SaaS and license revenue in the first quarter was $91.9 million up 14.9% over last year.

Our adjusted EBITDA in the first quarter was $29.2 million.

I want to pay our service providers and the alarm dot com team for their contributions to our resolve and for their ongoing performance during these challenging times.

We carry significant momentum from last year into the first quarter.

During most of the quarter or the market continued to be very healthy for us on a number of dimensions, including commercial video energy management and international.

This momentum along with confidence execution led to solid financial results.

In the first quarter, we had a record level of hardware sales that were driven by subscribers continuing to add video to their smart home systems at an increasing rate.

With many also choosing to further enhance their system with our AI enable video analytics capabilities.

Our R&D program also continued to deploy new technology in key areas throughout the quarter.

We introduced a series of new capabilities to both simplifying and enhance the experience for more sophisticated subscribers.

More advanced system.

We introduced our scenes feature to our Apple watch out to make controlling multiple automation devices more convenient.

We also expanded our up sell engine and launched a new portal that makes it easier to upgrade existing systems with self install devices.

On the alarm dot com for business platform, we launched a commercial grade stream video recorder, which gives our service providers, a competitive and differentiated solution for supporting larger video installations and the SMB market.

We also launched video health reports for commercial video customers, which provides a monthly update on the condition of video cameras and stream video recorders.

This ensures continuous uninterrupted video coverage.

During the quarter. We also worked hard to begin onboarding, some large new international partners and our subsidiaries continued to build their product offerings and market opportunities.

Our subsidiary points Central successfully acquired door poor.

Which is an innovative startup that provides a software based access control solution for multifamily dwellings.

And Energyhub announced a new relationship with Baltimore gas and electric the largest electric and natural gas utility in Maryland with over 1.25 million residential electricity customers.

This relationship Energyhub and BG any will enable a first of its kind electric vehicle charging program.

That incentivize is off peak charging and minimizes grid impacts as the adoption of electrical vehicles increases.

Next I want to shift and talk in more detail about what we have seen in the markets. We serve since the covert 19 pandemic took hold.

As I'm sure that this is an area of interest for our investors.

As we approached the middle of March the locked down measures put in place to combat the novel Krona virus began to reduce our service providers ability to sell and install new security or smart I O T systems for both homes and businesses.

Homeowners began sheltering and place and social doesn't insane and solve more reluctant to schedule system design appointments or installations with our service providers.

Typically in the more urban markets.

Some businesses that might normally be candidates for commercial offerings were temporarily shuttered.

Both businesses and consumers generally moved to serve their resources as the state of the Academy became more uncertain.

And some of our service providers delayed marketing campaigns that they typically kick off in the spring or generally scaled back their operations in an effort to protect their employees.

As the weeks were on many of our entrepreneurial service provider partners moved to adapt to these conditions.

They began actively emphasizing more of a distinct selling model and also providing their technicians with the P. P required to conduct nearly sterile installations and repairs.

As a result of these steps we have begun to see cells and installation activity turning back upwards in the last week or so.

We hope that this initial positive momentum continues to build.

Some north American markets have been less impacted than others.

The seems to be largely a function of where the bars has spread widely or has been relatively contained.

In some areas our service providers have continued on a relatively normal trajectory in April.

On an overall basis, we're currently seeing installation rates running at about 70% of what we would characterize as normal.

Our best guess based on what we see today and recognizing that we are probably better at Aiotv technology than we are at epidemiology is that installation rates will gradually recover as the year progress is to about 95% of normal by the fourth quarter.

In general we believe that the cobot pandemic is simply pushing out the timeline for fulfilling underlying demand until conditions allow our service providers to get back into homes and businesses broadly.

Revenue retention is holding that expected pre tobin levels, indicating that existing subscribers, who are responsible for the bulk of our revenues are not choosing to terminate their security or smart property services.

As we've seen in previous economic downturns, most people continue to place a high priority on the safety and security of their businesses or families. During this uncertain time.

Other key metrics, we're watching our hardware sales and dsos.

Hardware sales are down in April after a very strong first quarter.

This essentially confirms the lower installation rates were seeing.

Dsos are stretched to some degree but remain at a manageable level.

Internally.

Our focus has been to ensure the safety and health of the alarm dot com team and to maintain the reliability of our services for the millions of people who depend on them.

We proactively implemented numerous steps to protect our workforce ahead of government measures.

We are fortunate that our employees have remained healthy and our teams remain productive.

We're also continuing to execute on the bulk of our recruiting plan, which will be important to our future growth.

During this time, we've also been working closely with our service providers. So they can continue to build their businesses during the walk though.

One example is our extensive online learning program.

We designed the training program to keep installation support and sales teams profession, with our latest capabilities like video analytics and our commercial offerings.

The number of course completions by technicians increased significantly in April.

The alarm Dot Com Academy also ramped up the number of live training Webinars, we offer each week.

We believe this investment and training during the walk down we'll give our service providers, a more solid foundation upon which to pursue growth opportunities as macro conditions improve.

In summary.

We remain confident that we can continue to advance our strategy through this period.

We have a lot to be thankful for and I want to thank our service provider partners, our ecosystem partners and the alarm dot com team for their hard work and our investors for their trust in our business.

And with that let me turn things over to Steve Valensuela Steve.

Thank you Steve I will begin with a review over strong first quarter 2020 financial results and then discuss guidance before opening the call for questions.

Seth and license revenue in the first quarter grew 14.9% fund the same quarter last year to 91.9 billion.

This includes connect software license revenue of approximately 9.7 million for the first quarter.

This is down from 11 million in the year ago quarter as expected.

As the main licensee of or connect software is now primarily deploying a new platform that is powered by the alarm dot com South software that we operate in post for the service provider.

Our south of license revenue visibility remains high with a revenue renewal rate of 93% into first quarter in the middle of our historical range of 90% to 94%.

And only slightly lower than last quarter by approximately 20 basis points.

Hardware and other revenue in the first quarter was 60 million up 86% over Q1 2019.

We continue to see strong sales of our video cameras, which primarily accounted for a large increase in hardware sales.

Hardware revenue in the first quarter also benefited from our acquisition of opened I, which closed in Q4 2019 and contributed 8.2 million in hardware revenue in the quarter.

Total revenue of 151.9 million for the first quarter grew 35.3% from Q1 2019.

That's a license gross margin in the first quarter was 86.6% up approximately 200 basis points from Q1 19 gross margin of 84.6%.

Due to improved efficiencies, we've been able to achieve in our operations.

Hardware gross margin was 23.9% for the first quarter compared to 17.5% for the same quarter last year, primarily due to product mix and inclusion of opened I, which has a slightly higher hardware margin.

Total gross margin was 61.8% for the first quarter compared to 65.3% were the same quarter last year, mainly due to the increase in hardware revenue.

Turning to operating expenses R&D expenses in the first quarter were 39.7 million compared to 26.5 million in the first quarter of 2019.

R&D expense in the quarter includes approximately 4.4 million rating process R&D for two small asset acquisitions.

We ended the first quarter with 650 employees in R&D and total head count of 1200 27 employees.

From 519 employs an R&D and head count of 938 in the year ago quarter.

Sales and marketing expenses in the first quarter were 17.1 million or 11.2% of total revenue compared to 13.2 million or 11.8% of revenue in the same quarter last year.

Our Gina expenses in the first quarter were 20.9 million compared to 19.2 million in the year ago quarter.

Due to expense in the first quarter includes non ordinary course litigation expense of 2.5 million compared to 5.5 million for Q1 2019.

Non ordinary course litigation and acquisition expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance.

Non-GAAP adjusted EBITDA in the first quarter of 29.2 million route 20.4% from Q1 2019.

In the first quarter GAAP net income was 8.8 million compared to GAAP net income of 9 million for Q1 2019.

Non-GAAP adjusted net income increased to 20.9 million in the first quarter compared to 17.2 million for the first quarter of 2019.

Turning to our balance sheet.

We ended the first quarter with $171.7 million, a cash and cash equivalents.

We have a strong balance sheet and cash flow positive business model.

To provide additional flexibility we drew a 50 million on our revolver in March as macro level economic uncertainties began to emerge.

We do not expect to use these funds are operating purposes.

Our total bank debt is 113 million Wellbore available 125 million revolver, which expires in October 2022.

During Q1 for the first time, we activated our 75 million dollar board authorized share buyback plan and use $5.1 million of our cash to buy back 147153 shares of stock at an average price per share of $34.

So 97 cents excluding commissions.

In the first quarter, we generated approximately 12.9 million in cash flow from operations.

Paired to negative 1.2 million cash used in the first quarter of 2019.

Our free cash flow for the first quarter was 9.2 million.

Cared a negative 4.1 million cash used for the same quarter last year.

In the first quarter, our capital equipment purchases were 3.7 million compared to 3 million in Q1 2019.

Next I will review our outlook for the second quarter and 2020.

This is the challenging period to forecast, but we are providing guidance based on what we know today.

There are many unknowns with regard to the pandemic.

Leading the timing of the reopening other economies and how this impacts our service providers.

Their existing and potential customers and our supply chain among other factors.

Our guidance should be considered in this context.

For the second quarter of 2020, we expect SaaS and license revenue of 92.4, the 92.8 million.

For the full year of 2020, we expect staff and license revenue will be between 375 to 380 million.

Which is about 99% over prior guidance.

We are forecasting total revenue for 2020.

515 to 535 million, which includes hardware and other revenue of 140 to 155 million.

We believe hardware revenue in the second quarter will be significantly lower than the first quarter.

We are updating our estimate for non-GAAP adjusted EBITDA for 2020 to be between 100 to 103 million.

Non-GAAP net income for 2020 is estimated to be 69 to 73.5 million or $1.36 to $1.45 per diluted share.

We expect our non-GAAP tax rate to remain a 21% for 2020.

EPS is based on an estimate at 50.7 million weighted average diluted shares outstanding.

We expect full year 2020 stock based compensation expense of 26 to 28 million.

In summary, we are pleased with our strong start to the year.

We believe that our strong balance sheet positive cash flow and recurring subscription based business model will allow us to whether the current environment.

We will continue to work hard to support our service provider partners and their customers during these challenging times.

And with that operator, please open the call for acuity.

Thank you Sir as a reminder to ask a question you would need to press star one on your telephone.

Your question press the pound key.

Please standby, while we compounded.

Right.

Hi show our first question comes from Adam Tindle from Raymond James. Please go ahead.

Okay. Thanks, Good afternoon, I just wanted to start Steve on guidance for SaaS and license revenue for fiscal 2000, essentially unchanged, which is quite impressive.

If you could maybe just talk us through some of the metrics that gave you confidence to reinforce that I guess more specifically looking for you know obviously gross adds are likely going to be challenge, but ballpark as kind of how much or what you're seeing.

Churn trends and retention rate declined modestly still very healthy, but decelerated a little bit I'm. So.

Any assumptions, there and ARPU trend so gross adds churn and ARPU would be helpful. In thinking about the full year guidance.

Sure.

This is Steve bundle.

Steve you can Japan, if theres something I Miss player.

Yeah, we looked at things pretty carefully I think we're very fortunate that a lot of our service providers are just very entrepreneurial and they have adjusted practices. Some so.

They're continuing to do business in most cases, it really depends some on the area of the country or the area of the world.

In my prepared remarks, I noted that but currently we were off in terms of gross new creations.

Relative to what's normal we were at about 70%.

And I indicated that.

Within the last couple of weeks, we've seen that that.

What we think are what we hope as a bottom and now a slow trend line back up so.

We were careful to note this a tough quarter to guide them and we were careful to note a few of our assumptions in guiding the biggest one being that we see a trend line.

As the year progress is.

Steadily upwards to the point that in the fourth quarter were at around 95% of normal.

In terms of.

Gross creations and that's that's.

An important trend to watch.

Steve noted that revenue retention is sort of right, where it's always been right in normal range of 90% to 94%. So we haven't seen any any changes there no changes really on on ARPU.

And then we you know we benefited a little bit from a strong first two months of the year were coming in January and February.

Things, where we're probably a little hotter than we expected and that gave us a little bit of a push that allowed us to.

Ill get comfortable in something close to the prior to the prior guide.

Yes, Adam Steve outflow, the revenue retention and I talked about going from 94 to 93, that's really rounding because it's only 20 basis points. So it's a very minor and really had nothing to do at Kodak is just more of a mathematical.

Rounding down versus rounding up.

Yes make it makes sense, Steve the if I could just do one follow up obviously had healthy cash generation in the quarter, you're coming from a strong cash position into this which is nice maybe just talk about how you're thinking about potential impact to align dot com from a cash standpoint as the dealer base goes through.

This challenging period that Steve mentioned any considerations that we should think about from a cash generation standpoint.

Well, we had a good cash flow generation model and in fact in Q1 typically Q1 is a cash use each quarter because that's when we kick the can pay the company bonuses typically timing wise, but this last quarter. We saw very good cash generation free cash flow of about 9 million and if you look at last year. We enter is about 50 million of free cash.

Cash flow.

Based on our models for the year, we were projecting around 40 to 50 million of free cash flow for this year, we still feel that that's still a reasonable number of might be little bit less.

If you look at our Dsos for example in Q1 of the Dsos actually held flat to Q4 at about 49 days now we will see that tick up a little bit and we factored into our models as some of the dealers have taken a little bit longer to pay which.

It is understandable given the circumstances.

But we have over 90% of our receivables.

Our current or within 30 days of the due date. So we actually has a very good.

Very good not accounts receivable process very good dsos very good cash flow generation engine and the 50 million, we pull down really was.

At the beginning of the you know the pandemic if you will in the locked down and I went through 2008, where liquidity dried up and I talk to our banking syndicate and they said hey by the way all of our clients are pulling down there, they're they're revolvers as much as they can we decided to pull down 50 million. A again, we don't intend to use added we don't intend didnt.

Need that for operating person purposes, but it's good didnt. This kind of environment cash is king so to speak and there will be some good opportunities out there to deploy our cash at some point, perhaps but in the meantime to the cost of that capital was very low.

We have a revolver that doesnt expire until October 2022, so it made a lot of sense.

Got it makes sense. Thank you for the color.

Thank you.

Thank you on next question comes from Nikolay ability of from Bank of America. Please go ahead.

To their system new devices more easily than has been the case in the past. So we added a an entire sort of add device portal that allows you.

Service provider and someone wants to add for example, a doorbell camera they want to add a like you know thermostat or whatever it may be the system device. You know, we now can let the the dealership that to the consumer and consumers guided through a set of self fulfillment prophecies then can upgrade their system more easily with without any.

Human contact so I I'd say, we saw some you know we see some some modest adjustments and we're sort of angouleme to support more of that but I also do want to note that a lot of the service providers are able to.

You know.

Get out there and fulfill demand to the consumer.

Thank you guys.

Q.

Thank you.

X. question comes from Matt from William Blair. Please go ahead.

Oh, Yeah. This is David Robinson on for Matt I, just had a question around.

The video analytics commentary, so I know in the past you'd disclosed.

The kind of okay. Good good join a looks has improved a year over year I. Since you had kind of a good quarter with regards to camera sales I Wonder if you had any metrics or any more commentary on how those customers are up taking the video in a lake solution.

Yeah.

Say.

We should probably samora, the same and and the first quarter.

Slightly higher video attachment rate I think the last time, we updated that metric. We said you know over 35% video attachment on an overall basis and.

I'd say it it held there was you know slightly above that in the first quarter and then on analytic specifically you know more than half of the.

New installations getting.

Getting our pro video solution, if you exclude those connect customers, where we where we can deploy it in one case, but for that and you look at at the folks that are.

<unk> our video solution on the court platform. It's you know at this point, it's over half or taking video and let accent that also is is trendy in.

Turning up or something.

Great. Thanks, guys.

Thank you thanks.

Thank you.

Oh and next question comes from.

<unk>.

Capital. Please go ahead.

Yes, hi in terms of the court industry Award.

That helps you gain share with the small and medium business market.

Attraction with the integrators or what is a long have to do to prove their value to the integrators in that category.

Mm.

Yeah, so that that a war you know it's a it's a bigger deal than maybe you might think it it if you're working with integrators and service providers and you're constantly streaming out new technology.

No your products only as good as the support behind it and we've got a lot of people that.

<unk>.

They're going to a business or they're going to residential customer and they're they're trying to install something that's news.

It's pretty critical that they feel like they've got a reliable.

Enter and service infrastructure behind that piece of technology. So.

So it's a it's a domain where we.

We treat is very high priority and we do a good job of it that's that's our core team so being recognized.

By the business Intelligence group for you know for that contribution I think does help to business. It means that when our sales team is you know these days on zoom speaking to perspective.

System integration partners. They can they can point to the third party.

Credible third party references that suggests that we will be there. We don't just say it we will be there for our partners and support them.

In a professional manner. So I think it does help us, particularly in in dealer recruitment, but even in dealer attention. You know, it's it's almost sales for us if you're supporting dealer well they'll keep using you.

Great. Thanks, and regarding cloud services from open I, what progress hasn't been in terms of his shop offering for customers.

<unk>.

I'm sorry, I missed the second part of that question, David What progress has been made in terms of software as in service offerings from customers.

Right on open I sure.

That's right on plan. So I think we you know open I was like like all parts of the hardware business is being impacted by the pandemic, but we're not slowing down the transition of the model. There two more of a staff model I don't I don't know if I had a metric I can update you on to.

To give you an indication of progress, but you know probably not but but we we are continuing that transition sort of.

On or even a little bit ahead of plan based on anecdotal sales feedback I'm getting from the old age.

Got it thanks in that anecdotal sales feedback is that that is more people working remotely they want more stuff on the clouds sort of thing going on.

Well it definitely helps if you're especially the small business customer you you know you need to the value or there. There are two places where real value is created right. Now one is if you're an actual customer and you have a business where you the manager a business spina remotely managed had business at this point or at least remotely 10 on it keep track.

Things is more important than ever and then the second.

In a real value coming from you know the the remote that are.

Turntables is for the service providers themselves.

They don't want to have to go visit a customer.

Yeah.

Repair at this point, if it's at all avoidable.

Really good remote tools that runs through the cloud and you can do things like you know Debugged Ham or reconfigure a wife I connection.

Oh power cycle, the radio whatever it may be if you can do those types of things remotely and minimize the number of visit you need to make to a property. It it makes it more feasible for our service providers to support.

Their customers remotely.

<unk> has been you know.

In fact, I heard from one service provider said look I didn't fully appreciate devalue prop of alarm dot com until.

Uh-huh this pandemic and now I <unk>, yeah, I can't imagine getting through it without your tools. So we've seen some endorsements like that that are encouraging and and yeah. I'd think that does come from the clown infrastructure.

Great. Thanks, so much.

Thank you.

As a reminder to ask a question you would need to <unk> on your telephone.

<unk> press the pound key.

I should know further questions into cue.

<unk>, ladies and gentlemen, thank you for participating in today's conference call do you mean now disconnect.

Thank you. Thank you.

Yeah.

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So.

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