Q3 2020 Alarm.com Holdings Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the alarm Dotcom third quarter 2020 earnings Conference call. At this time all participants lines are in listen only mode. After speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone please.

Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Mr., David Trone, Vice President Investor Relations. Please go ahead Sir.

Thank you good afternoon, everyone and welcome to alarm Dot Com third 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.

Before we begin a quick reminder to our listeners.

Management's discussion during the call today will include forward looking statements which include.

Jack and financial performance for the fourth quarter 2020, and full year 2020, as well of early thoughts on 2021.

Emerging market dynamics and trends on our business and on anticipated market demand for our offerings.

Possible impact of the global economic uncertainty caused by the COVID-19 pandemic.

Our business strategies.

Plans and objectives for future operations, including expectations regarding our future relationship with 80.

Continued enhancements to our platform and offering opportunity.

The opportunities for growth in our current markets.

In other forward looking statements.

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

And review the progress we've made against our growth initiatives and their contributions to our overall Douglas.

Up again with our product initiatives.

We recently launched an innovative new device called <unk> <unk>.

<unk> is a security center that does not require a connection to a control panel aura hub or a Wi Fi network.

It can stand on its own or be fully integrated into an existing multi sensor control panel environment.

The sensor is integrated with an LP cat M. Further communication capability and it's battery powered so it can be deployed anywhere it may be meeting.

We designed flex Io for outdoor applications, where we can extend security and awareness to any location on a property or even to other very distant properties.

Flex Io addresses an entire set of new security use cases, where existing sensors and devices that are directly connected to the control panel via low voltage wires or RF connectivity.

Not enough.

For example, residential subscribers can monitor driveway gates or pool gates detached garages.

Remote storage units Barnes or mobile items, such as boats tractors arby's or lawnmowers.

And the commercial market, we see a strong fit with industrial facilities and other properties with diverse physical.

Flex Io sense data to our cloud and allows subscribers to create customized alerts or to use the centers event data to trigger alarm dot com automation scenes and video recordings.

The device enables a new service plan with an incremental subscription fee.

Will allow our professional service providers to extend the breath of solutions that they can bring to their customers.

We also released are smart water valve plus meter solution this quarter, which has been announced earlier in the year at CES.

This solution can automatically shut off the properties water supply when it's too onboard flow sensors detect burst pipes major leagues and even slow persistent drips.

Unlike standalone water valve devices are solution also works with water censors deployed anywhere in the property.

To provide a whole home water safety solution.

After a positive introduction to the building 36 service provider partners, who.

Who are primarily H back in plumbing companies the.

The solution is now also available to all alarm dot Com service providers.

Another strategic area of focus for R&D program is intelligent integration with central monitoring stations over.

Over the last few years, we've been working closely with that monitoring station partners to improve service efficiency reduce or eliminate pass alarms and false dispatches and differentiate the monitoring services provided by systems powered by alarm Dot com.

I wanted to update you on the positive results of one of the products we've introduced.

In 2019, we introduced the capability called smart signal, which allows subscribers to easily cancel or verify alarms.

Our mobile App.

This capability received several industry awards when it was released including security product of the year at CES.

Rapid response is a long time central monitoring station partner of ours, and they moved aggressively to introduce smart signal to the alarm dot com service providers.

Rapid response recently reported to us that enabling the smart signal capability for a dealer has reduced despatched alarm events by 25% to 30%.

Next I want to talk about progress, we're making against some of our key growth initiatives.

As I have discussed on prior calls we've been investing in video and video analytics, the commercial security vertical international markets, and then adjacent Iot application opportunities in order to fully capitalize on the growth opportunities we see.

I am pleased with the overall progress we've made.

These growth initiatives accounted for 22, 5% of our SaaS revenue in the third quarter and grew 42% year over year.

We continued to see strong growth and residential video.

The third quarter, 40% of our new subscribers opted to include video services with their systems the.

The growing contribution from video is the result of lots of hard work and investment to advance every aspect of our video service.

We have a strong product an engineering team and place to continue to advance and differentiate our video capabilities.

As the commercial market continues to recover we're making good progress expanding our service provider base and tailoring, our commercial platform to service and even wider diversity of property types custom.

Customer requirements and opportunities.

In the last 12 months about 50% of our service provider partners have created a new account with an alarm dot com commercial service plan.

In addition.

<unk> Dot Com service providers are beginning to bring Open-eyed enterprise grade video monitoring solution to a growing number of sales opportunities.

Meanwhile.

Energy hub continue to grow its network of energy utility partners this quarter.

They recently announced that over 50 utilities now use the mercury platform to manage distributed energy resource programs that include thermostats electric vehicle Chargers batteries solar and burgers.

Water heaters and for commercial and industrial sites and Aggregators.

According to a recent report from with Mckinsey Global research firm.

Energy hub managers, the largest portfolio of flexible customer owned load of.

Of any distributed energy resource management system provider in the United States.

One of energy hubs recent utility additions, the Los Angeles Department of water and power.

The largest municipal utility in the country.

This past summer.

Energy hubs Mercury platform managed to their thermostat driven demand response program and initiated seven demand response events to offset peeking requirements during the summer heat waves in California.

That our agreement with ATP also anticipates that alarm dot com will continue to provide service to all existing ATP subscribers.

On both of the alarm Dot com software platforms for the full service life of the subscriber accounts.

Overall, we are excited to resolve this uncertainty by extending our agreement with 80 until 2023.

We expect to continue to support 80, and millions of 80 subscribers, who are serviced by our software platforms over the next decade.

We have a strong and positive working relationship with ATP and expect that to continue for many years and on many fronts.

In summary.

Im pleased with our third quarter financial results and the work we have done this quarter on both the product side and commercial side of the business in the face of the pandemic.

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.

Thanks, Steve I'll start with a review of our third quarter 2020 financial results and then provide guidance for the fourth quarter as well as our raised outlook for the full year of 2020.

I'll conclude with our initial thoughts on 2021 before opening the call for questions.

SaaS and license revenue in the third quarter grew 17.9% from the same quarter last year to $100.1 million.

This includes connect software license revenue of approximately $9.5 million for the third quarter.

Turning to operating expenses R&D expenses in the third quarter were $36.9 million compared to $29.5 million in the third quarter of 2019.

We ended the third quarter with 750 employees in R&D and total head count of 1361 employees.

Up from 582 employees in R&D in total head count of 1043 in the year ago quarter.

Sales and marketing expenses in the third quarter were $18.4 million or 11.6% of total revenue compared to $14.5 million or 11.4% of revenue in the same quarter last year.

Our GNS expenses in the third quarter were $17.4 million down from $18.7 million in the year ago quarter.

Which improve for 49 days, and Q2, 2020, and our flat compared to a year ago. When our Dsos. We're also a 46 days.

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

In the third quarter, we generated approximately $18 $6 million in cash flow from operations up for $1 million cash flow in the third quarter of 2019.

Our free cash flow for the third quarter was $15 1 million compared to negative $4 million for the same quarter last year.

On a year to date basis through the first nine months of 2020.

Are operating cash flow was 66 $7 million in free cash flow was 56 million up significantly from the same period of 2019.

Ending.

We expect full year 2020 stock based compensation expense of $28 million to $29 million.

Finally.

While we're on the initial planning stages I will provide some early thoughts on 2021.

With the caveat that we cannot forecast the impact dip additional cobot shutdowns or other economic upheaval were to occur including the impact on our service providers or our supply chain among other factors.

With that said, we currently believe our SaaS and license revenue for 2021 will be around $435 million.

Yep.

Extended that contract. So we know what's occurring in 2021, we know what's occurring in 2022.

And there will be.

Subscribers coming on and then they'll run for their full life.

Okay. That's helpful. I think you also mentioned the rocker terms.

You still support the a royalty or IP license.

Agreement there a way for us to maybe think about that occurs that transition occurs just kind of the change in economics generally speaking.

Well, yes.

Obviously less.

And I.

I can't really go into the exact.

Okay can't really communicate exactly the terms of our agreement there, but I think.

What I will say is its.

Reasonable reasonable recurring royalty agreement and includes a lot of incentives for different types of performance.

Buyer customer in different areas. So it had some variability in it depending on how those incentives are going and.

But I can't really give you the dollar number there now.

Okay that maybe try one last one then instead.

So that's probably.

Hi look at at the same time I am sort of.

Uhm relieved and happy that we have had a clear plan here on clear runway for.

For more than a couple of years.

Understood Thanks, and congrats again on the results.

Thanks.

Thank you and our next question comes from Nicole I fell off a way of things of America and your lifestyle open.

Hi, Thanks for taking my questions. Steve last call. There are you spoke about the covid potentially being a durable all today. Thank you are shifts to the business on the on the residential side do you have any more data point over the last three months to confirm or or maybe disprove that.

Yeah. Good question Nicolai I think we have been surprised.

We're not.

They remain with you are with your service provider for a long period of time, So I think we're probably.

Seen something that will have some long term.

Benefits to our business and our service providers, because we are grabbing more ground.

Right now it may be induced by Cove. It it may be something else going on but we are grabbing more turf and may.

The feedback.

Is variable, but I will say not variable in a bad way I mean, we have some some folks that really think it's a game changer and are excited to use it for.

Just a whole myriad of purpose I think particularly if you're in an area, where you are it's sort of a more spread out suburb where people are living on.

345 acre types of lots and they have detached garages and they they may have some some equipment some capital equipment that they used to maintain the property.

They may have I mean, even weird things we've heard of people installing this thing on the chicken Coop for example to make sure. They didn't leave the door open on on.

Paul is too far from my home to sort of monitor with RF connectivity and I want to know if someone opened the gate as the child grows into the swimming pool or whatever.

Im just adding that to my existing.

Jeff It's a good question and a data point I was excited too.

To toss out there this quarter when we did the analysis, what we were looking at last quarter.

Someone asked is how do we measure sort of return on investment around some of the R&D investments were making so we looked at the domains, where we're really.

Kicking in.

Okay.

Wallet share internationals, a swag, but it's the slide where we're doing well and we've been continuing to make investments and getting to sort of a point, where it's more mature now and instead of people running pilots and test.

Net sales, we went out there every day and selling alarm dot com in 40 different countries. So lot of these things are reaching the maturity and makes them more relevant and and that maturity.

You and I, probably both no.

For us so very very high quality operators and I was up there.

A few months ago and looking at all the different things they were doing and in and those conversations we talked about smart signal and what its impact had been on what we call the false dispatch rate false dispatches, obviously better for both.

Add for everyone back to first responders bad for the subscriber beams that you had an alarm that was false and we dispatched on it are we and our partner did so we looked at the impact there of our work together on smart signal and obviously on their side, there's education of the of the service provider and there is a lot of tech.

LNG they bring to bear.

From there.

They are to kind of selling in key into the residential customers and then.

In terms of.

That other segment in terms of the growth profile, maybe relative to the overall business. Thank you.

The other segment has been growing depending upon the quarter and there is some seasonality with an energy hub and timing differences, but generally the other segments in growing anywhere from 30% to 40% year over year. We don't see any reason why that would that would that would change in 2021.

Thank you.

And our next question comes from.

Jack Van der.

Line is now open.

Hi, great. Thanks, Hi, Hi, Steve Kean has TV.

Excellent quarter.

The reef times and they report attrition.

Patricia none of refined and the larger you are as a service provider to more advantages you have when people move because you can resign them in a new market. They may have moved then but.

But somewhat service providers do report that I don't think we have a right now we could probably find anecdotal examples by talking to quote.

Okay. That's that's helpful. That's helpful. And then you should gears uhm.

There's a lot of talk some talk on international I'm, hoping explicitly or specifically to get an update maybe on the partnership you announce last quarter.

On on the lease development and progress with your partnership with Johnson controls.

And the the countries and regions, you're you're going after with global Interactive services.

Sure Yeah, I think that partnership is going.

Going well I think they've done a great job I would just would say in that case we.

We had a time bound objector to upgrade a lot of the existing subscribers that they were servicing internationally in several different markets and it was a hard project.

And they executed 100, very well, we obviously worked with them on that so we upgraded quite a few customers throughout the first <unk>.

Okay.

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