Q3 2021 Alarm.com Holdings Inc Earnings Call
Good day and welcome to alarm Dot Com Q3, 2021 earnings conference call.
At this time, all participants on a listen only mode.
After the Speakers' presentation there'll be a question each session.
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I would like to turn the call over to David Chung Vice President of Investor Relations.
Thank you.
Good afternoon, everyone and welcome to alarm Dot Coms third quarter 2021 earnings Conference call. As a reminder, this call is being recorded.
Joining us today from alarm Dot com are 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.
Projected financial performance for the fourth quarter, 2021, and full year 2021 and 2022.
The impact of emerging market dynamics and trends on our business and on anticipated market demand for our offerings, including new product offerings.
The impact of the Covid pandemic on our global supply chain and the global economy.
Our business strategies.
Plans and objectives for future operations and integration of recent acquisitions.
Continued enhancements to our platform and offerings.
Opportunities for growth in our current markets and our plans to expand into new markets.
And other forward looking statements.
These forward looking statements are based on our current expectations and beliefs and on information currently available to us.
Statements containing words, such as anticipate began believe continue could estimate expect.
Forecast May plan project trend 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 factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August five 2021.
And in subsequent reports that we file with the Securities and Exchange Commission from time to time.
Including our quarterly report on Form 10-Q for the quarter ended September 32021 that we intend to file with the Securities and Exchange Commission. Shortly after this call.
That could cause actual results to 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 management's 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 or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.
Reconciliation 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 and a telephone replay will also be available on our website.
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 are pleased to report another quarter of strong results, our SaaS and license revenue in the third quarter was $118 1 million up 17, 9% over the same period last year.
Our adjusted EBITDA in the third quarter was $37 6 million.
I want to thank our service provider partners and the alarm dot com team for their continued strong performance.
I'll start by updating you on several new products that we recently introduced and discuss how they support our long term goals.
During the third quarter, we introduced a new outdoor camera that we call that 724, and a new capability powered by our video analytics engine that we call perimeter card.
The new 724 camera offers premium image quality and <unk> of June.
It also includes the addition of an onboard microphone and a powerful speaker led light.
We marry these new hardware capabilities with our advanced video analytics software to enable a new set of customer experiences.
Criminal guard identifies people anywhere around the perimeter of a property and triggers to 700000 for camera to respond with both audible alerts and a flashing red led light.
This capability immediately puts any potential intruder on notice that they are being actively watched.
Scriber skin easily configure the conditions that trigger perimeter guard.
For example, it can be instructed to respond based on a person's direction of travel are only when they loiter in a specific location for a specific period.
It can also be tapped to respond based on various parameters and rules. For example, it can be configured to trigger both while the system is arm and the subscriber is home for the night.
Or when they are out during the day.
The uptake and engagement with perimeter guard among existing subscribers is running above our expectations.
Thousands of perimeter guard rules were customized and activated within the first few weeks of its introduction.
Our goal is to continue to develop our video offering to address high value use cases that will drive higher video attachment rates in the residential segment.
Shifting to the commercial market, we launched a new lineup of commercial grade video cameras as well as a package of video analytics software capabilities that we call business activity analytics.
The pro series commercial grade camera lineup is designed for the mid market commercial segment.
These customers tend to have more nuanced and diverse video surveillance requirements from small businesses.
The Pro series cameras were designed for our service providers to flexibly address these customer needs. For example, the pro series line includes a range of form factors with four megapixel image sensors and very focal lenses that greatly expand the forensic image quality of recorded video.
These capabilities allow technicians to utilize more location options for Cabo placements, while providing the coverage area and image quality their security installations require.
The Pro series line enables our sophisticated new video analytics surplus for commercial customers.
Business activity analytics identifies and tracks the movement of people and captures business performance and operational data.
It enables occupancy tracking people counting <unk>.
<unk> monitoring detection of crowd gathering.
And the occupancy heat mapping.
Each analytics capability can be customized witnessing.
With specific virtual trip wires.
Multi directional counting configuration rules and brownstone demarcation that can monitor activity in specified areas.
We designed business activity analytics to keep managers and business owners aware of issues in that business. For example, a manager can customize alerts so that they can know in real time, if the customer wait time and the checkout line exceed the pre determined limit or occupancy restrictions are exceeded.
Lastly business activity analytics provides robust enterprise business intelligence reporting.
Commercial subtract subscribers can analyze activity trends monitor and measure foot traffic and customer flows, allowing them to optimize operations and staffing levels.
Our goal with these enhancements to our commercial video software is to enable our service providers to introduce alarm Dot com video solutions to a larger segment of their commercial customers.
As we build our inventory of pro series products, our partners will be able to service more of their mid market commercial customers with our fully integrated security and video solutions.
This benefits, both our partners and their customers.
We will continue to invest in our video platform to expand our market opportunity and build new revenue for our service providers.
We also provide a broad suite of tools and solutions for service providers through our partner services platform.
Cutting edge enterprise grade capabilities unlock the full breadth of opportunities and value enabled by <unk> technology.
Partner services enables our service providers to leverage data and insights from connected property solutions to optimize business operations lower their cost to serve build customer lifetime value and dramatically enhance and differentiate the professional monitoring services they provide.
We look we work closely with our partners to identify and develop innovative new solutions for our partner services platform.
We recently launched a package of enterprise software updates that we call jetstream.
The focus of Jetstream is to drive efficiency and reduce cost by enabling our software capabilities to further support our service providers internal operations.
Jetstream includes.
Ointments, which is a feature that seamlessly pushes information about customer support appointments.
From a service provider CRM system to the alarm dot com customer facing mobile App and web interface.
This capability automate and unified customer communications. It can also reduce.
Service appointments when traditional email confirmations are inaccurately filter as potential spam or junk mail.
Gesturing also includes our service dashboard.
This new tool is designed for service managers with day to day responsibilities overseeing technicians and customer support operations.
Service dashboard provides a unified interface for monitoring key operational metrics and customer experience indicators generated by alarm dot com.
It displays scores for technician performance system reliability and customer engagement and highlights critical trouble conditions across the account base.
Service Dashboard also support service managers and implementing operational efficiency goals through our full range of service provider solutions, including the award winning onsite onsite wrap up capability and our system check tool.
We believe that our partner services software platform add significant mutual value to our relationship with service providers and contributes to our competitive advantage in the market.
Lastly, I want to update you on a new agreement that we reached with Brinks home that extends our partnership for another three years.
In addition to enabling our ongoing partnership the agreement will support a significant opportunity that brings home is managing to upgrade At&t's digital life customers to Brink's home services in 2022.
The agreement also ties in our deep integration of Iot devices, with new market verticals and opportunities that brink's home is pursuing for.
For example breaks Hong can both reduce carbon emissions and generate additional revenue each time one of their customers enrolled in energy management device and a demand response program that is managed by energy hub.
We are excited to continue our long term partnership with the Brinks home team and we're pleased to have completed this renewal in the third quarter.
In summary, I'm pleased with our third quarter results and with our execution against our plans 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.
And with that let me turn things over to Steve Valenzuela to review, our financial results and provide guidance.
Thanks, Steve.
Ill begin with a review of our third quarter 2021 financial results and then provide our updated guidance before opening the call for questions.
And license revenue in the third quarter grew 17, 9% from the same quarter last year to $118 1 million.
We saw solid growth in new subscribers and continued increase in video attachment rates.
On the strength of our video and video analytics offering.
Connect software license revenue in the third quarter was approximately $7 9 million down as expected from $9 5 million in a year ago quarter.
Our SaaS and license revenue visibility remains high with a revenue renewal rate of 96% in the third quarter, which is above our historical range of 92% to 94%.
It's encouraging to see our renewal rates continue to increase our some of the increase could be the result of fewer people moving homes at the start of the pandemic and we continue to anticipate that this measure could revert to our long term historical range.
Hardware and other revenue in the third quarter was $74 3 million up 26, 5% over Q3 2020.
Strong hardware sales were driven by increased adoption of our video cameras and the residential segment and improvement in our North American commercial business with open <unk> alarm dot com for business continuing to show good momentum coming out of the pandemic.
Total revenue of $192 3 million for the third quarter grew 21, 1% year over year.
SaaS and license gross margin for the third quarter was 85, 2% up slightly by 40 basis points quarter over quarter.
Hardware gross margin was 15, 2% for the third quarter down from 25% in Q2, 2021, due to higher prices and increased shipping costs.
The global supply chain continues to present challenges, which require us to expedite shipments and incur higher airfreight costs.
Total gross margin in the third quarter was 58, 2% down from 61, 5% in the year ago quarter, mainly due to the lower hardware gross margins and mix.
I'll now turn to operating expenses.
R&D expenses in the third quarter were $44 1 million compared to $36 9 million for the third quarter of 2020, as we continue to add R&D capacity to help us address the large opportunities we see in our markets both in our residential and commercial businesses.
We ended the third quarter was 819 employees in R&D up from 750 employees in the same quarter last year.
Total head count increased to 1400 82 employees in the third quarter compared to 1300 61 employees a year ago.
Sales and marketing expenses in the third quarter were $22 6 million or 11, 7% of total revenue compared to $18 4 million or 11, 6% of revenue in the same quarter last year.
During the third quarter, we attended and exhibited at the annual ISC West Security Conference held in Las Vegas, which was canceled last year due to the pandemic and moved to July for this year.
Our G&A expenses in the third quarter were $18 7 million up from $17 4 million in the same quarter last year.
G&A expense in the third quarter includes non ordinary course litigation expense of $1 6 million compared to $2 4 million for Q3 2020.
Non ordinary course litigation expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance.
Moving on to our profitability.
Non-GAAP adjusted EBITDA in the third quarter was $37 6 million up $34 5 million in the third quarter of 2020.
In the third quarter GAAP net income was $13 5 million in.
In the year ago quarter GAAP net income was $36 1 million, which included a gain of $24 7 million, resulting from an investment we had in the company that was acquired by an unrelated third party.
We reflected the gain in our GAAP P&L as other income. However, we excluded this from our operating income and our non-GAAP financial results as it was not related to our operating performance.
Non-GAAP adjusted net income increased to $27 4 million or <unk> 53 per diluted share in the third quarter compared to $24 8 million or <unk> 49 per share for the third quarter of 2020.
Turning to our balance sheet, we ended the third quarter with $703 million of cash and cash equivalents, we have a strong balance sheet, which provides us significant flexibility going forward.
In the third quarter, we generated approximately $37 $9 million in cash flow from operations.
Year to $18 6 million for the third quarter of 2020.
Our free cash flow for the third quarter was $36 3 million compared to $15 1 million for the same quarter last year.
On a year to date basis through the first nine months of 2021, we generated $74 3 million of free cash flow up from $56 million for the same period in 2020.
In the third quarter, our capital equipment purchases were about $1 6 million down from $3 6 million in the third quarter of 2020, mainly due to less facility build out costs.
Turning to our financial outlook.
For the fourth quarter of 2021, we expect SaaS and license revenue of $118, one to $118 3 million for.
For the full year of 2021, we believe SaaS and license revenue will be between 456, 7% to $456 9 million up from our prior guidance of 450 to three to $452 8 million.
We are now projecting total revenue for 2021 of $721 seven to $731 9 million increase from our prior guidance of 707, three to $717 8 million, which includes estimated hardware and other revenue was 265.
$5 million to $275 million.
We expect continued challenges and higher shipping costs with the global supply chain, which we have factored into our guidance based on the information we have available today.
We estimate that non-GAAP adjusted EBITDA for 2021 will be between $138 million to $140 million up from our prior guidance of 133 to $134 5 million.
Non-GAAP net income for 2021 is projected to be 97 $3 million to $98 million or $1 87 to $1 88 per diluted share up from our prior guidance of 93 to $93 7 million or $1 77 to $1 79 per diluted share.
We project, our non-GAAP tax rate for 2021 to remain at 21% under current tax rules.
EPS is based on an estimate of $52 1 million weighted average diluted shares outstanding.
We expect full year 2021 stock based compensation expense of $38 million to $40 million.
Finally, while we are in the initial planning stages I will provide some early thoughts in 2022 with the caveat that there could be further disruption from the Covid pandemic and the global supply chain challenges among other unforeseen events, which could impact us and our service providers in the new year.
With that said, we currently believe our SaaS and license revenue for 2022 will be between $503 million to $504 million.
Total revenue for 2022 could range between $780 million to $800 million.
We currently project, our non-GAAP adjusted EBITDA for 2022 to be between $148 million to $150 million.
We will provide our initial guidance for 2022, when we report our fourth quarter 2021 results early next year.
In summary, we are pleased with how our service providers and our alarm dot com teams continue to perform during these challenging times.
We are focused on executing on our business strategy and investing in our growth opportunities, while continuing to deliver profitable growth.
And with that operator, please open the call for Q&A.
As a reminder to ask a question. Please press Star then one if your question has been answered and you'd like to limit yourself from the queue press the pound key.
First question comes from Adam Tindle with Raymond James Your line is open.
Hi, This is Alex on for Adam. Thanks for taking my question. So I understand the model centers around software, but hardware enabled software and I was just curious how you think your supply looks relative to demand as we get closer to the end of the year here.
Well this is Steve Trundle speaking.
Our team has pulled out as many stops as we can too.
To keep our supply chain is healthy as it can be so I think as we look through the end of this year.
We're not sounding any alarm at this point we.
We feel pretty good about where we are for the most part.
Could there be one or two skus in one particular category, where we are suffering.
Suffering backlog, yes, there are but overall right now looking throughout the rest of 2021.
We feel good and.
And then we're working hard so that hopefully by the next time, we update you we feel that way about 2022 as well but.
Most of the work right now is going into the 2022 supply chain.
Perfect. Thanks, and then just how should we think about energy hub, given macro developments you'd imagine that demand would be increasing materially for that for that offering.
What can you do to accelerate that business to become even more meaningful and more of a driver going forward.
Yes, that's a great question.
And Youre correct, yes, the macro trends are favorable to energy hub.
The business has continued to grow nicely in the sort of.
Year over year mid 30% range.
Maybe a tad higher than that and we wind up they've got kind of a marquee list of partners so lined up.
16 of the top 50 utilities already in the U S and are getting to a wider number of homes in terms of where we execute.
Distributed energy resource management program, so in terms of going further.
I think primarily going to be driven by our ability to two.
Lengthened the lead that we have in terms of product capability by investing more in.
RMB to expand the range and the capabilities of the product.
A number of different types of solutions in the range of solutions that we can provide so as you probably remember we started or they started with.
Demand response on primarily on thermostats.
Like how if Europe is opening up and how the business on international Fernandez.
Sure. It was the first part was it just international or are you asking about something else before international because international just international Okay.
Gotcha.
International sort of I would say still in a steady state at the moment.
Mean, we we sort of entered COVID-19 at a certain.
Production level International and we've continued to execute at that level of production for most of this year, we've been sort of holding our breath waiting for some of the clouds to part and rest of world market. So that we can go back to accelerating now.
Said the way things work, if you are installing hypothetically 15000 properties a month and a market.
And you continue to do that forever you keep growing so internationally is growing as a percentage of revenues and in terms of its contribution to alarm dot com, but we see an opportunity to sort of havoc grow or we expect it to actually grow at a faster clip than we've seen thus far in 2021, and we're hoping to see that.
Some kind of.
And any disruption there impacts are long term SaaS revenue growth. So when we have a choice to make.
In terms of whether to incur some additional costs to expedite things.
We typically will choose to incur those costs and execute.
Types of expediting activity, whether that be securing long term parks at inflated rates or whether it means.
Air Freighting product in.
And all of that activity has compounded too dry.
Drive down hardware margins.
Second half of this year, especially in the last quarter, but I think we will kind of see an ongoing.
What you saw in the third quarter is what you would likely we will see in the fourth quarter.
And then.
We will revisit some of our strategies around.
Hardware margins as we come into the new year, and and if we see a need to correct course, some will will do so.
Okay, I apologize about working from home.
So the next question I have is.
The deal with breaks can you talk a little bit about that what is that ad incrementally.
But what you had before what with breaks a relationship you talk a little bit.
Yeah sure.
Yep.
Yeah those are great.
New.
Endorsement of our long term relationship her springs had done a nice job to secure a big win for them.
In partnership with AT&T to provide an upgrade path to the AT&T digital light subscribers that sort of represented.
Business is coming to an end for AT&T, but breaks is right there to actually take those existing subs.
And move into it brings home offering.
Of course powered by alarm Dot com. So we were excited to be able to participate in that and to help to identify the product and the capabilities that those subscribers.
Subscribers will receive in this renewal.
Captures.
That opportunity and.
It also.
Yo.
Created a path for breaks to continue to drive very focused on.
Customer sat overall and actually really driving in I'd say more of the smart home and video capabilities into the subscriber base then maybe what has been the case.
Historically and the reason for that of course is the trends in the positive results, they're seeing both in terms of upfront.
Business activity analytics, which I spoke about some is.
As a pretty meaningful.
Feature upgrades and capability upgrades to what a mid size commercial customer has been able to access in the past, especially if you say that you need to have a video offering thats completely integrated with the intrusion offering and with the access control offering.
What we're doing on the analytics side now with the inputs coming from.
Anywhere from five to 20 video cameras to do things like.
That are fine.
People that are too close to each other monitoring queues in lines those type of capabilities open eyes, and give people a little bit more excited about pulling the trigger and making a purchase.
If you're only providing security that's great if you're providing security and Youre also driving business value.
Metrics that you can use to make a decision to improve your operation and your revenue streams or your customers that it's a little more exciting. So I think we've seen early signs that the.
The commercial sales forces for our partners and integrators are having some luck with.
With that message.
<unk> been able to use the analytics capability for not just security of course security is better but also.
For driving a lot.
A lot of improvement or more Intel on.
Some of the customer satisfaction and customer service metrics.
Awesome and then.
In regards to the improvement I guess has it been pretty broad based across the customer size, obviously, you're focusing on kind of the mid market, but I was just trying to get a sense of the different sizes of customers on the commercial side as well, yes. Good question, we're kind of.
The improvement has been across the spectrum, but what I'd say is it's a bit more sort of early days for us if you will in the mid <unk>.
And larger size.
Commercial customer accounts, so in that pool, we're growing off a smaller base in the small business segment, we've got a nice base already and we've been strong there for some time, but if you look at some.
Some of the things we've done to build out the platform.
With open.
With SBS.
Peter detection systems.
We're attaching to a increasingly larger.
Commercial customer now.
Got it thanks for taking my questions sure.
Our next question comes from Darren <unk> with Roth Capital Partners. Your line is open.
Hey, guys. Thanks for taking my questions and nice results.
If I may I think it's been about nine months since you guys launched flex I am just kind of curious.
And in the market and then.
For <unk> can you give the other SaaS revenue in the quarter. Thanks sure I'll start with the other SaaS I know Thats. Your favorite question. So it was $8 9 million in the quarter and it was up 22% year over year.
And really driven mainly by energy of course that includes <unk> Central building 36, with a smart water valve plus meter, which has been doing well, but yes, so $8 9 million for SaaS revenue for Q3.
Yes, and coming back to flex so we.
We've put flex in the market a number of dealers have have begun to introduce that into their first getting it onto their price sheets.
Their salespeople trained on when to solid what types of use cases.
Deserve.
Our flex cell.
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