Q1 2022 Alarm.com Holdings Inc Earnings Call

May 5, 2022

Okay.

Good day, and thank you for standing by welcome to the alarm Dot Com first quarter 2022 earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference.

Is being recorded I would now like to hand, the conference over to your Speaker today, Matt <unk> Vice President of Investor Relations. Please go ahead.

Thank you good afternoon, everyone and welcome to alarm Dot Com first quarter 2022 earnings conference call I want to remind you that this call is being recorded joining us today from alarm dot com or Steve.

<unk>, President and CEO and Steve Valensuela, our CFO before we begin a quick reminder, management's discussion during today's call will include forward looking statements, which include among others projected financial performance the impact of emerging market dynamics trends and anticipated market demand the impact of the Covid pandemic.

And challenging global supply chain dynamics, our business strategies plans and objectives and integration of recent acquisitions continued enhancements to our platform and offerings opportunities for growth and expansion in our current and new markets. These forward looking statements are based on our current expectations and beliefs and on information currently available to us.

These statements are subject to risks and uncertainties, including those contained in today's earnings press release and in the risk factors section of our most recent annual report on Form 10-K filed with the SEC on February 24, 2022, and in subsequent reports that we file with the SEC from time to time.

<unk> our quarterly report on Form 10-Q for the quarter ended March 31, 2022 that we intend to file with the SEC. 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 call speak only as of today's <unk>.

Date, and alarm 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.

Be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP 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 got alarmed.

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, let's now turn the call over to Steve Trundle, you may begin.

Thank you, Matt good afternoon, and welcome to everyone.

We're pleased to report solid Q1 results to begin the year, our SaaS and license revenue in the first quarter was $123 2 million up 14, 8% over last year.

Our adjusted EBITDA in the first quarter was $29 9 million.

In the first quarter demand remained steady for alarm dot com products and services and we saw stronger sales than expected.

But we also absorbed increased component and freight costs that pressured our hardware gross margins.

As a result, we are currently facing a second price increase of the year on select products.

We expect hardware margins to strengthen from Q1 levels as the year progresses, but not to reach our historical levels during 2022.

On today's call I want to update you on several new commercial product initiatives that are good examples of the ongoing collaboration between our open eye and alarm dot com R&D teams.

I will also share some takeaways from my time at ISC West the largest security industry trade show of the year, which was held in late March.

Starting with our new commercial products. We recently introduced the pro series commercial stream video recorder, our SBR, it's designed for small and medium sized commercial installations with support for up to 16 cameras on a single recording device.

The SCR is accessible from anywhere through an intelligent interface that includes a timeline view of all video feeds in the property.

The timeline displays an overlay of activity detected by video analytics.

Security and access control systems and other sensor based events.

This functionality streamlines forensic video searches and provides a unified interface for subscribers to monitor their property and view important activity.

Importantly, the pro series SBR was developed via collaboration between the open eye and alarm Dot com product teams.

The effort has allowed us to introduce to mid tier commercial customers a set of enterprise grade video management capabilities that are typically available only to the large scale customers that <unk> serves.

Open I also had a productive quarter during the ISC west they demonstrated a new analytic solution that was recently introduced into their SaaS offering.

<unk> worked with alarm Dot Coms video analytics team to advance our AI architecture and deploy a new neural network that is optimized for the high demand environment of open eyes enterprise commercial customers.

This new video analytics engine can simultaneously analyze large volumes of data generated by hundreds of cameras.

It is also relatively open and supports retrofitting of existing third party camera deployment into open eyes enterprise video ecosystem.

One functional benefit of this new architecture is highly accurate activity detection that reduces false motion events that can be caused by background movement and other image noise.

More precise detection of important activity will allow subscribers to create more actionable alerts and quickly find recorded video associated with an incident.

Another benefit is the opportunity for customers to reduce video storage needs and related cost.

Today, most enterprise commercial customers received too many nuisance false alerts that waste valuable video recording space.

Open I can now dynamically trigger alerts and camera recordings only when important activity, including the presence of a human or vehicle is detected.

During testing of this new capability.

<unk> saw a reduction in force positive alert reporting that led to a 20% to 40% improvement in video storage efficiency.

When we acquired <unk> in the fourth quarter of 2019, I discussed the opportunity we saw to leverage technology and domain expertise across alarm dot com and open eye.

Developing and deploying advanced video analytics capabilities and the overnight channel was a key part of this vision and an important step in our strategy to build a strong and durable recurring revenue business model at openly.

The <unk> team is doing great work and has become a strong contributor to our business.

Let me next turn to ISC, West where alarm Dot Com recently had a great presence.

We highlighted our residential security and video products, especially new partner facing capabilities that drive operational efficiency and increase subscriber satisfaction.

We also showcased our expanding set of commercial services.

During the conference we engaged with a broad cross section of our service providers in direct meetings training sessions and hosted events.

These activities always create a valuable opportunity to take the pulse of our channel and to hear direct market feedback.

Our service provider partners continue to see a positive demand environment for professionally installed security services.

Tumors increasingly view security systems as the platform for an intelligent multi device smartphone.

Alarm dot com and our service providers are driving this trend and leading the industry, particularly in deploying video solutions.

In 2021, our service provider partners attached video to nearly half of all new security and smart home accounts.

Industry wide parks associates recently estimated that about 30% of residential security systems installed in 2021 included video.

Overall, my sense was that our partners see a positive year developing.

Most of their concerns were focused on supply related issues inflationary pressures and labor constraints, rather than market challenges competitors or product gaps.

To conclude.

I'm pleased with our Q1 results and the progress we made to expand our platform during the quarter.

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 Valensuela Steve.

Thanks, Steve I will begin with a review of our first quarter 2022 financial results and then provide our updated guidance before opening the call for questions.

SaaS and license revenue in the first quarter grew 14, 8% from the same quarter last year to $123 2 million.

This includes connect software license revenue of approximately $7 1 million for the first quarter down as expected from $8 7 million in the year ago quarter.

SaaS and license revenue visibility remains high with a revenue renewal rate of 94% in the first quarter, which is at the high end of our historical range of 92% to 94%.

Hardware and other revenue in the first quarter was $82 2 million up 26, 3% over Q1 2021.

We continue to see strong sales of our video cameras driven by increased adoption of our industry, leading video solutions and video analytics capabilities for both our residential and commercial subscribers.

Total revenue of $205 4 million for the first quarter grew 19, 1% year over year.

SaaS and license gross margin for the first quarter was 86, 3% up approximately 20 basis points quarter over quarter, mainly due to product mix.

Hardware gross margin was 11% for the first quarter, which was flat quarter over quarter and down from 22, 3% during the same quarter last year.

Hardware gross margins were lower than expected due to additional cost increases for components and higher shipping costs.

We continue to ship more product by airfreight to meet demand and shipping costs increased due in part to increasing fuel prices.

As a result of these additional costs, we announced our second price increase this year on some of our hardware products.

The pricing changes will mostly take effect later in the second quarter.

Barring any additional economic impacts or supply chain disruptions, we expect hardware gross margins to improve from Q1 levels each quarter. This year.

Total gross margin was 56, 1% for the first quarter down from 57, 8% last quarter, mainly due to a higher mix of hardware revenue in the quarter.

Turning to operating expenses R&D expenses in the first quarter were $51 5 million compared to $42 5 million for the first quarter of 2021.

We ended the first quarter with 892 employees in R&D up from 797 employees in the same quarter last year total.

Total head count increased to 565 employees in the first quarter compared to 1400 14 employees a year ago.

Sales and marketing expenses in the first quarter were $23 2 million or 11, 3% of total revenue compared to $19 million or 11% of revenue in the same quarter last year.

Our G&A expenses in the first quarter were $24 million up from $22 9 million in the same quarter last year.

G&A expense in the first quarter includes non ordinary course litigation expense of $1 1 million compared to $5 3 million for Q1 2021.

Non ordinary course litigation 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 was $29 9 million down from $35 6 million in Q1 2021.

Mainly due to the lower hardware margins.

In the first quarter GAAP net income was $9 1 million compared to GAAP net income of $14 8 million for Q1 2021.

non-GAAP adjusted net income was $21 3 million or 39 per diluted share in the first quarter compared to $25 8 million or <unk> 50 per share for the first quarter of 2021.

Turning to our balance sheet, we ended the first quarter with $671 8 million of cash and cash equivalents. During the first quarter, we used $23 $3 million of our cash to repurchase 354123 shares of our stock.

Turning to our financial outlook for the second quarter of 2022, we expect SaaS and license revenue of $126 two to $126 4 million.

For the full year of 2022, we expect SaaS and license revenue to be between $512 seven to $513 3 million.

Up from our prior guidance of $508 million to $509 million.

We are projecting total revenue for 2022 of $822 seven to $853 3 million increase from our prior guidance of $808 million to $819 million, which includes estimated hardware and other revenue of $310 million to $340 million.

We are maintaining our guidance for non-GAAP adjusted EBITDA for 2022 at $149 million to $150 million, given the very challenging global supply chain dynamics and the unusual geopolitical concerns among other factors.

We expect adjusted EBITDA in Q2 to represent approximately 22% of our annual guide.

non-GAAP adjusted net income for 2022 is projected to be $104 $3 million to $105 million consistent with our prior guidance.

Our EPS is estimated to be $1 87 to $1 88 per diluted share compared to our prior guidance of $1 86 to $1 88 per share.

We currently project, our non-GAAP tax rate for 2022 to remain at 21% under current tax rules.

EPS is based on an estimate of $55 8 million weighted average diluted shares outstanding.

We expect full year 2022 stock based compensation expense of $50 to $52 million.

In summary, we are pleased how well our service providers and internal teams continued to perform during these challenging times we.

We are focused on executing 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.

Thank you and as a reminder to ask a question you will need to press star one on your telephone to withdraw.

Your question press the pound key.

Our first question comes from Adam Tindle with Raymond James Your line is open.

Okay. Thanks, Good afternoon, I wanted to start with Steve Trundle, just kind of an observation that a lot of consumer subscription companies are seeing major challenges right now, whether it's Netflix et cetera.

Yet your subscription metrics are still solid mid teens growth I know youre, BBW EBIT and consumer.

The ultimate customer and I'm wondering why you think this is is there some sort of lag effect because your b to b to C or youre not expecting impact any metrics that you can give us to kind of support your view on why this business seems to be a lot more durable than some of those other consumer subscription models out there.

Hey, Adam.

Yeah. Good question I think.

A lot of it is or the market we serve in that.

Security and safety are sort of fundamental consumer needs, we're not selling an entertainment service and we're not competing with.

No.

We have other sources of new entertainment, whether it be tictoc or otherwise so.

I think in our case, Fortunately, we're going after.

A market that is.

And sort of fundamental to the consumer.

They don't want to part with safety and security and our service providers have a long long history of of knowing how to address the needs of each locality.

So perhaps the <unk> gives us a little bit of a.

A shield but.

I think it's probably more basic than that which is.

The market is generally growing we are delivering the technology that that renders what we believe to be the best smart home and security experience and.

And the consumer need is not going away, even even during recessionary periods.

We normally see that security holds up very well people are moving less and there's usually a heightened concerned about property protection. So so I think it's probably a trend that's not going away I think we will hold up fine.

Got it that makes sense.

Just a follow up for Steve.

EBITDA margin, obviously, a very challenging environment that you are executing well and in Q1, just under 15% this quarter, but if I looked at the full year guidance I think it's closer to 18% so sort of this risk as the year progresses I'm wondering if you could maybe unpack some of the factors that you're considering in that assumption.

To kind of climb up EBITDA margin and the timing for those margins to normalize. Thank you yes.

Yes, Adam Good point, certainly the hardware margins, we expect to improve with the price increases so Q1 hardware margin of 11%.

We expect Q2 to probably be around 13% and then Q3 could closer to 17% to 18%. So that's certainly a big factor.

Keep in mind seasonality wise typically Q4 is our seasonally strongest quarter, especially with energy are contributing better incremental amount of revenue. So those are really the main factors I would point to for the improvement in EBITDA margins.

Okay, and just really quickly clarify since we're just in such an uncertain supply environment.

Hardware for Q2, I mean, we typically see summer months, you get a sequential uptick but I'm just not sure. If we've got kind of a different type of a year and would hate to be missing something on how to think about hardware revenue for Q2.

I think Adam this is Steve speaking I think yes.

A little bit of an odd year. So we can absolutely certain that we're going to see that sequential uptick in Q2, we also.

As Steve mentioned in his prepared remarks, we put forth are put through a second.

Cost increase on the price increase on the hardware. So while we don't expect that to dampen demand.

<unk>.

It Hasnt really played out yet it becomes an comes into effect may one so.

So I wouldn't go crazy with the second quarter hardware, I think I'd anticipate sort of a flat quarter over quarter hardware number.

Very helpful. Thank you.

Thanks.

Thank you. Our next question comes from Michael Funk with Bank of America. Your line is open.

Yes. Thank you all for taking the questions today I really really appreciate it so first on the commercial side.

I know in the past you've given some quantitative commentary about the quarterly additions I think last quarter, you said youre kind of run rating around 25000, a quarter remember correctly. So hoping you just update us there if youre seeing any kind of acceleration that I will follow up after if I could.

Hey, Michael this is Steve.

To make sure I've got it right you are referencing on the 25 K per quarter you are referencing.

Which part of the business.

I believe it was commercial you said last quarter was 25, if I remember correctly.

Yes, so commercial momentum continues to be good it's becoming an increasingly.

Larger and larger component of our of our SaaS.

Revenue I believe last quarter I indicated that.

Commercial account base was over 400000.

Active subscriptions that numbers continue to grow and is growing at a level at a percentage level that's faster than our.

Then our overall SaaS growth so.

We spent a fair amount of time in my prepared remarks talking also about the <unk> business and the recent integrations, we've done there to drive deeper video analytic opportunities.

Into.

The enterprise space and I think.

In the first quarter as an example, I believe our open it alone activated over 50000.

New connection points, which basically means new cameras.

In the commercial space. So the business is going well and I think will be.

Barring any sort of major recession, I think we will continue to see good solid commercial momentum.

And then one more if I could start with a higher level I know you commented on the second price increase on the equipment side earlier.

Thats understood obviously, passing on some of your own.

The increase in pricing, but how are you thinking about increase in your subscription pricing and were seeing pretty broad based price increases walked our convenience store today guy with increasing prices and everything is kind of shrug my shoulders, Mike We're all seeing it.

And a condition to that at this point.

We'd expect it not that you are trying to.

Pushed it out to your customer, but everyone else is doing.

How have you thought about the ability to increase pricing on the subscription side and the current market environment.

It might help to offset some of the other pricing pressure sorry cost pressure that youre seeing.

Yeah, that's a great question and one we spend time on historically we have.

Really wanted to be stable on the pricing of the subscription services that we offer through our service providers everyone's planning their business around.

Certain amount of cost on each subscription and our service providers are oftentimes funding account creation cost using debt, making assumptions about certain levels of margin on each account. So a stable environment requires that you would not be.

Two quick I would say too.

To drive this.

Subscription cost that said.

The reflection you you just sort of made in terms of what we're all experiencing day to day create a dynamic where at some point.

You simply have to be ready too.

To increase the cost of subscription and our service providers will have also increased the cost of a subscription. So we're not we're not saying that we absolutely will never increased subscription cost I think at some point.

That becomes a necessary part of it.

Our business model, if we don't see some.

Temporary tampering down of kind of the current inflationary pressures, but we're not going to be quick on it is what I would say, we will probably be the last.

To move in that direction.

I wanted to start AT&T increased pricing in wireless has been a deflationary.

<unk> for last 20 years.

Nobody would've expected wireless price increases just Scott just a data point that the company that should've been last just raised their prices on Nebraska.

Anywhere I mean, even hardware we expected a couple of years ago I think our view was hardware costs would always be.

We will always be driving those costs down and.

It's just not happening right now so the world is a little different right now I think I like the old way better but.

But we will react to the world we live in.

I really appreciate the time I'll yield the floor back to the next participant.

Thanks, Michael.

Thank you. Our next question comes from Matt Pfau with William Blair. Your line is open.

Hey, guys. Thanks for questions I wanted to follow up on the discussion around higher prices and inflation I think in terms of new customer probably the bigger impact from a pricing perspective would be increased hardware prices and also.

Most likely labor costs for the installers, which I assume would be getting passed back to the.

Homeowner to some extent, but your demand environment has remained robust so it doesn't really seem like that.

Price increases around the sort of initial install and setup are impacting demand maybe if you could just sort of comment on that and how.

Sensitive consumers have been historically too to changes in the initial install.

Yes, I would say, we haven't seen a drop in demand thus far.

I think that and we don't really anticipate a drop in demand I think that.

Still on a relative basis, the cost of what our service provider is offering in terms of security and smart home experiences is it's not the most sort of expensive thing and the.

And the budget for most folks I mean, we're talking.

$50 a month type of service plan for safety and security might be 60, depending on the amount of video services. It might be 40, if there's not a ton of services, but in any case, it's a.

London metal sort of need people have for safety and security and I don't think were sort of the biggest target.

When people are sort of looking too.

Potentially reduce expense on new account creation.

I think what's happening there. Some is the technology is just continuously getting better so the value we provide is offsetting.

Some of the increase in cost and a big driver of that is the video analytics services that are now.

Pretty rich and pretty developed on a residential grade camera.

So I do think we've talked quite a bit more value in and and then on the actual financing side, we've seen a movement over the last.

Two three years, that's still underway towards a dynamic whereby a lot of the cost.

That's being incurred to originate a new customer as is being financed through some type of consumer financing.

<unk>, where the consumer's credit itself is being used to finance the creation cost instead of the service providers balance sheet. So that also takes some of the pressure off when you and Youre seeing thats, another consumer markets with companies like affirm and otherwise, but when you can.

Spread out the incremental cost over a five year period.

Uses the burden on both the service provider and the consumer I think that's helping.

Got it and just one more on the commercial video analytics functionality that you have released you've had some out there for a while obviously, making improvements what are your expectations in terms of attach of video analytics to commercial customers relevant relative to <unk>.

<unk> I assume the percentage of commercial customers with video would be higher. So would you also then expect the analytics to be higher as well.

Well.

I would say absolutely, yes, except that.

On the residential side, we have seen very very high attach of analytics at this point.

75% of the customers, who are activated with analytic capable cameras are being activated with analytics on the residential side. So that's a pretty high attach rate.

Which is great that means we're rendering the most sort of value of the most functionality. We can a consumer I would expect on the commercial side through time as the offering becomes well adopted by the service providers that.

We will see at least that level and perhaps a bit higher but.

But it's not as if.

But we're starting with sort of a 75 numbers, there's not that much higher we can we can go on attach of analytics in the commercial side.

That makes sense.

Yes, it does.

So you can't go past 100, so got it.

Sure.

Thank you. Our next question comes from Brian Ruttenberg with Imperial Capital. Your line is open.

Yes. Thank you very much on first of all I want to go to a macro question a lot of the <unk>.

<unk> been asked about margins and things, but recessionary environment, let's just play that out let's hope that doesn't happen, but you guys have been doing this 22 years.

Can you talk a little bit about your business and what you anticipate happening if there is a downturn.

And then what your plans are for the cash that changes at all.

If there is a downturn in the economy.

Yes, I can spend a moment on that I think.

Obviously, it depends on the severity of the downturn, but.

Our expectation would be that.

Revenue retention would probably increase some we know that when people are not moving that we see we generally see less R&D.

<unk> dealers see less attrition so that tends to be a positive. We also know from prior experience that during that during a recessionary period that <unk>.

People are more concerned, particularly if they're layoffs, they're more concerned about the safety and security of their property.

They begin to wonder about.

Just wondering through the neighborhood during the middle of the day and that sort of thing so.

There is probably even a heightened desire for safety and security of that again I think supports customer retention.

Those are the positives on on new sales.

Some of those same positives will drive new sales activity at the same time, you see a slowdown typically.

On construction now.

Yes.

Have probably fewer new homes being initiated so that creates a bit of a headwind right now about 10% of home sales in the U S are coming from the builder trade our new homes. So.

You might have a little bit less there.

And.

So a little bit of a headwind, perhaps on new account origination.

Some by greater retention in terms of.

What it means.

The way, we think about our cash position.

Yes, I think that in a risk.

A recessionary period, that's often.

And time when your cash takes on.

More value.

You can find.

More opportunities to deploy our cash.

Efficiently and with.

Our reasonable expectations for returns so.

In some ways. If we saw a recessionary period I think you would see us maybe be a little bit more.

Active on the Corp, Dev front thinking about how to leverage our cost and cash position.

Most effectively.

Great. Thank you very much.

Sure.

We have a question from Darren <unk> with Roth Capital Your line is open.

Okay.

Hi. Thank you. This is Austin on for Darrin, Thanks for taking my questions.

Just have two.

Two if I may.

The first one I think it's been asked I'll try to rephrase it a little bit differently.

But with again on the theme of inflation and rising interest rates I'm, just curious what kind of changes you have seen her.

Anticipate to see on the residential side with regard to the new Homebuilder program as well as second homebuyers.

Good question, yes.

Yes.

The residential side, new homebuyers, I mean, I think we watched the national data there to get a feeling for whats happening with new home.

<unk> my recollection.

Yes.

My memory is not perfect, but I seem to remember that we've seen sort of a 10, 11% drop in new home sales over the prior quarter, so a little bit of a tapering there at the same time, we're not like super heavily penetrated and the fifth.

While we have the majority of the builders.

In partnership Someplace, we haven't completely penetrated all of the the builder.

Opportunities that we see and therefore, we've got some room for expansion in terms of greater attachment.

Two the number of new homes being constructed so I would hope that <unk>.

Even as new homes decline potentially first you got to remember that's not.

Yes, most of the sort of 10% of home sales, but as new home construction declines.

We can hopefully further penetrate that Tam.

Some and.

Thats, what we would.

It will be attempting to do we might see that more homes are kind of coming in at a slightly different.

Price point, and maybe some compression on what folks are willing to buy with higher interest rates, but but generally speaking.

I don't think we see any sort of.

Avalanche coming even if if new home sales.

Declined further.

With regard to second home sales, that's a data point I actually don't have I'm not sure what's been going on the second home sales.

The general market right now what I would say is from our perspective, there is a favorable trend towards.

At least what we're seeing is towards increasing.

Rental and second homes and.

When you have people going to places and renting a home that's good for our central business.

And that we're driving the technology that allows a property manager to quickly.

Turner rental from one gas to the next so.

If that continues if that trend continues as people continue to sort of flavor.

Vacations that are in the United States over a ton of.

International travel or work with just seeing sort of the emergence of a new habit.

When I go to the beach the Lake instead of.

Sure.

Necessarily New York City, then Thats.

That's a good trend for us so far that appears to be trending the right direction.

Great I appreciate that and then last one for me just curious how you are.

Flex Io initiatives going.

Sure.

Color on that so flex is is underway we've got some dealers that are.

That are beginning to deploy that in various situations probably the most common is.

Use right now would be fourth gate that are remote.

From the home, whether that be driveway gates or swimming pool gate.

We're not at the point, where flex is.

By itself.

Driving any sort of material change in our numbers, it's still fairly early days.

Still working out a few.

Feature requests that somewhat service providers have had so it's moving but it's not a dial mover at the moment.

Got it alright.

Alright, well I appreciate it and congrats again.

Thank you.

Thank you. Our next question comes from Jack Vander Rd.

Maxim Group your line is open.

Yes.

Great Hi, Steve key Stephie I appreciate the update.

Thanks for taking my questions.

I'll just start with a question in case, you haven't gotten enough on price increases.

Just for clarity did you say you already rolled out that second round of price increases in the hardware products or are these in the works.

Yes Jack.

So we rolled out.

We really didn't want to have to do a second one but.

We did our first one that really went into full effect in late February early March and then on the heels of that we announced a second increase goes into effect beginning may one so it's already been <unk>.

Now, it's been deployed and we will sort of.

Begin to show up in the second half of this quarter.

Got it okay.

And then.

Separate topic, just on the premium services front, its always fun to kind of you guys have patents.

Yes.

As an idea of what might be coming down the down the line. So.

In step with drone.

Our own patents filed I think over the last two years.

I imagine those are the big drivers, but.

Just.

Close to something bigger going on.

Deborah.

Thats unique and innovative like that you have the connected car as well that came out recently.

Anything I can throw one or anything you can talk about.

Fun things, we're talking about other than inflation and price increases.

Nicely.

Yes, so the car the connected car offering is gaining traction and we're seeing some use on the residential side, we are seeing a lot of demand.

Really from our service providers for it on the F&B and sort of the commercial space. So we are at.

Adding some capabilities to better support that arena that is incremental to the typical installation. So if we can see that continue to pick up. Some then at some point it begins to push our approved.

I'm excited about the progress being made.

Okay, Great and then just one more.

International business can you manage to provide an update on that overall, Pam opportunity and where you're at today.

Clearly still relatively untapped opportunity.

You still there.

Massive untapped longterm growth driver has anything changed in your in your plan <unk>.

No nothing has changed its on a relative basis I think at the end of last year, we talked about overall number of customers around $8.4 million and I said international at the time, we were getting close to half a million.

International subscribers during the quarter, we blew through that milestone which is great. So it's.

It's a real business when you're talking about over half a million dollars installations outside of the U S and Canada and.

Crossing new milestones almost every quarter so.

We still believe over time that.

That the rest of the world is a fairly large place and that we would.

At some point see the number of subscribers.

Globally B, a third to half of what we have.

Domestically. So the question is just sort of when does that curved really began to pick up and what I will say is that the.

The cost to sort of entry to the cost of really playing globally or material to support the different environments and the different types of hardware and components that you need for each market.

So we're sort of continuing to work through.

All of those issues, but.

Continuing to drive product out that will service.

Large swaths of the globe, but but we still have enthusiasm about the tan and and the progress that we're making.

Don't think we've changed on that at all.

Okay, great well I appreciate the time I'll hop back in the queue.

Okay. Thank you.

Thank you we have a question from Mike Lattimore with North plant capital. Your line is open.

Hi, This is our duty on behalf of Mike Lattimore.

Could you tell me how much did your largest customer contribute so pleasant age of revenue.

So our largest customer.

Is ADT and they are a little bit over 15% of our revenue.

And there is no other customer that's greater than 10% of our revenue.

All right all right and could you give some color on the gross margins how should we think about the gross margin and two Q and for the rest of the year.

Yeah. So obviously.

Obviously, Q Q1 was 11% for hardware gross margin, 86% for South status has been very stable as you've probably seen it's been 80 686, two so 20 or 30 basis points.

But in terms of the hardware margins, that's where the price increases of course, we are taking effect and so we see probably in Q2 around the 13% gross margin for hardware.

Q3, probably going up to let's say, 15% to 16% and then queue for probably closer to 18%.

Hardware margins and that's of course dependent upon what we know today and no other changes occurring in so we have to caveat that but that's that's a current expectations.

Alright, alright, thank you.

Sure. Thank you.

Thank you.

And that's all the time, we have for questions. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

[music].

Okay.

Hello.

Mmm.

Okay.

Well.

Uh-huh.

Okay.

Mmm.

Uh-huh.

Okay.

Mmm.

Okay.

[music].

Is being recorded I would now like to hand, the conference over to your speaker today Mets Aardman Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone and welcome to alarm Dot Com first quarter 2022 earnings conference call I want to remind you that this call is being recorded joining us today from alarm Dot com are Steve Trundle, President and CEO and Steve Valensuela, Our CFO before we begin a quick reminder, management's discussion during today's call will include forward looking.

Looking statements, which include among others projected financial performance the impact of emerging market dynamics trends and anticipated market demand the impact of the Covid pandemic and challenging global supply chain dynamics, our business strategies plans and objectives and integration of recent acquisitions continued enhancements to.

Our platform and offerings opportunities for growth and expansion in our current and new markets. These forward looking statements are based on our current expectations and beliefs and on information currently available to US. These statements are subject to risks and uncertainties, including those contained in today's earnings press release and in the risk factors section of our most <unk>.

<unk> annual report on Form 10-K filed with the SEC on February 24, 2022, and in subsequent reports that we file with the SEC from time to time, including our quarterly report on Form 10-Q for the quarter ended March 31, 2022 that we intend to file with the SEC 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 call speak only as of today's date and alarm Com undertakes no obligation to update these statements to reflect subsequent events or circumstances, except to the extent.

Required by law.

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 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 got 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, let's now turn the call over to Steve Trundle, you may begin.

Thank you Matt Good afternoon, and welcome to everyone. We are pleased to report solid Q1 results to begin the year, our SaaS and license revenue in the first quarter was $123 2 million up 14, 8% over last year.

Our adjusted EBITDA in the first quarter was $29 9 million.

In the first quarter demand remained steady for alarm dot com products and services and we saw stronger sales than expected while.

While we also absorbed increased component and freight costs that pressured our hardware gross margins.

As a result, we are currently facing at a second price increase of the year on select products.

We expect hardware margins to strengthen from Q1 levels as the year progresses, but not to reach our historical levels during 2022.

On today's call I want to update you on several new commercial product initiatives that are good examples of the ongoing collaboration between our open eye and alarm dot com R&D teams.

I'll also share some takeaways from my time at ISC West the largest security industry trade show of the year, which was held in late March.

The SCR is accessible from anywhere through an intelligent interface that includes a timeline view of all video feeds in the property.

The timeline displays an overlay of activity detected by video analytics.

Security and access control systems and other sensor based events.

This functionality streamlines forensic video searches and provides a unified interface for subscribers to monitor their property and view important activity.

Importantly, the pro series SBR was developed via collaboration between the open eye at alarm Dot com product teams.

Open I also had a productive quarter during the ISC west they demonstrated a new analytic solution that was recently introduced into their SaaS offering.

<unk> worked with alarm Dot com video analytics team to advance our AI architecture and deploy a new neural network that is optimized for the high demand environment of open eyes enterprise commercial customers.

This new video analytics engine can simultaneously analyze the large volumes of data generated by one hundreds of cameras.

It is also relatively open and supports retrofitting of existing third party camera deployments and the open eyes enterprise video ecosystem.

One functional benefit of this new architecture is highly accurate activity detection that reduces false motion events that can be caused by background movement and other image noise.

More precise detection of important activity will allow subscribers to create more actionable alerts and quickly find recorded video associated with an incident.

Another benefit is the opportunity for customers to reduce video storage needs and related cost.

Today, most enterprise commercial customers received too many nuisance false alerts that waste valuable video recording space.

Open I can now dynamically trigger alerts and camera recordings only when important activity, including the presence of a human or vehicle is detected.

During testing of this new capability.

<unk> saw a reduction in force positive alert reporting that led to a 20% to 40% improvement in video storage efficiency.

When we acquired <unk> in the fourth quarter of 2019, I discussed the opportunity we saw to leverage technology and domain expertise across alarm dot com and open right.

The open eye team is doing great work and has become a strong contributor to our business.