Q2 2022 Alarm.com Holdings Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day, and thank you for standing by welcome to the alarm Dot Com second quarter 2022 conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during this session.
Paul.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today Matthew.
Go ahead.
Yeah.
Good afternoon, everyone and welcome to alarm Dot Com second quarter 2022 earnings Conference call. Please note that this call's being recorded joining us today from alarm Dot com are Steve Trundle, our president and CEO and Steve Valensuela, Our CFO before we begin a quick reminder, management's discussion during todays.
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-19, pandemic challenging global supply chain dynamics and adverse macroeconomic conditions, our business strategies plans and objectives.
<unk> 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May five 2022 and in subsequent reports that we file with the SEC from time to time, including our quarterly look.
Port on Form 10-Q for the quarter ended June 32022 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 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.
<unk> non-GAAP guidance management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use to understand the company's performance and trends. However, 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 Dot 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 <unk>.
Archived and a replay will 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 second quarter results, our SaaS and license revenue in the second quarter was $129 $5 million up 14, 4% over last year.
Our adjusted EBITDA in the second quarter was $37 1 million.
I want to thank our service provider partners and the alarm dot com team for their contributions to our results and for their ongoing performance.
Our continued SaaS growth and profitability during the quarter was driven by strong new account creation by our service providers in both our residential smart home.
And our business markets.
Their outstanding performance on subscriber additions suggest that demand for installations remains healthy.
As we look to the back half of the year and consider the current economic uncertainty.
We continue to feel well positioned to execute on our annual plan across our diversified revenue streams.
This includes our market leadership in North American residential security.
Our growing momentum in commercial markets are expanding presence in many global markets and the continued progress of our long term growth businesses.
Starting with our smart home solutions, we recently introduced a new capability called Smart Army for our residential subscribers.
This enables intelligent automatic system army and disarming that adjust in real time based on activity in the home.
Subscribers select periods when they want their system to monitor activity in the property and then either automatically arm our desk arm the system.
For example, you might want to automatically RMR system. Each lite between 10 P. M at midnight, depending on when you had the bed.
During that time the system against the monitor motion sensors and other designated sensor activity in the home.
After an extended period of inactivity. The system, then arms itself for the night.
The system can automatically disarm in the morning related tax designated internal motion, indicating that people are up and about.
We believe that smart farming is unique in the market. It's a capability that we have long offered our commercial business subscribers, which we have now enhanced to suit the needs of our residential users.
It's a convenient and intelligent way to control the state of the security system and we believe that it will further drive daily engagement with the central station monitoring aspect of the smart home system.
Smarter Army is also another element of our strategy to differentiate the professional monitoring services that our service provider partners typically include with alarm dot com powered systems.
We will continue to invest in developing market, leading capabilities that can enhance the life safety services that millions of homeowners depend on each day to protect their families and property.
Shifting to our commercial services I want to give you an update on our software offering for small and medium sized businesses, which we referred to as Smbs.
We address this space through our alarm dot com for business platform.
This includes integrated services for Smart security video monitoring video analytics and access control.
During the quarter, we introduced mobile credentials for our cloud based access control solution.
This allows subscribers to use smartphones to access locked doors and our property instead of key cards our fabs.
At administrator can virtually provision and manage access credentials directly to a smartphone through our administrative interface Inc.
Including managing the days and times when a user is allowed to access the property.
We believe that mobile credentials can further streamline access management for administrators.
<unk> costs associated with access cards and improve the experience for our credential holders.
We estimate the F&B opportunity that we're targeting with features like mobile credentials to consist of about $5 5 million business properties in the U S and Canada the.
The segment is heavily penetrated with legacy technology.
We believe that our integrated services and unified interface deliver unique functionality that will incentivize many of these businesses to upgrade over time.
SMB properties typically offer a higher SaaS <unk> opportunity than we see in the residential market frankly.
For example, in F&B property with a security system and eight channel video system and an access control solution will drive about six times the <unk> of a typical residential account.
In summary, I'm pleased with our second quarter results and with the execution of our plans through the first half of 2022.
Looking ahead I want to make sure our investors understand that we plan to continue to invest in our key growth areas of our business in the back half of 2022, and then 2023.
Even in a macro economic environment that may be less certain.
We are entering a seasonally strong recruiting and new employee Onboarding period.
Im anxious to get our growing team fully deployed on the growth opportunities. We are pursuing in commercial international active shooter episode control and energy management.
Finally, 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.
And with that let me turn things over to Steve Valenzuela to review, our financial results and provide guidance Steve.
Thanks, Steve I will begin with a review of our second quarter 2022 financial results and then provide our updated guidance before opening the call for questions.
SaaS and license revenue in the second quarter grew 14, 4% from the same quarter last year to $129 5 million.
This includes connect software license revenue of approximately $6 9 million for the second quarter.
As expected from $8 3 million in the year ago quarter.
As our SaaS and license revenue visibility remains high with a revenue renewal rate of 94% in the second quarter.
Part of another revenue in the second quarter was $83 4 million up 10, 2% over Q2 2021.
Video camera sales continued to be the main contributor to growth in hardware revenue as residential and commercial subscribers increased adoption of our industry, leading video solutions and analytic capabilities.
Total revenue of $212 8 million for the second quarter grew 12, 7% year over year.
SaaS and license gross margin for the second quarter was 85, 6%.
Up about 80 basis points over the same quarter last year due to modest scale benefit.
Hardware gross margin was 17, 7% for the second quarter, an improvement from 11% last quarter.
But down from 25% during the same quarter last year.
Hardware gross margins improved as expected following our price increases earlier. This year, however, they're still below our historical levels of 20% to 22% as the global supply chain continues to be challenging.
We expect hardware gross margins for the second half of this year to be in the range of 18% to 19%.
Total gross margin was 59% for the second quarter, which is flat year over year and up from 56, 1% in Q1 2020 to.
Due to the improved hardware margins.
Turning to operating expenses R&D expenses in the second quarter were $54 2 million.
Compared to $43 5 million for the second quarter of 2021.
Mainly due to employee related expenses.
We ended the second quarter with 919 employees in R&D up from 792 employees in the same quarter last year.
Total head count increased to <unk> hundred six employees in the second quarter compared to <unk> hundred 21 employees a year ago.
Sales and marketing expenses in the second quarter were $22 9 million or 10, 8% of total revenue.
Compared to $20 5 million or 10, 9% of revenue in the same quarter last year the.
The increase in sales and marketing costs were mainly due to an increase in head count and higher travel costs as we have more employees traveling as COVID-19 protocols were relaxed.
Our G&A expenses in the second quarter were $29 3 million.
From $23 3 million in the same quarter last year, mainly due to increased legal fees employee related costs travel costs and rent as we expanded our facilities to accommodate our growth.
G&A expense in the second quarter includes non ordinary course litigation expense of $5 3 million compared to $3 7 million for Q2 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 second quarter was $37 1 million down slightly from $38 million in Q2 2021.
In the second quarter GAAP net income was $10 8 million compared to GAAP net income of $14 7 million for Q2 2021.
non-GAAP adjusted net income was $26 9 million or <unk> 49 per diluted share in the second quarter compared to $27 7 million or <unk> 54 per diluted share for the second quarter of 2021.
We ended the second quarter with $643 4 million of cash and cash equivalents.
During the second quarter, we used $28 2 million.
We repurchased 480.
531 shares of our stock at an average price per share of $58 62.
Year to date, we have repurchased 834654 shares or approximately one 7% of our outstanding stock.
Turning to our financial outlook for the third quarter of 2022, we expect SaaS and license revenue of 139 to $131 1 million.
For the full year of 2022, we expect SaaS and license revenue to be between $518 $5 million to $519 million.
Up from our prior guidance of $512 seven.
To $513 3 million.
We are projecting total revenue for 2022 of.
$828 $5 million to $859 million increase from our prior guidance of $822 seven to $853 3 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% to $150 million.
non-GAAP adjusted net income for 2022 is projected to be 104 $3 million to $105 million consistent with our prior guidance.
Our non-GAAP EPS is estimated to be $1 89 to $1 91 per diluted 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 1 million weighted average diluted shares outstanding.
We expect full year 2022 stock based compensation expense of $50 to $52 million.
In summary.
We believe the solid growth of our SaaS revenue and strong retention metrics shows the durability of our model.
Our channel remains strong as our service providers continued to provide excellent support to their customers.
We are focused on continuing to invest in market, leading smart property solutions, while delivering profitable growth and with that operator. Please open the call for Q&A.
Thank you.
As a reminder to ask a question you will need to press.
One on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from Scott <unk> with Barclays. Your line is open.
Okay, Great Hey, good afternoon, guys. Thanks for taking my questions here.
Okay.
Hey, maybe maybe for you Steve Trundle helpful commentary just on the health of the of the end market. I was wondering if you can just go one level deeper and just talk about how the health of the residential housing market in the U S potentially impacts your businesses and clearly.
<unk> been through multiple real estate cycles before can you just remind us what you've seen in and what what metrics, maybe you pay attention to in this type of backdrop.
Sure.
Okay.
Yes.
We're kind of in a fortunate position, where whenever there has been historically a slowdown and move.
Moving activity or in new home sales.
Typically there has been an uptake in sort of sales to existing properties, where there was no move and the reason for that is it's just as likely that a new.
Buyer of a smart home system is buying because of a increased concern about crime in their neighborhood.
Or more and more today, even an increased desire for sort of the smart home capabilities that we offer.
That's just as likely as it is that they are buying because they move so.
While there is.
A bit of a tapering I think in the residential real estate market right now.
For us.
New builds are roughly 4% or so of our.
New installations.
For the year. So it's not while we have great relationships I believe with 18 of the 20.
Largest builders and we're trying to grow those relationships, we're not super exposed.
Two newbuild activity and we would expect probably.
Are there any type of sort of interest rate driven slowdown and move that we would.
Offset that with an increased.
Level of sales to folks who are buying for other reasons.
Got it that's very helpful. Maybe for my follow up for you Steve Venezuela.
Great to see the EBITDA beat on the quarter.
As you.
Looking at the full year guide of 149 to $1 50, what was sort of just the puts and takes that you considered one maintaining the guide for the year. Despite the nice beat on Q2.
Sure Yes.
First of all we have a lot of predictability in the SaaS revenue and high gross margin, 85%, 86% and a high renewal rate as well so a lot of predictability there with the hardware and the supply chain challenges will continue we have to be cautious there. The good news is we did see the gross margin on hardware go up too.
Almost 18% in Q2.
And we are predicting about 18% to 19% gross margin for Q3 and Q4, but.
As you know hardware is not as predictable. So we have to be cautious there we have a challenging macro environment, we have to be aware of as well and so we're actually very pleased to be able to maintain our guidance for a very high level of adjusted EBITDA in the quarter. So we feel very good about our guidance.
Very helpful. Thanks, guys. Thank.
Thank you.
Thank you.
Our next question comes from the line of Catherine Lee with Raymond James Your line is now open.
Hey, Thank you so much for taking our questions. It looks like the U S. Senate just passed a bill that helps on climate change with the intention of reducing greenhouse gas emissions do you think that this is a potential catalyst for energy hub, especially since intra quarter. You helps launched EV grid management solution, which almost helps push for those.
Greenhouse gas emission reductions.
Yes, absolutely we think that thats.
Contribute to the momentum that.
Energy hub has right now obviously, if we can be more.
Thoughtful at the times that we choose to exercise the grid.
To charge, an EV vehicle and use energy that is.
Sort of ultimately clean them.
That will.
Yes.
We'll produce.
Produce carbon emissions so.
Will.
Will it be an overnight catalyst I don't believe that sort of overnight be a catalyst, but it certainly gives the utilities a lot more air cover as well as.
With regulators and others too.
More aggressively pursue the types of programs that.
Energy hub enables so we were a little disappointed with the 1% excise tax on future buybacks, but we were pleased with.
With the contribution that the bill potentially has two our energy our business. So good question.
Awesome. Thank you so much for that color and then in your prepared remarks. When you talk about the supply chain is that incremental tightening or are these things that we've already all heard about the environment still being challenged just wondering if there's any incremental sequential uptick in the tightening that youre seeing.
I don't think so I don't think we've seen it get sort of worse than the last.
Two to three months.
It's probably getting slightly better on an overall basis, but we're not back anywhere close to sort of where we were.
Two years ago in terms of predictability of the supply chain.
There is still a lot of.
Heroic acts that are required to.
Maintain availability of product across all of the different skus that we offer in all the different geographies that we offer so it's still a tough environment, but it hasnt gotten tougher in the last two or three months and I guess I would say we're hopeful we don't have strong indications that this is going to occur, but we're hopeful that it will.
<unk> some in terms of how tight it is in the back half of the year.
That's great to hear thank you so much.
Sure. Thank you.
Our next question comes from Michael Funk.
With Bank of America. Your line is now open.
Yeah. Thanks, Thank you very much for the questions guys.
Nice results just thinking about the opportunity for improved revenue growth.
Where is the upside.
Just wondering if you could highlight a few areas where you think that there is greater.
Greater potential either for penetration.
Driving price increases or.
Even through product enhancement, so where is the greatest opportunity in European NIM to improve revenue growth.
I would say this is Steve Trundle speaking.
We're putting a lot of focus on those areas that we think have the greatest opportunity to drive growth.
And my last question was about energy hub. So we're excited about that as one.
I talked in my prepared remarks, a bit about commercial in the.
The meaning to us when a customer actually.
It takes the full stack of technology that we offer to an SMB customer I talked about.
Meaningful potential RP lift there and the size of that market at $5 5 million.
Locations.
We have our eye on that and we think Thats, a domain where with additional investment in the product.
And then sales activity and in marketing activity, we can drive.
Even more growth than we already.
There were not at all sort of bullish on the residential market I'm, sorry, bearish, we like the residential market. So we're continuing to make investments there as we did with smart Army. This past quarter and think that we'll continue to see growth there, but the challenge. We have is we are pretty heavily penetrated on the north American residential side.
<unk>.
We will still grow but we're growing internationally, but I would say if I were to sort of look at them all right now our focus on on what we're doing in commercial and what we're doing with video or the <unk>.
Two of the main drivers I would say for incremental growth in the future.
Got it and I guess, the flip side of the question, what's the biggest risk right now given the macro forecast or is it more on the MTR side net dollar retention.
Or what is the biggest risk and then what are you monitoring externally.
To gauge that risk.
Yes, it's a good question.
Fortunately for us at the moment most companies will probably answer that question I would say international I can size.
It's always a tough thing to predict what sort of event globally is going to change the international markets.
Don't think that's the right answer for US just yet because international for US is still at sort of four 5% 4% of revenues. So we don't have a ton of exposure there, it's more of a growth opportunity than a real risk.
<unk>.
I would say the primary thing that we keep our eye on each day is.
Are we doing a good job in.
In helping our service providers build their business and executed on their deliverables to the customer and providing.
Providing good value to the service providers and are we making sure the things big risk would be if things for example didn't work the way.
I expect them to work.
That's probably the thing that occupies us it's not an external event, but more of an internally controllable activity in it.
Occupies more of our attention than anything which is already doing a good job with our service provider partners and are maintaining those very valued relationships. Thank you.
Your question on <unk> I appreciate your questions and thank you very much.
Sure.
Thank you.
Our next question comes from Brian Martin.
Imperial capital your line is now open.
Great So got two different.
All lines of questions real quick on the finance line.
Can you talk about the weighting of adjusted EBITDA in third quarter versus fourth quarter.
The reason for this question as the last two years you have been more heavily weighted.
In terms of adjusted EBITDA in the third quarter versus the fourth quarter just wanted to see if that trend will continue.
Hey, Brian Good question. So this is <unk> by the way so we expect it to be relatively.
Similar Q3, and Q4, but flat spread evenly over Q3 Q4.
Okay.
So it should be even in third quarter and fourth quarter now sorry different lineup.
A whole different line of question.
Is about the door Board acquisition.
That you did in May can you talk a little bit about how you are positioned there I know butterfly amex as a dominant player in there I know smart rent and latch or trying to get into that market that.
Entercom market can you talk about how you are positioned now and Youre your runway for growth in that area.
Sure.
Yes.
Our port was relatively <unk>.
Small acquisition I would characterize as an aqua hire that we roll into our <unk>.
Central.
Business, which is in the other segment.
And <unk> central is focused on both the vacation rental market and the multifamily market and obviously the Entercom solution is an important component of the.
Of the multifamily market and I'd say, we're doing there is sort of twofold one is working.
Working to several fold actually first is getting the service providers setup.
The sales engine to continue to.
Gained traction in the multifamily space the multifamily space has gotten.
Really crowded in the last two years and there is a lot of.
There is always a point, where you look at it you say is that.
The business model, there one that I want to pursue and if we look at some of the other companies you referenced.
In our opinion, if we really sort of double click on the business model. There are places, where it's better for us to just say no.
It's not necessarily a business, we want at that level with that cost structure and with that expected revenue streams. So I would say, we're being a little more selective in how we go to market and what types of business.
We take and then on the specifically on the Entercom solution.
We are bringing to market a internally generated sort of door port solution, but also are open to partnerships and have partnerships with other intercom solutions that may already be installed and may be working well.
For a given building.
Great. Thank you very much.
Sure.
As a reminder to ask a question at this time, Please press star one one.
Our next question comes from the line of Dillon Heslin with Roth Capital. Your line is open.
Hey, good afternoon, thanks for taking my questions.
Firstly, if I could.
On the <unk>.
Relative stays a little bit.
Pacific Li.
Against the DIY sort of following up on on the <unk>.
Housing market.
I mean have you seen anything in terms of competition.
You're either taking share or getting more cap sure.
It has that combat.
Central higher subscriber acquisition costs.
Okay.
Okay.
We've always said that.
For the most part.
The DIY customer is a different customer than the one that is calling one of our service providers.
Not universally the case, but usually the case and therefore.
It's usually more likely that one of our end subscribers is comparing a couple of different service provider options.
Then it is that theyre going to be sort of comparing doing it themselves versus getting a full security solution thats not to say that some of the the DIY offerings aren't great and we even have some.
Some pretty successful.
Service providers that sell our offering through a DIY format, but I would say in the second quarter overall, no we didn't really feel any pain.
Or any new pay in any way from the DIY segment, if anything we were.
Pleasantly I would say surprised by the.
Subscriber additions that are service providers were able to deliver.
And we were able to two to.
To exceed expectations on the SaaS line and didn't really experience any new.
Competitive paint we may be taking share I don't really know, but I suspect it's just that the.
The market we serve as is.
Is more apt to buy them then.
A couple of years ago.
Thank you.
A follow up could.
Could you could you talk at all about sort of the mix installs.
<unk> versus <unk> between residential and commercial.
Yes, commercial revenue was about 7% of SaaS, which is up a little bit.
Year over year and quarter over quarter. So typically if you break out the <unk>.
Amount of commercial SaaS revenue that we achieved in the quarter I would say commercial is growing at about 25% year over year. So we're seeing good growth there and specifically an open eye, we're seeing very good growth in open eye.
And we're very proud of the achievement of all of us being able to have more of their revenue.
Actually coming as SaaS revenue.
A year ago their SaaS revenue was $5 million in this quarter. There are SaaS revenue was $1 5 million. So we're seeing a very good good progress and good growth in commercial.
Thank you.
Thank you.
Thank you.
And I'm currently showing no further questions at this time. This does conclude today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
[music].
Yes.
Okay.
[music].