Q2 2023 Alarm.com Holdings Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the alarm Dot Com Q2, 2023 earnings 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 the session would need to press star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please.
Press Star wouldn't want again, please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today, Matt <unk>. Please go ahead.
Good afternoon, everyone and welcome to alarm Dot Com second quarter 2023 earnings Conference call. Please note that this call's being recorded joining us today from alarm Dot com are Steve Trundle, our CEO and Steve balanced whaler, our CFO during today's call, we will be making forward.
Looking statements, which are predictions projections estimates or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors.
Discussed in our quarterly report on Form 10-Q, and form 8-K, which will be filed shortly after this call with the SEC along with the associated press release. This call is subject to these risk factors and we encourage you to review these risk factors alarm dot com assumes no obligation to us.
Any forward looking statements or information, which speak as of their respective dates.
In addition, several non-GAAP financial measures will be discussed on the call.
A reconciliation of the GAAP and non-GAAP measures can be found in today's press release on our Investor Relations website I'll now turn the call over to Steve Trundle, you may begin.
Thank you Matt.
Afternoon, and welcome to everyone.
Pleased to report that our second quarter results exceeded our expectations SaaS and license revenue in the second quarter was $144 million.
On a non-GAAP growth rate of 13, 3% over last year, excluding by that.
Our adjusted EBITDA in the second quarter was $36 $4 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 increasingly diverse business continued to grow despite uncertain macro conditions are SaaS outperformance was driven by a growing subscriber base and increasing contributions from our growth initiatives.
Hardware outperformance was driven by sequential growth in the volume of camera cells consistent with solid account creation during the quarter and normalized channel inventory levels.
Our stronger than expected adjusted adjusted EBITDA line was driven by an increased focus on controlling costs, along with the higher performance and SaaS and hardware revenues.
In terms of our operations, we continue to focus on our growth strategies as we exploit the opportunities we see in commercial international video and our venture businesses.
Collectively SaaS revenue from these initiatives is growing faster than our total SaaS at about 25% on a trailing 12 month basis.
We're carrying nice momentum into the back half of the year and I believe we are well positioned to execute our annual plan.
On today's call I want to provide a few product updates around our video services platform and the development of our commercial business.
Again with the video services platform.
And the second quarter, we introduced a new video doorbell called the BBB 750 <unk>.
Now with three alarm dot com developed products in the market. Our video doorbell lineup offers our service providers unmatched choice flexibility and performance options.
This should allow us to drive up the attachment rate of our video doorbell through time.
We believe the 750 is the first battery free video doorbell on the market.
As you May know, even wire powered video doorbell still in bed and require a small battery that must be replaced periodically.
With no consumable parts. The 750 is the lowest maintenance video doorbell product that service providers can install.
Embedded batteries also restrict the typical video doorbell operating temperature range.
New 750 has an operating temperature range that is as much as 70 degrees fahrenheit wider than other leading video doorbell brands.
That's particularly important to our service providers in both the far north and the southwest.
750 became generally available in the second quarter, and we expect it to be adopted quickly as our service providers integrated into their offerings.
Our investments in video software and cameras are consistent with the opportunity we are seeing.
And the last two years, we've seen a double digit growth rate and the number of alarm dot com video cameras that are service providers installed monthly.
Adding our video solution to subscribers account contributes to higher ARPA and supports an eight to 10 year SaaS revenue stream.
I'll now shift to discuss the significant enhancements, we've made to our partner services platform. So.
That our service providers can better manage their commercial customer accounts.
As a reminder, our partner services platform is a broad suite of remote management software resources and business intelligence solutions with.
We design these capabilities to help our partners operate more efficiently, while deploying more devices and services to their customers.
We've put a lot of effort into wrapping our consumer facing technology with backend services and software that enable service providers to be successful with their broad deployment of our products.
This quarter, we expanded the business intelligence component of our partner services platform provide new insights into commercial account performance.
Our data science team was able to model the historical account characteristics.
And identify discrete attributes that are closely associated with lower customer attrition and greater everyday system engagement.
These are sites, where then rolled into a set of six specific best practices.
Our service providers can implement these practices to increase customer lifetime value from their high ARPA commercial accounts they.
They can also monitor implementation and their commercial account base and identify opportunities for additional improvements using our business intelligence reporting engine.
In summary.
I am pleased with our second quarter results and our execution of our plan through the first half of 2023 weeks.
We continue to expand our platform and market opportunity with the launch of innovative new products and the occasional acquisition that aligns with our long term growth strategy.
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 balance whaler to review, our financial results and provide guidance Steve.
Thanks, Steve ill begin with a review of our second quarter 2023 financial results and then provide our updated guidance before opening the call for questions.
Second quarter, SaaS and license revenue of $144 million grew eight 5% from the same quarter last year.
Excluding debit license revenue.
<unk> quarter 2023, non-GAAP adjusted SaaS and license revenue grew 13, 3% year over year on a comparable basis.
SaaS and license revenue includes connect software license revenue of approximately $5 9 million for the second quarter down as expected from $6 9 million in the year ago quarter.
Our SaaS and license revenue visibility remains high with a revenue renewal rate of 93% in the second quarter.
<unk> with our historical trends.
Hardware and other revenue in the second quarter was $83 4 million at the same level as Q2, 2022, and up $9 1 million or 12, 3% quarter over quarter.
Mainly due to an increase in sales of cameras and access door controllers.
Total revenue of $223 9 million for the second quarter grew five 2% year over year.
SaaS and license gross margin for the second quarter was 84, 6% down from 85, 6% in the year ago quarter, mainly due to lower license revenue.
Hardware gross margin was 22, 4% for the second quarter up from 17, 7% in Q2 2022, mainly due to favorable product mix with more commercial offerings.
Total gross margin was 61, 4% for the second quarter up from 59% in the year ago quarter, mainly due to the improvement in hardware margins.
Turning to operating expenses R&D expenses in the second quarter were $60 9 million compared to $54 2 million in Q2, 2022, mainly due to an increase in headcount and related compensation expenses.
We ended the second quarter with 1053 employees in R&D up from 919 employees in Q2 2022.
Total head count increased to 19 809 employees for the second quarter compared with <unk> hundred six employees in the year ago quarter.
Sales and marketing expenses in the second quarter were $23 8 million or 10, 6% of total revenue compared to $22 9 million or 10, 8% of total revenue in the same quarter last year, mainly due to increased headcount.
Our G&A expenses in the second quarter were $28 8 million down slightly from $29 3 million in the year ago quarter due to lower head count and compensation costs, partially offset by higher legal fees.
G&A expenses in the second quarter includes non ordinary course litigation expense of $1 3 million down from $5 3 million in the year ago quarter.
Non ordinary course litigation expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance.
In the second quarter GAAP net income was $15 8 million compared to GAAP net income of $10 8 million in the year ago quarter.
non-GAAP adjusted EBITDA in the second quarter was $36 4 million compared to $37 1 million in Q2 2022.
non-GAAP adjusted net income was $26 6 million or <unk> 49 per diluted share in the second quarter compared to $26 9 million or <unk> 49 per share for the second quarter of 2022.
Turning to our balance sheet, we ended the second quarter with $627 million of cash and cash equivalents up from $622 2 million at December 31, 2022.
During the quarter, we used $6 7 million to repurchase 134235 shares of our common stock at an average cost of $50 at 11.
Turning to our financial outlook for the third quarter of 2023, we expect SaaS and license revenue of 141, four to $141 6 million.
For the full year of 2023, we now expect SaaS and license revenue to be between 560 to three to $562 7 million up from our prior guidance of 555 nine to $556 5 million.
We are projecting total revenue for 2023 up $872 three to $887 7 million increase from our prior guidance of 855 nine to $881 5 million, which includes estimated hardware and other revenue of 300.
<unk> the $325 million.
We estimate that adjusted non-GAAP EBITDA for 2023 will be between $128 million to $131 million up from our prior guidance of $120 million to $125 million.
We expect adjusted non-GAAP EBITDA for the third quarter of 2023. The represented approximately 23, 5% the 24% of our annual guide.
Adjusted non-GAAP net income for 2023 is projected to be 92 to $94 2 million or $1 69 to $1 73 per diluted share up from our prior guidance of $84 $687 5 million.
$1 55 to $1 60 per diluted share.
EPS is based on an estimated $54 6 million weighted average diluted shares outstanding.
We currently project, our non-GAAP tax rate for 2023 to remain at 21% under current tax rules.
We expect full year 2023 stock based compensation expense of $52 million to $54 million.
In summary, we are focused on executing on our strategic business plan.
And investing in our long term strategy, while continuing to deliver profitable growth and with that operator. Please open the call for Q&A.
Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Our first question comes from Michael Funk with Bank of America. Your line is open.
Hi, Yes. This is Matt bouley on for Mike Funk.
Thanks for all that color on the call.
Love an update on international progress specifically the progress you've made with signing new service providers and an overall update on how you expect international revenue growth to trend over the next couple of years. Thanks.
Hey.
Matt This is Steve Trundle speaking so international.
I think last quarter.
Indicated growth was around 25% in that business overall.
And Thats.
Well I can update this quarter, but I think we've seen that trajectory sort of continue.
We.
In terms of signing new service providers, we're out all the time and feel like we have a nice pipeline and some additional ones that are going to come on towards the end of this year.
Can we sustain 25% sort of the next two years as the growth rate there I think it's conceivable.
That certainly would be our goal so business is going to continue to grow and become a more meaningful chunk of the.
Of the alarm Dot Com revenue base, if you look at international today, it's between four and 5% of total revenue.
Our long term target there is something.
And the 30% plus range. So we think theres plenty of runway and we're at.
Building that business every day.
Excellent Super helpful. And then one more if I could.
Could you provide a little bit of additional context on what commercial <unk> looks like today versus your standard residential <unk> and then as we move through 'twenty three 'twenty four maybe even 25 how that <unk>.
Could it could increase as you add more products and services.
Yes, good question.
The rule of thumb today is that commercial <unk>.
Brown to X.
Residential <unk>.
You have to remember in our case that the place where we're currently strongest commercially is really small business. So.
The average the average site if we're doing access control may have three or four doors that we're doing today.
Today on average that doesn't mean, we can't take down installations, where we're doing 80 to 100 doors, but on average today.
We're probably stronger on the SMB side than we are on the larger enterprise side as we continue to.
Build out and deploy with open eye with Sds and with our commercial the rest of our commercial platform I would expect that we'll have some gradual lift in that our pool and overtime.
Commercial will probably be closer to.
There will be accounts there'll be outliers, where it's.
$25 30 times, our standard residential are too, but on average you'll probably see a drift up to something closer to the three acts over over a long period of time.
Super helpful. Thank you very much.
One of them before our next question.
Our next question comes from Scott <unk> with Barclays. Your line is open.
Okay, Great Hey, good afternoon, guys. Thanks for taking my questions here and nice revision to the guidance.
Okay. Thank you.
Absolutely, Steve Trundle, maybe maybe to start with you.
On the back of the last questions I want to zoom out a little bit you talked about growth initiatives.
On the whole growing at about 25% in your prepared remarks, I think that's really interesting can you just maybe talk about how big that business is in total in and maybe rank order the components.
Those growth business that growth business as we just think about the drivers that makes sense.
Yeah, absolutely makes sense and good question.
In terms of the overall scope of what we describe as the growth initiatives. It's today around 30% of our total.
Total revenue and we bucket into that bucket.
Commercial video.
Energy hub.
And international So those are really the four key pillars of what we today characterizes as growth initiatives when we talk about that.
That particular growth rate that I mentioned in my prepared remarks so.
In terms of.
And that gives you a feel for sort of the scale and it's getting sort of bigger that bucket every quarter, obviously in terms of ranking them.
Hard for me to rank in terms of preference because I like.
I'd like each of those areas.
Long term growth drivers in the business in terms of where we are today I would say.
A size that.
Video and commercial are the two larger components of that mix after that it would be energy hub, which is growing nicely and it's probably the number three spot there and then international not far behind in the number of <unk>.
Spot in terms of rank ordering them.
Okay.
On today's contribution.
Does that help you on a customer that does thats really helpful actually.
Steve Venezuela, maybe maybe for the follow up for you and somewhat related.
Is there is there a different margin profile for these growth businesses I mean, I know that those are all very different and of course, they're all SaaS, but I'm just curious as we think about that 30% inching up to 35% to 40 in the quarters and years ahead.
How might that that increasing mix impact margins here as those growth businesses get bigger.
Yes, Steve Trundle talked about most of those growth businesses are in the alarm Dot Com segment, where we have SaaS gross margins in the mid Eighty's in the other segment, which includes energy hub generally that gross margins a little bit lower generally in the 65% to 69% range in the mid to upper 60 per.
<unk> range, so as the growth business continue to grow we might see a little bit of a drop in the gross margin matter of fact, if you look at Q1 versus Q2 2023 gross margin did come down a little bit on SaaS only about 80 basis points. Some of that is because the other segment actually is now 9% of our revenue which is good.
Good news it was 8% a year ago, and so there'll be a little bit of an impact, but I wouldn't expect more than 100 to 200 200 basis point impact on the SaaS gross margin and then just to pile on.
Steve is talking about the SaaS on the hardware piece.
These areas, particularly the commercial side tend to generate a little higher.
Margin on hardware revenue, that's just sort of normal course as that.
Hardware in the commercial sector is at least today, we are driving margins more in the 30% to 40% range. So yes. That's a good point. So what I was talking about was all SaaS gross margins hardware gross margins generally are commercial.
In the 40% range.
He was talking about.
Got it Super helpful guys I'll get back in queue. Thank you. Thank.
Thank you.
Our next question.
Our next question comes from Jack Nordson with Raymond James Your line is open.
Okay perfect. Thank you guys for taking my question.
Just a couple from me.
You could provide more color on the renewal rate I know it sort of hovered near that 90, 394% for a few years now.
How high could this go do you have any long term targets and what would be the puts and takes are driving that number up.
So generally it's been 92% to 94% has been the renewal rate and that's the revenue renewal rate, we did see it at one point during COVID-19 at 94% that's when there was fewer moves.
I think it's important to point out generally when there's fewer routes, there's lesser attrition and so that does contribute to a higher renewal rate.
Also I think that as we have video video analytics those are very sticky.
And think about that those really came out about four years ago in the lifetime of a customer is eight to 10 years. So over a long period of time with these enhanced services I would expect that we would see a higher retention rate and that takes time, because you have got 9 million subscribers over a long period of time.
It's like moving a large large boat right. It takes a while to shift over but over time, we should see an increase in that.
Retention rate as all of these value added services really cause even a longer lifetime already today, we have an eight to 10 year life, which is pretty long. So over a long period of time I would say I would be surprised if the retention rate doesn't go up.
Okay perfect I appreciate that color and then last one for me.
Just from a higher level could you talk about the puts and takes of returning to that 20% plus EBITDA margin range and maybe how we should think about that for fiscal 'twenty four.
Sure I guess higher level of maintenance.
Lee.
This is Steve Steve Trundle speaking sure.
I think you've seen us.
Yeah in the last quarter, we were able to come in a little better on an adjusted EBITDA than we expected.
There was some.
Increased focus on cost and we had some idle time.
John .
Both SaaS and hardware revenue that contributed to that in terms of the margin profile in the business.
It's a little early for us yet to really forecast exactly what we're going to do in 'twenty 2024, I don't want to shy away from the question, but I would say.
Generally I look at.
What are the items that what do we have on our stack and where are we in the growth cycle in the various.
Initiatives, we have underway and what sort of investment banks that we we don't want to.
So enamored with with.
Investment that we don't deliver EBITDA, but we're looking more in the.
What kind of move towards that direction, but I think our internal guideline that we shoot for is more in 17 and 18%.
Range right now.
Perfect Thats very helpful. Congrats on the quarter guys. Thank you.
Thank you.
One moment for our next question.
Our next question comes from Matt Pfau with William Blair. Your line is open.
Okay, great. Thanks for taking my questions I wanted to ask.
<unk> product released in some of the AI functionality that you're incorporating.
With your service providers does this help you on the cost side at all and if so is it meaningful enough to help you out from a margin perspective at all.
I would hope that through time it helps us on the cost side right now our focus is really on enhancing the services.
And the experience that our service providers have when they see support or help from us but.
One can imagine that as the service providers become more comfortable interacting with gopher when gopher delivers results faster and as good as a person that we may see some shift to to.
To the AI interface and that could help us on the support side of the cost equation.
That said, we've we've built our business around doing the best we can provide.
Yeah.
High quality support to the service providers. It is important for us to do that if we're continuing to ship new products they need to feel like.
If we work with alarm dot com and we're out there with a new product that we can get great support on it so.
We're going to continue that as as sort of a number one priority, but I can imagine that.
That with what we're doing with AI that over time, we could see some reduction in.
In person call volume I think there also are opportunities, though with the.
Large libraries to do some additional things internally and we've got a number of initiatives that are maybe not as customer focus, but just in terms of our own processes and things. We work on every day to take better advantage of.
Some of the AI capabilities, there and then of course.
The other piece of AI is what we do with video analytics and we've been doing that for a long long time, but there were product ties into capability and putting it out in the market.
Got it and I wanted to circle back to your comments around the new video doorbell that you released maybe if you could just give us some sort of idea what attach rates of video doorbell to subscribers of abandoned then with the release of this product is that.
Can we move that up meaningfully in your view.
Yes, good question.
Our hope so we have good product today out in the market with video doorbell.
We have.
I have taken feedback from service providers that in some markets, particularly those that have a lot of temperature extremes.
Yes, they are challenged when they install a video doorbell. If you have a south facing exposure on a haul when you have a front door there and its a 130 degrees outside with.
Or even a 110 with a lot of direct sunlight. It can be a challenge. So 750 solves that our goal would be to drive up attachment attachment spending.
25% to 30% range and.
We think theres, an opportunity to get that probably over time.
Closer to the 40%, 50% range some homes already have doorbell that ice thing is even if they have a third party dorval today it doesn't exclude us from providing the smart home experience. It's just we may not replace the existing doorbell, but we're seeing cases, where the existing doorbell is usually not our own so when I refer to existing doorbell third party products.
Where those are broken as well are not working well et cetera. So hope is that with the 750, we can drive up that attachment also reduced the likelihood I mean, we're constantly focused on ways to reduce attrition. So if you have a product in the market that.
That causes a problem for the consumer there is a risk that you no longer able to bill.
Services associated with that product. So we want to drive down any sort of revenue attrition that may come from.
Doorbell that go dormant because either they are battery is bad or their work they werent prepared to handle either the extreme heat or the extreme cold.
Perfect. Thanks for taking my questions.
Sure.
One moment for our next question.
Our next question comes from Darren <unk> with Roth <unk>. Your line is open.
Hey, guys. Thanks for taking my questions and congrats on the results.
Question for you.
Maybe I think IAC West you guys announced the LTE cell connector.
Well I think you made some comments on our strength in hardware being related to door controller access I guess can any update there in Rs II connected.
Yes.
Okay.
So we got cell connector out in second quarter. Its now being installed has it been a primary driver of the beat on hardware no. It wasn't a primary driver, but the access control business is growing.
Nicely in the mid <unk> range and that's continued now.
And I think cell connector is contributing to that that growth. It's one more way that a service provider can attack and installation with our products and bring a new subscriber.
Our services so.
The product has added selling it I just can't say that it by itself was a primary driver I think Steve mentioned the door controllers, probably were bigger driver because they are bigger chunk of the average installation and then video cameras.
For the second driver on the hardware.
Yeah.
That's helpful. Thanks, and then just kind of big picture, just given the housing market with interest rates and lack of supply.
I'm just curious like is that having a beneficial effect to your retention rate and then on the inverse are you seeing.
Slowdown in residential sort of new gross adds.
Yes, two part question there in terms of the interest rates impacting attrition.
Traditionally you're exactly right, but if you have fewer moves.
Market, then you will have.
You will have typically lower attrition than you may have a slightly subdued.
Sure.
Creation.
Creation rate as well because there are fewer new homeowners being originated we haven't really seen that yet on either front. So.
As far as we can tell the builder channel for us looks.
It looks pretty strong.
Builders continue to build a fair number of homes, there's been a nice backlog there. So we haven't really seen yet.
A decline in terms of.
Production go into new homes now, it's not a huge chunk of our business, but it's <unk>.
<unk> hundred 60000.
New installs a year. So it's meaningful we haven't seen that rate really drop in terms of.
In terms of attrition due to higher interest rates I don't think we've.
Necessarily seen a positive tailwind there yet it's been sort of steady state as evidenced by our <unk>.
Our revenue retention metric.
Fair enough. Thank you.
Sure.
One moment for our next question.
Our next question comes from Jack <unk> with Maxim Group. Your line is open.
Hi, guys. This is Jack could Erik calling in for Jack Vander already thanks for taking my questions I kind of want to elaborate.
Elaborate on that last question that was asked.
Last quarter, you guys talked on some macro trends one being activation seems strong with consumers in some areas. Some regions had maybe a slightly smaller footprint on number of devices year over year.
Given your guys' guidance raise it seems like that maybe that's not the case anymore, but are you still seeing that trend play out and you are you able to quantify that at all thank you.
Yes, good memory, so I think that we've seen over the last quarter I mean.
We were a little surprised ourself by.
By the outperformance on hardware during the quarter again, driven heavily by video camera sales. So.
So it seems like the consumer.
Really possibly two explanations there one is the consumer has.
Kind of a return to normal if you will a bit in the second quarter. The other is just that the <unk>.
Inventory levels being held by service providers normalized some.
During the quarter and.
I am not sure we have an update on exactly which of those two is the more likely contributor but.
Could we measure it yes, do I have that measurement.
Front of me right now the answer is unfortunately I don't.
Okay.
No that's helpful color.
My apologies if this is another kind of non question.
I'd also be interested to hear on a regional side you guys mentioned that Canada was performing.
Strangely well, but you didn't really know why that is have you guys been able to figure that out at all.
Canadian market Youre talking about Canadian market has been a good performer for a while so it's not surprising to us.
So I think he's referring back to prior quarter, maybe where we had a Q&A on that or something but no Canada has continued to be.
Strong for us.
I think if I were to say why it would be that we have.
Yes.
We have the right service providers in Canada, we've been in the market a long time.
<unk> appears to have been resilient there we haven't really seen any.
Drop off I would say in contribution coming from.
From Canada, So continues to be a good market.
Yes. Thank you.
Ill hop back in queue.
Thank you. Thank you.
And im not showing any further questions at this time. So this does conclude today's presentation. You may now disconnect and have a wonderful day.
Thank you. Thank you.
Okay.
[music].