Q2 2024 Alarm.com Holdings Inc Earnings Call
i
Speaker Change: Good day and thank you for standing by. Welcome to the Alarm.com second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session you need to press star 1 1 on your telephone. You will then hear an automated message device and your hand is raised.
Matthew Zartman: To withdraw your question, please press star 1 1 again. Please be advised today's conference is being recorded. I would like to hand the conference over to your speaker today, Matthew Zartman, Vice President, Strategic Communications and Investor Relations. Please go ahead.
Operator: Thank you, Kevin. Good afternoon, everyone, and welcome to Alarm.com's second quarter 2024 earnings conference call. Please note that this call is being recorded. Joining us today are Steve Trundle, our CEO, and Steve Valenzuela, our CFO.
Matthew Zartman: Thank you, Kevin. Good afternoon, everyone, and welcome to Alarm.com's second quarter 2024 earnings conference call. Please note that this call is being recorded.
Speaker Change: Joining us today are Steve Trundle, our CEO , and Steve Valenzuela, our CFO . During today's call, we'll be making four looking statements, which are predictions, projections, estimates, and other statements about future events.
Operator: During today's call, we'll be making four forward-looking statements, which are predictions, projections, estimates, and 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 our Form 8-K, which will be filed shortly with the SEC, along with the associated press release.
Speaker Change: 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.
Speaker Change: We refer you to the risk factors discussed in our quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly with the SEC, along with the associated press release.
Operator: The call is subject to these risk factors, and we encourage you to review them. Warm.com assumes no obligation to update forward-looking statements or other information, which speak only as of their respective dates. In addition, several non-gap financial measures will be discussed on the call; a reconciliation of the gap to the non-gap measures can be found in today's press release on our investor relations website. I'll now turn the call over to Steve Trundle. Steve?
Speaker Change: The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or other information which speak as of their respective dates.
Speaker Change: In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to the 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. Steve?
Steve Trundle: Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report financial results for the second quarter that exceeded our expectations. SAS and license revenue in the second quarter grew to $155.9 million, and adjusted EBITDA was $42.8 million. During the quarter, Alarm.com and our service provider partners continued to drive organic growth in the commercial, international, and energy hub business. We also increased our balance sheet flexibility with a $500 million Convertible Notes Offer.
Steve Trundle: Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report financial results for the second quarter that exceeded our expectations.
Steve Trundle: SAS and license revenue in the second quarter grew to $155.9 million and adjusted EBITDA was $42.8 million.
Speaker Change: During the quarter, Alarm.com and our service provider partners continue to drive organic growth in the commercial, international, and energy hub businesses.
Speaker Change: We also increased our balance sheet flexibility with a $500 million Convertible Notes offering.
Steve Trundle: I want to thank our service provider partners and our employees for their contributions to our results. On today's call, I'll cover recent developments in our residential and commercial business. In the second quarter, we continue to see the term in the residential account base remain below the historical average. This is consistent with our expectations and in line with our experience in prior periods of economic software. With mortgage rates remaining elevated, people are moving less.
Speaker Change: I want to thank our service provider partners and our employees for their contributions to our results.
Speaker Change: On today's call, I'll cover recent developments in our residential and commercial businesses.
Speaker Change: In the second quarter, we continued to see that term in the residential account base remained below the historical averages.
Speaker Change: This is consistent with our expectations and in line with our experience in prior periods of economic softness.
Steve Trundle: Instead, they are investing in their existing homes and staying put. We believe that an additional factor contributing to lower residential churn in the last few quarters has been the fact that a higher percentage of systems today include a number of capabilities that are used routinely by the consumer. System Engagement and the Attachment of Advanced Devices or Capabilities, like Video and Video Analytics. Smart Alarm.com thermostats and Smart Locks significantly increase account survival and lifetime value over time. So we are pleased to see that the attachment rate of video services on new residential accounts nudged higher to 53% during the second quarter. This followed several quarters of the rate hovering around 50%.
Speaker Change: With mortgage rates remaining elevated, people are moving less. Instead, they are investing into their existing home and staying put.
Speaker Change: We believe that an additional factor contributing to lower residential churn in the last few quarters has been the fact that a higher percentage of systems today include a number of capabilities that are used routinely by the consumer.
Speaker Change: System engagement and the attachment of advanced devices or capabilities like video and video analytics, SmartAlarm.com thermostats and smart locks significantly increase account survival and lifetime value over time.
Speaker Change: So we are pleased to see that the attachment rate of video services on new residential accounts nudged higher to 53% during the second quarter.
Speaker Change: This followed several quarters of the rate hovering around 50%.
Steve Trundle: Since launching our video analytics solution in the fourth quarter of 2018, the video attachment to new accounts has increased more than two and a half times. Several recent new products, including our 750 video doorbell and our new floodlight camera, combined with our enhanced remote video monitoring central station integrations, appear to be well received by the residential markets we serve. To better serve our partners who are delivering these more advanced systems to the market, we recently introduced a generative AI capability to our service provider support platform. We trained a large language model on our complete database of product information, support, installation, and training content.
Speaker Change: Since launching our video analytics solution in the fourth quarter of 2018, the video attachment to new accounts has increased more than two and a half times.
Speaker Change: Several recent new products, including our 750 video doorbell and our new floodlight camera combined with our enhanced remote video monitoring central station integrations, appear to be well received by the residential markets we serve.
Speaker Change: To better service our partners who are delivering these more advanced systems to the market, we recently introduced a generative AI capability to our service provider support platform.
Speaker Change: We trained a large language model on our complete database of product information, support, installation, and training content. The chat-based interface we created is accessible to technicians in our mobile tech app.
Steve Trundle: The chat-based interface we created is accessible to technicians in our mobile tech app. This allows technicians to seamlessly access synthesized information. From all our support resources while they are in the field actively engaged in an installation or supporting a subscriber. Nearly 2,000 of our partners have adopted and used this capability since its release. Now, let me shift to an update on our commercial business. We believe that the commercial market remains fragmented and is in the early stages of a significant transition to cloud-based solutions that are more capable across the enterprise, less expensive to maintain, and easier to install and use.
Speaker Change: This allows technicians to seamlessly access synthesized information from all our support resources while they are in the field actively engaged in installations or supporting subscribers.
Speaker Change: Nearly 2,000 of our partners have adopted and used this capability since its release.
Speaker Change: Now let me shift to an update on our commercial business.
Speaker Change: We believe that the commercial market remains fragmented and is in the early stages of a significant transition to cloud-based solutions that are more capable across the enterprise, less expensive to maintain, and easier to install and use.
Steve Trundle: As this market shift unfolds, we are leveraging our competitive advantages in SaaS software, reliability, and our service-oriented partner business model to capture share. Our commercial offering is a purpose-built, end-to-end solution that unifies intrusion, access control, and video capabilities. We're also enabling integrated solutions for fleet management and active shooter response. I'm particularly pleased with the progress we have made with our access control solution. We brought it to market several years ago, and the team has worked closely with our partners to drive a steady cadence of enhancements like mobile credentials, which allow users to access a property using just their smart devices.
Speaker Change: As this market shift unfolds, we are leveraging our competitive advantages in fast software, reliability and our service-oriented partner business model to capture share.
Speaker Change: Our commercial offering is a purpose-built, end-to-end solution that unifies intrusion, access control, and video capabilities. We're also enabling integrated solutions for fleet management and active shooter response.
Speaker Change: I'm particularly pleased with the progress we have made with our access control solution.
Speaker Change: which we brought to market several years ago. The team has worked closely with our partners to drive a steady cadence of enhancements like mobile credentials which allow users to access a property using just their smartphone.
Steve Trundle: We also added elevated enterprise management so that larger commercial customers can create and manage access plans that align with their more complex organizational structure. And we launched CellConnector so that our access control solution can operate without the challenges of deploying connected devices on the customer's IT network. This quarter, we also began to introduce elevator control with our access control solution. The steady work by our access control team has expanded our product fit, and our partners have successfully introduced our solution in more sales cycles. As a result, we achieved a few nice milestones in the second quarter.
Speaker Change: We also added elevated enterprise management so that larger commercial customers can create and manage access plans that align with their more complex organizational structures.
Speaker Change: And we launched CellConnector so that our access control solution can operate without the challenges of deploying connected devices on the customer's IT network.
Speaker Change: This quarter, we also began to introduce elevator control with our access control solution.
Speaker Change: The steady work by our access control team has expanded our product debt and our partners have successfully introduced our solution in more sales cycles.
Steve Trundle: Our access control platform now powers over 100,000 doors and 2 million active user credentials. We have a diverse base of access control customers across approximately 30 different worldwide markets. They range from small businesses with two to three doors to large-scale enterprise customers with hundreds of doors to manage. One of our multi-location accounts includes nearly 1,000 doors. Another commercial account manages over 15,000 employee access credentials through our service.
Speaker Change: As a result, we surpassed a few nice milestones in the second quarter. Our access control platform now powers over 100,000 doors and 2 million active user credentials.
Speaker Change: We have a diverse base of access control customers across approximately 30 different worldwide markets.
Speaker Change: They range from small businesses with two to three doors to large-scale enterprise customers with hundreds of doors to manage.
Speaker Change: One of our multi-location accounts includes nearly 1,000 doors.
Speaker Change: Another commercial account manages over 15,000 employee access credentials through our service.
Steve Trundle: We're pleased that our service provider partners and our platform can serve such a wide market and we are excited to continue advancing our solution and driving growth in this area. Before I hand things over to Steve Valenzuela, I want to touch upon the convertible senior notes offering that we closed during the second quarter. We took advantage of what we felt was a strong convertible bond market to put more dry powder into our business so that we could continue to be optimistic about our corporate development initiatives.
Speaker Change: We are pleased that our service provider partners and our platform can serve such a wide market and are excited to continue advancing our solution and driving roads in this area.
Steve Valenzuela: Before I hand things over to Steve Valenzuela, I want to touch upon the convertible senior notes offering that we closed during the second quarter.
Steve Valenzuela: We took advantage of what we felt was a strong convertible bond market to put more dry powder into our business so that we can continue to be optimistic in our corporate development initiatives.
Steve Trundle: We are pleased with the strong market interest in our bond offering and the turns we secured, including the 2.25% interest rate. As I have indicated in the past, our corporate development strategy is to be deliberate in pursuing acquisitions that are consistent with our strategy and support our partners. The convertible bond transaction included a $75 million stock buyback and a cap call transaction to reduce future dilution. We anticipate continuing buyback activity from time to time consistent with our board's authorization.
Steve Valenzuela: We're pleased with the strong market interest in our bond offering and the terms we secured, including the 2.25% interest rate.
Speaker Change: As I have indicated in the past, our corporate development strategy is to be deliberate in pursuing acquisitions that are consistent with our strategy and support our partners.
Speaker Change: The convertible bond transaction included a $75 million stock buyback and a cap call transaction to reduce future dilution.
Steve Valenzuela: We anticipate continuing buyback activity from time to time consistent with our board's authorization.
Steve Trundle: In summary, I'm pleased with our quarterly results and the growth we continue to see across the business. 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. With that, I'll hand things over to Steve Valenzuela to review our financials.
Speaker Change: In summary, I'm pleased with our quarterly results and the growth we continue to see across the business. 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.
Steve Valenzuela: With that, I'll hand things over to Steve Valenzuela to review our financials. Steve?
Steve Valenzuela: Thanks, Steve. I'll begin with a review of our second quarter 2024 financial results and then provide our updated guidance before opening the call for questions. Second quarter staff and license revenue of $155.9 million grew 11% from the same quarter last year. Our SAS and licensed revenue visibility remains high, with a revenue renewal rate of 94% in the second quarter, at the higher end of our historical range. Part of another revenue in the second quarter was $77.9 million, up from $72.9 million in Q1 2024, mainly due to some strengthening in video camera sales.
Steve Valenzuela: Thanks, Steve. I'll begin with a review of our second quarter 2024 financial results and then provide our updated guidance before opening the call for questions.
Steve Valenzuela: 2nd quarter, staffs and licensed revenue of 155.9 million who are 11% from the same quarter last year.
Steve Valenzuela: Our SAS and licensed revenue visibility remains high, with a revenue renewal rate of 94% in the second quarter, at the higher end of our historical range.
Steve Valenzuela: Part of another revenue in the second quarter was $77.9 million, up from $72.9 million in Q1 2024, mainly due to some strengthening in video camera sales.
Steve Valenzuela: Total revenue was $233.8 million for the second quarter, growing 4.4% year-over-year. SAS and Lexan's gross margin for the second quarter was 85.8%, up about 120 basis points year-over-year. Hardware gross margin was 24% for the second quarter, up from 22.4% in the year-ago quarter, mainly due to product mix with increased commercial hardware product contribution. Total gross margin was 65.2% for the second quarter, up from 61.4% for Q2 2023. Due to increased SAS and HARPRA margins and a higher mix of margin-rich status revenue and licensed revenue.
Steve Valenzuela: Total revenue of $233.8 million for the second quarter, grew 4.4% year-over-year.
Speaker Change: Sath and Lexan's gross margin for the second quarter was 85.8% up about 120 basis points a year of year.
Steve Valenzuela: Hardware gross margin was 24% for the second quarter, up from 22.4% in the year-ago quarter, mainly due to product mix with increased commercial hardware product contribution.
Steve Valenzuela: Total gross margin was 65.2% for the second quarter, up from 61.4% for Q2 2023 due to increased SAS and HARPRA margins.
Steve Valenzuela: and a higher mix of margin rich stats and license revenue.
Steve Valenzuela: Turning to operating expenses, R&D expenses in the second quarter were $65.7 million, compared to $60.9 million in the second quarter of 2023. We ended the second quarter with 1,155 employees in R&D, up from 1,053 employees in Q2 2023. Total headcount increased to 233 employees for the second quarter, compared to 1900 and 9 employees in the year-ago quarter.
Steve Valenzuela: Turning to operating expenses, R&D expenses in the second quarter were 65.7 million compared to 60.9 million in the second quarter of 2023.
Steve Valenzuela: We ended the second quarter with 1,155 employees in R&D, up from 1,053 employees in Q2 2023.
Steve Valenzuela: Total headcount increased to 2,033 employees for the second quarter, compared to 1,909 employees in the year-ago quarter.
Steve Valenzuela: Sales and marketing expenses in the second quarter were $27.8 million, or 11.9% of total revenue, up from $23.8 million, or 10.6% of revenue in the same quarter last year, mainly due to conference expenses and more marketing program spending. Our G&A expenses in the second quarter were $26.1 million, down from $28.8 million, mainly due to lower legal expenses. In the second quarter, GAAP net income was $33.5 million, up from GAAP net income of $15.8 million for Q2 2023.
Steve Valenzuela: Sales and marketing expenses in the second quarter were $27.8 million or 11.9% of total revenue up from $23.8 million or 10.6% of revenue in the same quarter last year.
Steve Valenzuela: mainly due to conference expenses and more marketing program spending.
Steve Valenzuela: Our G&A expenses in the second quarter were $26.1 million, down from $28.8 million, mainly due to lower legal expenses.
Steve Valenzuela: In the second quarter, GAAP net income was $33.5 million, up from GAAP net income of $15.8 million for Q2 2023.
Steve Valenzuela: Non-GAAP Adjusted Unit for the 2nd quarter was 42.8 million, up 17.8% from 36.4 million for Q2 2023. Non-GAAP-adjusted net income was $32 million, or $0.58 per diluted share, in the second quarter, compared to $26.6 million, or $0.49 per share, for the second quarter of 2023. Turning to our ballots.
Steve Valenzuela: Non-GAAP-adjusted EBITDA in the second quarter was $42.8 million, up 17.8% from $36.4 million for Q2 2023.
Steve Valenzuela: Non-GAAP-adjusted net income was $32 million, or $0.58 per diluted share, in the second quarter, compared to $26.6 million, or $0.49 per share, for the second quarter of 2023.
Steve Valenzuela: We ended the second quarter with $1.1 billion of cash and cash equivalents, up from $697 million at December 31st, 2023. During the quarter, we issued $500 million in convertible notes that mature in June 2029. As part of the transaction, we used $75 million to repurchase 1.1 million shares of our common stock at $67.14. We also used $63 million to purchase CapCalls, which bid up the convertible bond conversion premium from 30% to 100% for an effective conversion price of $134.28.
Steve Valenzuela: Turning to our balance sheet.
Steve Valenzuela: We ended the second quarter with $1.1 billion of cash and cash equivalents, up from $697 million at December 31st, 2023.
Steve Valenzuela: During the quarter, we issued $500 million in convertible notes that mature in June 2029.
Steve Valenzuela: As part of the transaction, we used $75 million to repurchase 1.1 million shares of our common stock at $67.14.
Steve Valenzuela: We also used $63 million to purchase CapCalls to bid up the convertible bond conversion premium.
Steve Valenzuela: from 30% to 100% for an effective conversion price of $134.28.
Steve Valenzuela: As a reminder, our original $500 million convertible bonds mature in January, 2021. Turning to our financial outlook for the third quarter of 2024, we expect SAS and licensed revenue of $157.3 to $157.5 million. Our third quarter guide includes a $1.25 million reduction in SAS and license revenue resulting from the CrowdStrike outage that temporarily impacted some of our operations.
Steve Valenzuela: As a reminder, our original $500 million convertible bonds mature in January 2026.
Steve Valenzuela: Turning to our financial outlook, for the third quarter of 2024, we expect SAF and license revenue of $157.3 to $157.5 million.
Steve Valenzuela: Our third quarter guide includes a $1.25 million reduction in SAS and license revenue, resulting from the CrowdStrike outage that temporarily impacted some of our operations.
Steve Valenzuela: For the full year of 2024, we are raising our expectations for SAS and license revenue to be between $626.8 and $627.2 million, up from our prior guidance of $624.5 to $625 million. We are projecting total revenue for 2024 of $920.8 to $931.2 million, up from our prior guidance of $914.5 to $931 million, which includes estimated hardware and other revenue of $294 to $304 million. We estimate that adjusted Eputoff for 2020-24 will be between 165-167 million, up from our prior guidance of 164-166 million.
Steve Valenzuela: For the full year of 2024, we are raising our expectations for Assassin Lexington's review to be between 626.8, the 627.2 million, up from our prior guidance of 624.5, the 625 million.
Steve Valenzuela: We are projecting total revenue for 2024 of 920.8
Steve Valenzuela: and 9331.2 million.
Steve Valenzuela: Increased from our prior guidance of 914.5 to 9131 million.
Steve Valenzuela: which includes estimated hardware and other revenue of $294 to $304 million.
Steve Valenzuela: We estimate that adjusted EBITDA for 2024 will be between $165 to $167 million, up from our prior guidance of $164 to $166 million.
Steve Valenzuela: Non-GAAP net income for 2024 is projected to be $119.5 to $120.5 million, or $2.06 to $2.07 per diluted share, compared to our prior guidance of $118.5 to $119.5 million, or $2.14 to $2.16 per diluted share. As a reminder, our new convertible bond issuance increased the total number of diluted shares outstanding. EPS is based on an estimate of 58.1 million weighted average diluted shares outstanding. We currently project our non-gap tax rate for 2024 to remain 21% under the current tax rules.
Speaker Change: Don Gap Knitting Company 2024 is projected to be $119.5 to $120.5 million.
Steve Valenzuela: for $2.06 to $2.07 per diluted share compared to our prior guidance of $118.5 to $119.5 million for $2.14 to $2.16 per diluted share.
Steve Valenzuela: As a reminder, our new convertible bond issuance increased the total number of diluted shares outstanding.
Steve Valenzuela: EPS is based on an estimate of 58.1 million, weighted average diluted shares outstanding.
Steve Valenzuela: We currently project our non-gap tax rate for 2024 to remain a 21% under current tax rules.
Steve Valenzuela: We expect full year 2024 stock-based compensation expense of $51 to $53 million.
Steve Valenzuela: We expect full year 2024 stock-based compensation expense of $51 to $53 million. In summary, we are focused on executing on our 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. Thanks.
Steve Valenzuela: In summary, we are focused on executing on our business plan and investing in our long-term strategy while continuing to deliver profitable growth.
Operator: Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 11 again. We will pause for a moment while we compile our Q&A list. Our first question comes from Adam Tindle with Raymond James. Your line is open.
Speaker Change: and with that operator, please opt in the call for Q&A.
Speaker Change: Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 11 again. We will pause for a moment while we compile our Q&A roster.
Adam Tindle: Okay, thanks. Good afternoon.
Speaker Change: Our first question comes from Adam Tindle with Raymond James. Your line is open.
Adam Tindle: Okay, thanks. Good afternoon. Steve Trundle, I wanted to ask on the topic of Gen-AI as you get more insight. You mentioned in your prepared remarks
Steve Trundle: Steve Trundle, I wanted to ask you something on the topic of Gen AI as you get more insight. You mentioned in your prepared remarks the concept of utilizing it for text, which makes a lot of sense. I'm just curious, is that something that you are monetizing separately, or are you bundling that into the app? And then, on a broader topic, as you kind of think about Gen AI, where does it go from here and areas that you think you could potentially monetize and how Alarm.com can differentiate?
Speaker Change: The concept of utilizing it for text which makes a lot of sense.
Speaker Change: I'm just curious, is that something that you are monetizing separately or are you bundling that into the app and then on a broader topic as you kind of think about Gen AI? Where does it go from here and areas that you think you could potentially monetize and howalarm.com can differentiate?
Speaker Change: Good question, yes, on the implementation that's there to support our technicians, that's bundled into the mobile tech.
Speaker Change: Application and it's really intended to help them sort of while they're on the go more quickly get answers to
Speaker Change: At the moment, more routine types of questions. If someone's on a job site and they've got a super complicated issue, it's a technician, we'll still get on the phone, and we often do, and hold their hand for, you know, one or two hours sometimes to get them through a complex...
Steve Trundle: But for routine stuff, the large language model really helps them get sort of quick and easy expedited answers, and we've seen pretty good usage there. More generally, in the offering, I think where you'll see us go is in tying the capabilities that are becoming available to what we're doing with video and specifically what we're doing with remote video monitoring. So you can imagine that a number of the operator actions when I'm, you know, if I were an operator today, and I'm watching camera activity, at some point, I may need to speak to a potential perp, or someone who's doing something they may not maybe shouldn't be doing, or maybe I'm not sure. You can imagine that we can leverage a lot of the work we're doing in this world to make that And that's, that's one of the several areas where we're headed.
Speaker Change: type of commercial installation. But for routine stuff, the large language model really helps them get sort of quick and easy expedited answers. And we've seen pretty good usage there.
Speaker Change: More generally, in the offering, I think where you'll see us go is
Speaker Change: Tyne the capabilities that are becoming available to what we're doing with video and specifically what we're doing with remote video monitoring so you can imagine that a number of the operator actions when I'm, you know, if I were an operator today and I'm watching camera activity.
Speaker Change: At some point, I may need to speak to a potential perp.
Speaker Change: or someone who's doing something they maybe shouldn't be doing or maybe I'm not sure. You can imagine that we can leverage a lot of the work we're doing in this world to make that entire process.
Speaker Change: More efficient for the operator in the central station, and that's that's where we're in one of the several areas where we're headed
Adam Tindle: Got it. It makes sense.
Speaker Change: Got it, makes sense. And congrats on the convert, you know, you're now flush with cash, I think near a billion, even after some of the things that you had to do with the convert. So I wonder if you could maybe just in light of that, talk about priorities. And in particular, you know, if we were to potentially even use that in one fell swoop, for example, for a larger acquisition, you know, you kind of think through that potential, what would be the key criteria
Steve Trundle: And congrats on the conversion. You know, you're now flush with cash, I think near a billion, even after some of the things that you had to do with the conversion. So I wonder if you could maybe just in light of that, talk about priorities. And in particular, you know, if we were to potentially even use that in one fell swoop, for example, for a larger acquisition, you know, you kind of think through that potential, what would be the key criteria that you would need to look for? Or do you think it's more likely this would be kind of piecemeal and maybe a more tuck in type? Thanks.
Speaker Change: that you would need to look for, or do you think it's more likely this would be kind of piecemeal and maybe do more tuck-in type? Thanks.
Steve Trundle: Well, we wanted to be in the position to do more than just tuck-ins. We've had, I think, a nice track record with some of the smaller, by today's standards, some of the smaller acquisitions over time, like we did with Object Video, like we did with Energy Hub, and OpenAI was a bit larger, but we want to be in a position to potentially look at things that are still larger than those.
Speaker Change: Well, we wanted to be in a position to do more than just tuck-ins.
Speaker Change: A nice track record with some of the smaller, by today's standards, some of the smaller acquisitions through time, like we did with Object Video, like we did with Energy Hub, and OpenEye was a bit larger, but we want to be in a position to even potentially look at things that are
Steve Trundle: So that's what we're doing. We're being optimistic. We're watching the market, and we think that now is a good time to have some cash available. We think we're probably the acquirer of choice in the security industry anyway. And the range of things we may look at is sort of any place in the IoT space, particularly if those IoT applications are consistent with their mission of providing people with more safety and convenience in their everyday life.
Speaker Change: Still larger than those.
Speaker Change: So, that's...
Speaker Change: You know, that's what we're doing. We're being optimistic, we're watching the market, we think that now is a good time to have some cash available. We think we're probably the acquirer.
Speaker Change: of choice, in the security industry anyway, and
Speaker Change: The range of things we may look at are sort of any place in the IoT space, particularly if those IoT applications are consistent with our mission of providing people more safety and convenience in their everyday lives.
Speaker Change: We're looking at a lot of things. We're not ruling out larger opportunities. We'll continue to do a trickle of tuck-ins as the right opportunities present themselves.
Speaker Change: And I'd say the primary criteria, I mean, one that we're careful about is we attempt to look at things the way, you know, I as a shareholder would look at things and make sure that whatever we're doing is...
Speaker Change: on a long-term basis, a creative to our shareholders and supportive of the metrics that we wanted to deliver. So those are, that's a little bit of commentary there. I can't speak to any specific opportunity, but we're active but opportunistic and deliberate in how we look think.
Operator: Yep, I think investors certainly appreciate that mindset. Thank you.
Saket Kalia: One moment for our next question. Our next question comes from Saket Kalia with Barclays. Your line is open.
Speaker Change: Yep, I think investors certainly appreciate that mindset. Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from Saket Kalia with Barclays, your line is open.
Saket Kalia: Hey guys, thanks for taking my questions here. Steve Trundle, maybe just to start with you, I really appreciated the commentary just on commercial in your prepared remarks. Can you maybe go one level deeper into, you know, what would a dealer have to rip and replace to bring their platform onto Alarm? And how do you sort of think about that TAM that you're going after?
Saket Kalia: Okay, great. Hey guys, thanks for taking my questions here.
Saket Kalia: Steve Trundle, maybe just to start with you, really appreciated the commentary just on the commercial in your prepared remarks.
Saket Kalia: Can you just maybe go one level deeper into, you know, what would a dealer have to rip and replace to bring their platform onto Alarm? And how do you sort of think about that TAN that you're going after?
Steve Trundle: Good question, Saket. So, the amount of rip and replace is actually declining somewhat. The team we have at OpenEye has, for a long time, supported a wide variety of cameras on the video side. Some of that support's enabled via a standard that is known as OnViv. So we support a pretty wide range of cameras, not just our own. And what that enables is for us to go to a potential commercial customer and get them on the platform, get them all the value of our cloud services without ripping out everything they have.
Saket Kalia: Good question, Saket. So, the amount of rip and replace is actually declining somewhat.
Speaker Change: The team we have at OpenEye has, for a long time, supported a wide variety of cameras on the video side. Some of that support is enabled via a standard that is known as OnViv.
Saket Kalia: So we support a pretty wide range of cameras, not just our own, and what that enables...
Saket Kalia: is for us to go to a potential commercial customer and get them on platform, get them all the value of our cloud services without ripping out everything they have. Obviously newer cameras and newer models.
Steve Trundle: Obviously, newer cameras and newer models enable more functionality. And especially on the analytics side, more of the analysis is being done on the edge of the camera. So more capabilities are possible with newer equipment. But you want to sort of land on it and then expand, and that's what we're trying to do. We brought that capability back into the full Alarm.com platform, by the way, meaning broader camera support.
Saket Kalia: in able more functionality and especially on the analytics side, more of the analytics is being done on the edge.
Saket Kalia: on the camera, so more capabilities are possible with newer equipment, but you want to sort of land and then expand and that's what we're trying to do. We've brought that capability back into the full alarm.com platform, by the way, meaning broader camera support.
Steve Trundle: On the access side, and I talked a little bit about the access control market, there we're using, in most cases, what are fairly common market standard readers, which are the devices that you actually see next to a door that someone scans in or out with. So we can go in, we in this case, I mean, of course, our service provider partner can go in and take over a lot of those existing readers and begin to deliver, you know, enhanced new services without a ton of rip and replace.
Saket Kalia: On the access side, and I talked a little bit about the access control market, there we're using fairly, in most cases, we're leveraging what are fairly common
Saket Kalia: Markets standard readers, which are the devices that you actually see next to a door that someone scans in or out with. So we can go in, in this case, I mean, of course, our service provider partner can go in.
Saket Kalia: and take over a lot of those existing...
Saket Kalia: Readers and Begin to Deliver, you know, enhanced new services without a ton of ripping the place. So, we try, we're increasingly trying to avoid having to always convince, especially the commercial customer and these bigger ones. You just can't go in with the ripping or place, message and be successful, very often. So, try to avoid that.
Steve Trundle: So we try, we're increasingly trying to avoid having to always, especially the commercial customer, these bigger ones, just can't go in with a rip and replace message and be successful very often. So we try to avoid that as much as we can. To your comment about the TAM, I mean, I think we're sort of in the early days in our penetration of the TAM. The TAM is generally regarded as every, you know, every small business or enterprise in North America, if we at least look at the North American TAM number of sites there. I'm trying to think, do we have sizing? Roughly four and a half, five million sites we think are available, and we're sort of steadily chipping away at that.
Saket Kalia: is, um...
Saket Kalia: As much as we can. To your comment about the TAM, I mean, I think we think we're sort of early days in our penetration of the TAM. The TAM is generally regarded as every
Saket Kalia: you know, every small business or enterprise in North America, if we at least look at the North American TAM, number of sites there, I'm trying to think, do we have sizing?
Saket Kalia: Roughly four and a half, five million sites we think are available and we're sort of steadily chipping away at that.
Saket Kalia: Got it. That makes a ton of sense. Steve Valenzuela, maybe for you, and apologies if I missed a couple of remarks, but did we sort of give an update on the mix of the business or of the SaaS business that comes from, you know, some of those higher growth areas like commercial, like video, and international? That's always just a really useful sort of lens given the mix shift that's happening in that business.
Steve Valenzuela: Got it. That makes a ton of sense. Steve Valenzuela, maybe for you, and apologies if I missed a pair of remarks, but did we sort of give an update just on sort of the mix of the business or of the SaaS business that comes from, you know, some of those higher growth areas like commercial, like video, and international? That's always just a really useful sort of lens given the mix shift that's happening in that business.
Steve Valenzuela: Yeah, the growth initiative has continued to do very well. We've actually refined it a bit. We looked at North American residential video and actually pulled that out of the growth initiatives because it was actually understating North America. So if you look at the growth initiatives, which we include in commercial, international, and energy hub, those represent about a quarter of our total revenue, and they're growing about 20 to 25% year over year.
Speaker Change: Sure, Saket. Yeah, the growth initiative has continued to do very well.
Speaker Change: We've actually refined it a bit. We've looked at North American residential video and actually pulled that out of the growth initiatives because it was actually understating North America. So if you look at the growth initiatives, which we include in commercial, international, energy hub.
Saket Kalia: Those represent about a quarter of our total SaaS, and they're growing about 20 to 25 percent here over here.
Saket Kalia: Very helpful. Thanks, guys. Thank you.
Operator: Thank you. One moment for our next question. Our next question comes from Darren Aftahi with Roth. Your line is open.
Speaker Change: Very helpful. Thanks, guys.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Thanks for watching!
Speaker Change: Our next question comes from Darren F. Tahai with Roth. Your line is open.
Darren Aftahi: Hey, how are you? Thanks for taking the time to answer my question. Just two, if I may, on the Gen AI initiative, I'm curious if that's going to result in cost savings relative to some of the kind of help you said you would you'd have to provide longer term and then on international. I know you guys have made some acquisitions in the past. And I'm kind of curious how those acquisitions kind of play into kind of manifesting some new international markets as we get maybe go forward into 2025. Thanks.
Speaker Change: Great, can you hear me?
Hey Derr: This is Hey Derr.
Speaker Change: Hey, how are you? Thanks for taking my question. Just two, if I may, on the Gen AI initiative, I'm curious if that's going to result in cost saving relative to some of the kind of help
Speaker Change: You said you would you'd have to provide a longer term and then
Speaker Change: On International, I know you guys have made some acquisitions in the past, and I'm kind of curious how those acquisitions kind of play into kind of manifesting some new international markets that we've given, maybe go forward in the 2020 class. Thanks.
Steve Trundle: Hey, Darren. Sure, the Gen AI, in theory, over time should drive some amount of reduction in in-person call volume. As I was mentioning in the prior question, what we're seeing right now are most of the calls that we can handle with AI. Those are fairly routine calls that might have taken us one or two minutes with a human support person otherwise.
Speaker Change: Hey there.
Speaker Change: Sure, the Gen-AI, in theory, over time should...
Speaker Change: drive some amount of reduction in in-person call volume. As I was mentioning on the prior question,
Speaker Change: What we're seeing right now are most of the calls that we can handle with AI. Those are fairly routine calls that might have taken us one or two minutes with a human support person otherwise. We do expect, and one of the things we actually pride ourselves on is
Steve Trundle: We do expect, and one of the things we actually pride ourselves on is We're really laying out great support for our service provider partners so that they're confident in their development of new products or in their adoption of new products and technology. So I don't think we're going to see a massive reduction in our capacity, you know, the capacity we have to maintain to support our partners, but there's probably a bit of a positive tailwind there over time. With regard to...
Speaker Change: really laying out great support for our service provider partners so that they're confident in their development of new products or in their adoption of new products and technologies.
Speaker Change: I don't think we're going to see a massive reduction in our capacity, you know, the capacity we have to maintain to support our partners, but there's probably a bit of a positive tailwind there over time. With regard to...
Steve Trundle: Yeah, you're referring back to an acquisition we did a year and a half or two years ago, which was EBS. We've had a lot of work underway there since the acquisition, and we're just getting to the point where that product, which is a much lower cost communicator that will work with a wide variety of international panels, is coming to market. So it's going to start showing up in the second half of this year, sort of just starting now.
Speaker Change: You're referring back out to an acquisition we did a year and a half or two years ago, which was EBS.
Speaker Change: We've had a lot of work underway there since the acquisition, and we're just getting to the point where that product, which is a much lower cost,
Speaker Change: Um...
Speaker Change: communicator that will work with the wide variety of international panels.
Speaker Change: is coming to market. So it's going to start showing up in the second half of this year.
Speaker Change: Just starting right now, so it's a good reminder or something we should probably watch and hopefully talk about an update further on towards the end of the year, but we are now beginning to get to market with the integrated version of that technology.
Steve Trundle: So it's a good reminder, something we should probably watch and hopefully talk about an update further on towards the end of the year. But we are now beginning to get to market with the integrated version of that technology.
Darren Aftahi: Great, that's helpful. Thank you. Yes.
Operator: One moment for our next question. Our next question comes from Danny Hoffer with J.P. Morgan. Your line is open.
Speaker Change: Great, that's helpful. Thank you.
Speaker Change: One moment for our next question.
Danny Hoffer: Hey guys, thanks for the questions. For the first, can you provide us with some color on the macro front, maybe what you're seeing with existing home sales bonds at all-time lows? And then on the second, in your prepared remarks, you noted commercial contribution was greater on the hardware side, which led to the margin improvement. Can you maybe elaborate on whether you're seeing varying behavior from residential versus commercial customers on the hardware side? Thanks. Yeah, sure. Good question.
Speaker Change: Our next question comes from Danny Hoffer with J.P. Morgan. Your line is open.
Danny Hoffer: Hey guys, thanks for the questions. For the first, can you provide us with some color on the macro front, maybe what you're seeing with existing home sales bonds with all-time lows?
Speaker Change: And then on the second, in your prepared remarks, you noted commercial contribution was greater on the hardware side, which led to the margin improvement. Can you maybe elaborate on whether you're seeing varying behavior from residential versus commercial customers on the hardware side? Thanks.
Steve Trundle: Yeah, sure, good questions. On the macro side, things looked sort of as expected in the second quarter. As I noted in my prepared remarks, we're seeing, you know, higher revenue retention because we think there are fewer moves on the residential side. Certainly, your housing data supports that.
Speaker Change: To us, things looked sort of as expected in the second quarter. As I noted in my prepared remarks, we're seeing, you know, higher revenue retention.
Speaker Change: because we think there are few removes on the residential side, certainly your housing data supports that, but those consumers who are buying
Steve Trundle: So, those consumers who are buying, in the second quarter, anyway, we saw a little bit of a move back towards what we had planned in terms of the size of systems that they're purchasing and the amount of hardware going into each installation. Same thing on the commercial side, actually. If we go back in time, you know, following our Q1 report, we indicated we'd seen a little bit of softness on the commercial side and the S&B side.
Speaker Change: In the second quarter, anyway, we saw a little bit of a move back towards what we had planned in terms of the size of systems that they're purchasing and the amount of hardware going into each installation. Same thing on the commercial side, actually. If we go back in time,
Speaker Change: You know, following our Q1 report, we indicated we had seen a little bit of softness on the commercial side and the S&B side.
Steve Trundle: In the second quarter, we saw basically those installations right on plan, so a little bit of a recovery on the hardware side, a little bit more access control, and more cameras going into the average install. So macros look to us on an overall basis to improve a tad on both the residential and the commercial side in the second quarter.
Danny Hoffer: In the second quarter, we saw basically those installations right at plan, so a little bit of a recovery on the hardware side.
Danny Hoffer: a little bit more access control, more cameras going in to the average install.
Danny Hoffer: Makro has looked to us on an overall basis to improve a tad on both the residential and the commercial side in second quarter.
Operator: Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1 1 on your telephone for our next question. Our next question comes from Stephen Sheldon with William Blair. Your line is open.
Speaker Change: Let's talk more, thanks!
Speaker Change: Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. One moment for our next question.
Speaker Change: Our next question comes from Stephen Shelton with William Blayer, your line is open.
Stephen Sheldon: Hey, thanks for taking my question. And just one for me, I just want you guys to think about alarm.com's commercial capabilities. How should investors really think about the rank order of opportunities there that could really move the needle over the next two to three years? And when you think about monetization, which applications, I guess, in framing another way, which applications are you the most optimistic about?
Stephen Shelton: Hey, thanks for taking my questions and just want for me, I just want you guys to think about alarm.com's most capabilities.
Stephen Shelton: How should investors really think about the rank order of opportunities there that could really move the needle over the next two to three years? You think about monetization. Which applications, I guess, in framing another way, which applications are you the most optimistic about?
Steve Trundle: Hey, Stephen, I would rank them on video, first and foremost, including analytics, you know, upside on the SAS line with improvements constantly on the analytics level, and then with remote video monitoring capabilities. So I'd rank that.
Speaker Change: Hey Stephen, I would rank them
Stephen Shelton: video, first and foremost, including analytics, upside on the SAS line with improvements constantly on the analytics level, and then with remote video monitoring capabilities. So I'd rank that first. I would then rank
Stephen Shelton: in terms of our growth axis control as the second piece of commercial that is growing nicely.
Steve Trundle: First, I would then rank, in terms of our growth, access control as the second piece of commercial that is growing nicely. A little further down would be intrusion and then active shooting detection and, and fleet monitoring are all things that, you know, have promise, but I probably think the bigger drivers are really what we're doing with video, and, and access control. And then, over time, we may, you know, introduce additional products into that category. But the big two right now, and the big one is really video. And then after that, a lot of the other pieces sort of support the video installation.
Stephen Shelton: Little further down would be intrusion and then active shooting detection and fleet monitoring of all things that...
Stephen Shelton: You know, have promise, but I probably think the bigger drivers are really what we're doing with video.
Stephen Shelton: and Access Control, and then over time we may introduce additional products into that category. But the big two right now, and the big one is really video and then after that, a lot of the other pieces sort of support to video installation.
Stephen Sheldon: Very helpful. Thank you.
Operator: And I'm not showing any further questions at this time, and so this does conclude today's conference and presentation. You may now disconnect and have a wonderful day.
Speaker Change: Very helpful. Thank you.
Stephen Shelton: Thank you, Stephen.
Speaker Change: And I'm not showing any further questions at this time, and so this does conclude today's conference and presentation. You may now disconnect and have a wonderful day.
Speaker Change: [inaudible]
Steve Trundle: Good question, yes, on the implementation that's there to support our technicians, that's bundled into the mobile tech application, and it's really intended to help them sort of while they're on the go more quickly get answers to, at the moment, more routine types of questions. If someone's on a job site, and they've got a super complicated issue, it's a technician. But we'll still get on the phone, and we often do, and hold their hand for one or two hours sometimes to get them through a complex type of commercial installation.
Adam Tindle: So we're looking at a lot of things. We're not ruling out larger opportunities. We'll continue to do a trickle of tuck-ins as the right opportunities present themselves, and I'd say the primary criteria. I mean, one that we're careful about is we attempt to look at things the way I, as a shareholder, would look at things and make sure that whatever we're doing is on a long-term basis, it's creative for our shareholders, and supportive of the metrics that we want to deliver. So that's a little bit of commentary there. I can't speak to any specific opportunity, but we're active but opportunistic and deliberate in how we look at things.