Q3 2024 Alarm.com Holdings Inc Earnings Call
To remain at 21% under current tax rules.
Speaker Change: As Steve noted we are modeling the ADT ramps up to ADT Google rollout.
Speaker Change: We currently project our non-GAAP adjusted EBITDA for 2025.
Speaker Change: To be in the range of $188 million to $192 million.
Speaker Change: We will provide our annual guidance for 2025, when we report our fourth quarter 2024 financial results early next year.
Speaker Change: 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.
Speaker Change: 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 it yourself from the queue. Please press star one again.
Speaker Change: For a moment, while we compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: Our first question comes from Adam Tindle with Raymond James Your line is open.
Adam Tindle: Okay. Thanks, Good afternoon bear with me I'm, just crunching the numbers as best as I can here, Steve, but I wanted to ask on the SaaS guidance for fiscal 'twenty five.
Adam Tindle: I understand there's a lot of variables here and congrats on a strong Q3 that youre coming off of.
Speaker Change: I'm doing the math right Youre right I think youre going to finish this year at about 10, 5% SaaS growth for 2024 and the initial look for 2025, I think it's closer to six 5%.
Speaker Change: If you could maybe just walk through some of the building blocks on the Delta between those two I think ADT in particular.
Speaker Change: I think a lot of us had thought about somewhere in the neighborhood of 1.5% to 2% headwind related to that but I wonder if now that you have a little bit more visibility you've got some clarity on that so just some of the bridges from the strong finish in 2024 and our initial 2025 outlook would be helpful.
Adam Tindle: Hey, Adam this.
Steve Trundle: This is Steve Trundle speaking.
Speaker Change: Yes keep in mind that we're not yet calling guidance, we're going to do our full guidance after the fourth quarter, but in the initial look numbers.
Speaker Change: Youre doing the math correct.
Speaker Change: And there's really a couple of things there to point out first is as we've as we've said in the past we were anticipating.
Speaker Change: About a 200 basis point headwind to growth.
Speaker Change: On the ADT Google transition.
Speaker Change: So we expect that to really start next year and that's what we've modeled the second one is that if you remember this year, we got about it we've got a meaningful bump when we closed out some litigation.
Speaker Change: We had essentially no license revenue coming from IP licenses in 2023, and then we closed up litigation, we had a pretty meaningful bump off of that resolution this year.
Speaker Change: That IP license.
Speaker Change: Revenue is sort of straight lined into the early 2000 thirty's. So.
Speaker Change: We're not getting a bump there again this year and that by itself is sort of another.
Speaker Change: Another 200 basis points in that.
Speaker Change: And the math, so if you add those two up.
Speaker Change: Reconciles with the 10, 5%.
Speaker Change: We're showing.
Right now.
Speaker Change: Got it that's helpful and maybe just a follow up you mentioned I think EBITDA margins you expect current levels to hold one quick clarification and also a question on that the clarification that would be I think you did about 21% EBITDA margin this quarter the guide.
Speaker Change: I think implies 19% so when you say current levels.
Speaker Change: Assuming it would be off the kind of 19%.
Speaker Change: The 21% you just did but just clarifying that number one and then secondly.
Speaker Change: Steve Trundle as you think about holding those very very healthy EBITDA margin, maybe you can speak about.
Speaker Change: How you thought about the internal balance between growth and profitability.
Speaker Change: On one hand, we could say.
Speaker Change: Got a lot of room to potentially invest even more on that line. So just wonder how you thought about potentially balancing maybe investing a little bit more to bump up the growth versus holding EBITDA margins that corrupt. Thanks.
Speaker Change: Yes, good question again.
Speaker Change: So yes.
Speaker Change: The number we're guiding on.
Speaker Change: And the initial look is the 19% and I think what I said is we're going to we're going to hold things there it might be a little above that.
Speaker Change: If you do the exact math couple of 20 basis points or so above.
Speaker Change: The.
Speaker Change: Yes.
Speaker Change: It's up from sort of where we've been the last couple of years. So that's a meaningful transition for us but.
Speaker Change: The plan at the moment as is.
Speaker Change: We're sort of constantly scrutinizing the way that we allocate capital what things.
Speaker Change: It makes sense, what things have nice return characteristics.
Speaker Change: Through time, those things evolve some businesses have grown nicely and are now reaching a scale, where we see them actually as we look into the future beginning to actually contribute shift a bit more from sort of pure investment mode too.
Speaker Change:
Speaker Change: So a mode, where again, they're sort of more mature contributing cash back to the parent so.
Speaker Change: Talk for a while about our various <unk>.
Speaker Change: Growth businesses our growth initiatives.
Speaker Change: Specifically, we referenced energy hub, we referenced the commercial business and we reference.
Speaker Change: The international business and each of those now so that's larger than it's been in the past beginning to contribute more so that left us comfortable that.
Speaker Change: They are increased scale, we could we could.
Speaker Change: Shifting a bit more of the.
Speaker Change: Cash production capacity as a company into into the EBITDA line, and we expect that to be the case.
Speaker Change: Going forward.
Speaker Change: Very helpful. Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from Mason Marion with Jefferies. Your line is open.
Speaker Change: Hi, Thanks for taking the questions today.
Speaker Change: So your <unk> was really strong at 95% can you talk about some of the drivers there.
Speaker Change: <unk> to the lower churn, but here are you also seeing better cross selling.
Speaker Change: Within your base.
Speaker Change: Yes, I think it's a comment Steve well, it's a combination of fewer moves in churches really driven a lot by a move but also we think that the video and it's very compelling with the analytics and I think we're starting to see the benefit of that we came out with video number of years ago analytics.
Speaker Change: Couple of years ago, as well and we think that that's really enabling users to really interact the system every single day, and so we think thats driving up the usage and driving up the retention quite nicely.
Speaker Change: And you can almost think of that at times that is a.
Speaker Change: What you would call it cross sell we sometimes refer to it as an up sell so if we have the same subscribers.
Speaker Change: Moves from account without video to one with video obviously that creates a benefit and that would be a cross sell or if they already have.
Speaker Change: Our video subscription and then they opt into a more advanced video analytics package that also would help us on that revenue retention metrics, so theres, a little bit of all of that going on.
Speaker Change: It probably is true that the reduction in subscriber moves as the main driver, but as Steve just said.
Speaker Change: The account characteristics are also looking more positive.
Speaker Change: Got you understood and then I.
Speaker Change: I believe your eds integration I think you're largely complete with that now.
Speaker Change: Can you talk us through that what is early feedback then are you seeing benefits from that from that acquisition.
Speaker Change: Yes, good memory.
Speaker Change: We're right on the cusp of beginning to see.
Speaker Change: The rollout of the technology and the capabilities that we.
Speaker Change: When after when we did the UBS acquisition is sort of a refresher UBS as a ah.
Speaker Change: A business based in Europe that has a.
Speaker Change: A history of being able to support a wide range of various intrusion panels.
Speaker Change: We wanted to be able to attack a different part of the market than just the new installs that alarm dot com typically get so.
Speaker Change: So we're beginning that rollout now the ebs low cost communication product works with the alarm dot come back in at this moment and our belief at the moment is that we'll probably.
Speaker Change: Be successful in adding another 40 to 50000 subscribers in the rest of world markets next year.
Speaker Change: Using the low cost communication technology from UBS and those would be subscribers, we otherwise would get so it's beginning to contribute to the growth story on the international side of the business.
Speaker Change: Great. Thank you.
Speaker Change: Sure.
Speaker Change: One moment for our next question.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Adam Hotchkiss with Goldman Sachs. Your line is open.
Adam Hotchkiss: Great. Thanks, so much for taking the questions and nice speaking with you about just curious on how youre viewing pricing opportunities here.
Speaker Change: Really around some of the cost augmentation.
Speaker Change: That some of these AI initiatives are potentially providing to your customer base, how do you balance the ability to take price by allowing.
Speaker Change: Customers to manage cost more effectively versus this just being a bit of a.
Speaker Change: Customer success tool to increase retention.
Speaker Change: Yeah. Good question so.
Speaker Change: Yes, AI provides some ability for costs cost augmentation and I spoke a bit about that in my <unk>.
Speaker Change: Prepared remarks, if we're using.
Speaker Change: What we call AI, deterrence, where an AI bot to replace.
Speaker Change: Some of the previously expensive human monitoring activity that will be required to offer.
Speaker Change: That same service than we are.
Speaker Change: We're helping our partners our service provider partners with.
Speaker Change: With their cost to serve and that does correctly give us.
Speaker Change: Some ability to price that capability in a way that's beneficial to us so.
Speaker Change: So we work with our partners, we tried to figure out sort of what's the right.
Speaker Change: The right pricing that works for them, we are careful not to price things at a level that we sort of corner ourself in a niche market and sort of we prefer to be broad and we prefer to be broadly applicable and that's that's really probably the primary focus with what we're doing with AI and that necessitates keeping the cause.
Speaker Change: <unk> at a level that our partners can afford to bring it to a broad swath of the.
Speaker Change: The market otherwise with pricing, it's sort of normal course, we look at pricing in there.
Speaker Change: Tom.
Speaker Change: Pricing increases that are sort of part of the plan.
Speaker Change: But you are correct. The AIP is particularly interesting to think about right now.
Speaker Change: Okay, Great. That's really helpful. And then could you just refresh us on sort.
Speaker Change: Turning to top of funnel opportunity on the commercial side I guess in your view, whereas the rest of the market behind there and then how does.
Speaker Change: Some of these other investments on the technology side, Youre, making open up more conversion opportunities for you over time.
Speaker Change: At the top of funnel opportunity I'm trying to.
Speaker Change: Adam.
Speaker Change: What do you mean by that when you say what are we seen in the top of funnel opportunity.
Speaker Change: Yes, more just in terms of commercial prospects and being able to convert those commercial prospects into customers, what's driving or I guess, how are you viewing the demand for Saturday products on the commercial side of it.
Speaker Change: Any of the convert that's yes.
Speaker Change: Okay I understand.
Speaker Change: The man to us looks fairly constant maybe picking up a tad.
Speaker Change: <unk>.
Speaker Change: If we're trying to read the tea leaves in the fourth quarter there was increased demand.
Speaker Change: Particularly on the access control side, we had a meaningful beat on the hardware number. So I said fourth quarter mid third quarter had a meaningful beat on the hardware number and I think.
Speaker Change: Steve you indicated some of that was driven by access control hardware. So that is a good indicator often times those solutions are sold on pull through.
Speaker Change: We also saw pretty good behavior on the video side.
Speaker Change: So I feel like we feel like the.
Speaker Change: The market is pretty healthy on the commercial side.
Speaker Change: Right now we attack it a couple of different ways through through integrators on the very high sort of enterprise side of the market through our regular service provider partners in the mid market and then we do run some demand generation activity.
Speaker Change: There as well on the commercial side and everything I'm hearing and seeing is that it.
Speaker Change: Steady state sort of slightly better than maybe it wasn't the first half of the year.
Speaker Change: Okay incredibly helpful color. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone.
Speaker Change: Our next question comes from Matt <unk> with William Blair. Your line is open.
Speaker Change: Hello, everyone, Yes, Matt <unk> on for Stephen Sheldon. Thank you for taking my questions.
Speaker Change: Starting with one on hardware given the strong performance. There this quarter curious on what you think it would take to see hardware revenue returned to growth. In 2025 is I think the early look expectation imply more flat growth in 2005.
Speaker Change: Hey, Matt.
Speaker Change: Yes, I think at this moment.
Speaker Change: We're sticking with our sort of initial look.
Speaker Change: Estimates on hardware revenue I think that if we saw sort of unexpected strength.
Speaker Change: On the commercial side, where you saw.
Speaker Change: I talked about sort of the.
Speaker Change: The headwind a couple of headwinds, but one being the ADT Google rollout, if we saw that sort of.
Speaker Change: Dampen then obviously that might result in.
Speaker Change: More hardware sales as well, but I'd say the biggest one that would be.
Speaker Change: Nice to see but not we're not.
Speaker Change: I think the model we've run in the one we present with their forecast as to the best of our knowledge the right model, but we could see upside if we saw in particular more take off on the commercial side of the business.
Speaker Change: Got it that's helpful color. Thank you and then had one on R&D just thinking about priorities.
Speaker Change: In the R&D department over the coming year or are there any capabilities. You are focused on building out or is it more about enhancing the existing product catalog.
Speaker Change: No we're pretty focused on.
Speaker Change: I would say building out new capabilities, particularly in the video and the analytics.
Speaker Change: Space that would mean new form factors different cameras, we've got.
Speaker Change: We just had our partner summit and we had the opportunity to.
Speaker Change: Review.
Speaker Change: A couple of different form factors on video cameras.
Speaker Change: Some technology that were some battery powered video camera technology that.
Speaker Change: We're excited about we previewed the UBS stuff with our international partners and we're pleased to get that outcome.
Speaker Change: All of these are sort of contributing and focused on the markets that we're already driving in so we don't envision next year.
Speaker Change: Really introducing something that takes us into a different market. We are going to stay focused on the commercial the residential and the international markets.
Speaker Change: Most of the R&D effort that we are.
Speaker Change: Deploying right now.
Speaker Change: Very helpful. Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Darren <unk> with Roth Your line is open.
Speaker Change: My questions.
Speaker Change: Two if I may.
Speaker Change: I think it made them at the beginning of this year, Steve <unk>, but you had talked about.
Speaker Change: 18% on EBITDA margins, if I recall has been kind of steady state I guess.
Speaker Change: Why the pivot now second question you talked about some headwinds to your SaaS growth for 'twenty.
Speaker Change: I guess, where are there areas, where things could go right beyond maybe commercial which you talked about which could counterbalance those headwinds.
Speaker Change: Hey, Darrin yeah, good good memory.
Speaker Change: You guys always have a good memory that makes my life harder.
Speaker Change: I did talk about the 18% level at the end of the year.
Speaker Change: As we.
Speaker Change: As we've seen.
Speaker Change: Some of the growth initiatives reach a.
Speaker Change: More impressive level of scale.
Speaker Change: We got comfortable or we are comfortable at this point that even.
Speaker Change: EBITDA margins will be more in the 19% plus range.
Speaker Change: Going into next year.
Speaker Change: And we're comfortable sort of.
Speaker Change: Saying that we don't envision going backwards off of that so that's.
Speaker Change: Just an update.
And.
Speaker Change: As far as the.
Where can we get extra increased.
Speaker Change: SaaS gross contribution.
Speaker Change: I would say that.
Speaker Change: Some of it's going to be can we land a new logo.
Speaker Change: Someplace, either domestically or internationally and increased the size of the pipeline.
Speaker Change: Get that done in the first part of the year.
Speaker Change: Could be that something in Corp, Dev results and some additional growth.
Speaker Change: It could be that.
Speaker Change: But we see sort of increased acceleration.
Speaker Change: In the international business that we're not currently anticipating.
Speaker Change: The challenge right now, though is we're looking out five quarters. So when we provided an initial look and we don't like to lean into too many things that are sort of a scenario and not right in front of us.
And I.
Speaker Change: I guess I would say, we're relatively pleased that sort of a larger base, we're able to essentially see the same growth contribution coming.
Speaker Change: Next year as we're able to get this year, even with some of these headwinds.
Speaker Change: Fair enough. Thank you I appreciate it thanks.
One moment for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from Jack Vander <unk> with Maxim Group. Your line is open.
Speaker Change: Okay, great. Thanks, guys nice results.
Speaker Change: Looking at your 2025.
Speaker Change: SaaS outlook, maybe for Steve Trundle.
Speaker Change: For the international side of the business do you have plans to grow the number of service providers. You currently have in the international market.
Speaker Change: Is there an assumption baked in there.
Speaker Change: And then also are the existing.
Jack Vander: Partners, who do have internationally are they are they growing are they kind of assumed to be flat just curious to get if we can dissect that a bit further for your 2020 outlook sure Hey, Jack.
Speaker Change: Yes, I think we will continue so we're.
Speaker Change: Super fortunate to have.
Speaker Change: A great set of sort of anchor tenants and the international service provider.
Speaker Change: Partner.
Hey, Mark that we're going to market with right now so there really arent a lot of names or brands that one could have at the largest that's sort of the enterprise side of the business that we don't already have that.
Speaker Change: Said, we're continuing to work to.
Add a few.
Speaker Change: And then we want to build out the.
Speaker Change: Sort of the base of smaller service providers in many other markets. There is still some markets, where we're not particularly active yet and we're working on that because there will be some additional.
Speaker Change: There will be some new names, we're adding partners still on the international side at a faster clip than we are.
Speaker Change: Domestically, where we're more mature once we add someone usually takes.
Speaker Change: At least a year, but a couple of years oftentimes to kind of reorient their business around.
Speaker Change: Around alarm dot com and change the way they go to market. So there is some latency in the system. After we.
Speaker Change: After we have a partner, but we are still.
Speaker Change: So I'm trying to remember the second piece of your question.
Speaker Change: Well, yes, I was just wondering if I was wondering if you had plans to get baked in new countries expansion into that 2025 outlook as well as just do you assume youre, adding more partners internationally in general I think you've covered most of that so.
Speaker Change: So I just wanted to find out where we're not assuming we're signing new logos at this point when we do modeling we model off things that are real.
Speaker Change: We may add new logos that would that would create some upside.
Speaker Change: And we may add some new markets that we're not currently servicing just keep in mind, though there is some latency between those ads in between.
Speaker Change: That you actually see the result of that flow into our into our P&L.
Speaker Change: Yeah.
Speaker Change: Got it very helpful. And then maybe just a quick housekeeping for Steve <unk>.
Speaker Change: Can you just reiterate what the actual 2025 SaaS outlook range was again.
Speaker Change: I missed the actual.
Speaker Change: Healing of that.
Speaker Change: Yes, so the range for 2025 to $668 million to $671 million.
Speaker Change: Got it okay very helpful.
Speaker Change: Yes.
Speaker Change: Much appreciate it. Thank you guys. Good results again, thank you all right.
Speaker Change: Okay.
Speaker Change: And I'm not showing any further questions at this time, so ladies and gentlemen. This does conclude today's presentation. You may now disconnect and have a wonderful day.
Speaker Change: Okay.
Speaker Change: Thanks.
Speaker Change: Okay.
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Speaker Change: Yes.
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Speaker Change: Good day, and thank you for standing by and welcome to the alarm Dot Com third quarter 2024 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session I'll need to press star one on your telephone you will then hear an automated message advising your hand is raised to us.
Speaker Change: Your question. Please press Star one again, please be advised today's conference is being recorded I would now like turn the conference over to your speaker today, Matthew assortment Vice President of Investor Relations. Please go ahead.
Matthew Assortment: Thanks, Kevin Good afternoon, everyone and welcome to alarm Dot Coms third quarter 2024 earnings Conference call. Please note. The call is being recorded joining us today are Steve Trundle, our CEO and Steve <unk>, our CFO during today's call, we will be making forward looking statements, which are predictions projections estimates or other statements about.
Matthew Assortment: 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 on our quarterly report on Form 10-Q, and our form 8-K, which will be filed <unk>.
Matthew Assortment: Shortly with the SEC along with the associated press release, the call is subject to these risk factors and we encourage you to review them alarm Dot Com assumes no obligation to update forward looking statements or other information, which speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call a.
Matthew Assortment: A GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website, I will turn the call over to Steve Trundle, Steve.
Steve Trundle: Thank you, Matt good afternoon, and welcome to everyone.
Steve Trundle: We are pleased to report financial results for the third quarter that exceeded our expectations SaaS and license revenue in the third quarter grew to $159 $3 million and adjusted EBITDA was $50 million.
Steve Trundle: Our performance in the quarter resulted from continued momentum across our growth initiatives sale.
Steve Trundle: Sales of our video and access control products outperformed that contributed to hardware revenue that was above our expectations.
Steve Trundle: We also saw our revenue retention rate increased to 95%, which is above our historical range.
Steve Trundle: We believe two things are driving the revenue retention metric first our service providers have been increasingly putting them fully featured in more robust systems that provide value to the consumer or business owner everyday.
Steve Trundle: And second the slower U S housing market has reduced subscriber moves which can be a leading cause of account churn.
Steve Trundle: I want to thank our service provider partners and our employees for their contributions to our results on today's call I want to update you on a few new capabilities, we introduced to our commercial and residential video offerings before handing it over to Steve balance whaler to cover our financials in more detail.
Steve Trundle: In October we hosted our annual customer conference, which we call partner summit here in Washington DC.
Steve Trundle: The event again attracted a sold out audience that represented a nice cross section of our service provider partner community.
Steve Trundle: We were able to feature several recently released products in our presentations during the summit.
Steve Trundle: One of the products, we demonstrated is a consumer facing capability, we call AI deterrence or aid.
Steve Trundle: It can identify and engage a potential trespasser on our property and deter them from causing further problems.
Steve Trundle: <unk> is integrated into a remote video monitoring solution and is essentially an AI bot that replaces some of the workloads that are live operator monitoring the video camera would otherwise need to perform.
Steve Trundle: It can discern a clothing and location and deliver verbal warnings that are dynamically adapt it to the intruder and the scene.
Steve Trundle: Our goal with aid us to make a remote video monitoring solution as cost effective as possible for our service providers.
Steve Trundle: By augmenting human intervention and focusing humans on only the most critical events. We believe our partners can adopt our solution more aggressively and introduce it to a larger segment of the commercial and residential markets.
Steve Trundle: Our advancements in applying AI to video streams in both residential and commercial settings.
Steve Trundle: <unk> from our scale.
In August alone our AI enabled video cameras identified <unk>, one 2 billion events for further classification and verification by our cloud.
Steve Trundle: Of these $1 2 billion events of interest $700 million are verified by the cloud AI engine, triggering additional rules, which can include archival or push notifications to alert subscribers of important activity.
Steve Trundle: In September our <unk> business also launched a new line of cloud cameras designed for flexible streamlined enterprise video surveillance installations.
Steve Trundle: The new cameras are entirely self contained with onboard storage and AI processing.
Steve Trundle: They connect directly to the cloud and are provided as a subscription based solution that leverages. The full suite of management analytics, alerting and reporting tools offered by the <unk> platform.
Steve Trundle: Cloud cameras provide a cost effective way for our partners to land and expand and new commercial accounts.
Steve Trundle: We're pleased with open eyes continued momentum and growth.
Steve Trundle: <unk> is on the cusp of surpassing 1 million active channels, our video cameras on its software platform.
Steve Trundle: We expect continued strong contributions to alarm dot coms growth as Open-eyed leads the transformation of the enterprise security video management market from Standalone on premise devices to cloud enabled AI powered video solutions.
Steve Trundle: As most of you know, we typically conclude our third quarter with Steve Valensuela, providing an initial look at the following fiscal year.
Steve Trundle: It's early and we will continue to refine our plans and forecast before providing our more calibrated an official 2025 guidance on our fourth quarter call early next year.
But I want to give a little context for how we're looking at 2025 at this point.
Steve Trundle: As we think about 2025 revenue a meaningful variable is the rate at which ADT rolls out the ADT Google software.
Steve Trundle: This forecasting dependency makes visibility into 2025, a bit more opaque than in prior years.
Steve Trundle: Our first look numbers assume that adt's corporate residential account production will fully transition to the ADT, Google software and impact SaaS revenue growth for the entirety of 2025.
Steve Trundle: Fortunately, we have built a diverse organic growth engine that will allow us to continue growing our business. Despite this long anticipated headwinds.
Steve Trundle: We expect our energy hub business, our <unk> business, our international business, and our alarm dot com commercial business, including our access control solution to contribute to our consolidated growth rate at roughly the same levels in 2025 as in 2024.
Steve Trundle: Meanwhile, we have moved EBITDA margins up some in the second half of 2024, and we expect current levels to hold as we move through 2025.
In summary, I'm pleased with our Q3 results and the continued growth we see across the business.
Steve Trundle: 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.
Speaker Change: And with that let me turn things over to Steve Valensuela to review our financials Steve.
Speaker Change: Thanks, Steve ill begin with a review of our third quarter 2024 financial results then provide our guidance for Q4 and full year 2024, and conclude with initial thoughts in 2025 before opening the call for questions.
Speaker Change: Third quarter, SaaS and license revenue of $159 3 million grew nine 8% from the same quarter last year.
Speaker Change: Our SaaS and license revenue visibility remains high with a revenue renewal rate of 95% in the third quarter.
Speaker Change: Above our historical trend and higher than our long term target range of 92% to 94%.
Speaker Change: Hardware and other revenue in the third quarter was $81 2 million up five 7% from Q3 2023, mainly due to increased sales of access control devices and video cameras.
Speaker Change: Total revenue of $240 5 million for the third quarter grew eight 4% year over year.
Speaker Change: SaaS and license gross margin for the third quarter was 85, 5% up slightly from 84, 9% in the year ago quarter.
Speaker Change: Hardware gross margin was 24, 1% for the third quarter up from 22, 6% in Q3 2023, mainly due to favorable product mix.
Speaker Change: Total gross margin was 64, 8% for the third quarter up from 63, 3% in the prior year quarter.
Speaker Change: Turning to operating expenses R&D expenses in the third quarter were $62 2 million compared to $61 million in Q3 2023.
Speaker Change: We ended the third quarter was 1100 64 employees in R&D up from 1100 16 employees in Q3 2023.
Speaker Change: Total head count increased to $2 55 employees for the third quarter compared to 19 886 employees in the year ago quarter.
Speaker Change: Sales and marketing expenses in third quarter were $27 million or 11, 2% of total revenue compared to $23 9 million or 10, 8% of revenue in the same quarter last year, mainly due to a modest increase in marketing program investments.
Speaker Change: Our G&A expenses in the third quarter were $25 7 million down from $31 5 million in the year ago quarter, mainly due to lower legal related costs.
Speaker Change: G&A expense in the third quarter includes negligible non ordinary course litigation expense compared to $5 9 million in the year ago quarter.
Speaker Change: Non ordinary course litigation expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance.
Speaker Change: In the third quarter GAAP net income was $36 7 million up 88% from GAAP net income of $19 5 million in the year ago quarter.
non-GAAP adjusted EBITDA in the third quarter was $50 million up 26% from $41 4 million in Q3 2023.
Speaker Change: non-GAAP adjusted net income increased to $35 2 million or <unk> 62 per diluted share in the third quarter up from $30 6 million or <unk> 56 per share for the third quarter of 2023.
Speaker Change: Turning to our balance sheet, we ended the third quarter with $1 7 billion of cash and cash equivalents up from $697 million on December 31, 2023 with much of the increase due to the convertible offering we closed in may this year and to a lesser extent our positive cash flow.
Speaker Change: Our non-GAAP free cash flow for the three and nine months ended September 2024 of $74 5 million and $142 3 million, respectively increased from $60 9 million and $90 7 million for the same periods in 2023.
Speaker Change: Mainly due to higher profitability levels and improvements in working capital with declines in inventory and a reduction in accounts receivable days sales outstanding to 45 days.
Speaker Change: Turning to our financial outlook for the fourth quarter of 2024, we expect SaaS and license revenue of 163, two to $163 4 million for.
Speaker Change: For the full year of 2024, we are raising our expectations for SaaS and license revenue to $628 seven to $628 9 million a primary prior guidance of $626 eight to $627 2 million.
Speaker Change: We are now projecting total revenue for 2024 of $933 seven to $935 9 million up from our prior guidance of 928 to $931 2 million, which includes estimated hardware and other revenue of 305 to 300.
Speaker Change: $7 million.
We are raising our estimate for non-GAAP adjusted EBITDA for 2024 to $174 million to $176 million up from our prior guidance of $165 million to $167 million.
Speaker Change: Adjusted non-GAAP net income for 2024 is projected to be 125, five to $126 5 million or $2 25 to $2 27 per diluted share up from our prior guidance of $119 five to 120.
Speaker Change: <unk> 5 million or $2 $62 seven per diluted share.
Speaker Change: EPS is based on an estimate of $57 9 million weighted average diluted shares outstanding.
Speaker Change: We currently project, our non-GAAP tax rate for 2024 to remain at 21% under current tax rules.
Speaker Change: We expect full year 2020 for stock based compensation expense of $42 million to $43 million.
Finally, I will provide some early thoughts in 2025, noting that these are preliminary.
Speaker Change: We currently estimate our SaaS and license revenue for 2025 to be between $668 million to $671 million.
Speaker Change: Total revenue for 2025 could range between $975 million to $980 million.
Speaker Change: As Steve noted we are modeling the ADT ramps up to ADT Google rollout.
Speaker Change: We currently project our non-GAAP adjusted EBITDA for 2025 to be in the range of $188 million to $192 million.
Speaker Change: We will provide our annual guidance for 2025, when we report our fourth quarter 2024 financial results early next year.
Speaker Change: 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.
Speaker Change: 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 you remove yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Yeah.
Speaker Change: Okay.
Speaker Change: Our first question comes from Adam Tindle with Raymond James Your line is open.
Speaker Change: Okay. Thanks, Good afternoon bear with me I'm, just questioning the numbers as fast as I can here Steve.
Speaker Change: To ask on the SaaS guidance for fiscal 'twenty five.
Speaker Change: <unk>, there's a lot of variables here and congrats on a strong Q3 that youre coming off of if I'm doing the math right Youre right I think youre going to finish this year at about 10, 5% SaaS growth for 2024 and the initial look for 2025, I think it's closer to six 5%.
If you could maybe just walk through some of the building blocks on the Delta between those two I think ADT in particular.
Speaker Change: I think a lot of us had thought about somewhere in the neighborhood of one 5% to 2% headwind related to that but I wonder if.
Speaker Change: Now that you have a little bit more visibility you have got some clarity on that so just some of the bridges from the strong finish in 2024.
Speaker Change: Initial 2025 outlook would be helpful.
Speaker Change: Hey, Adam.
Speaker Change: This is Steve Trundle speaking.
Speaker Change: Yes keep in mind that we're not yet calling guidance, we're going to do our full guidance after the fourth quarter, but in the initial look numbers.
Speaker Change: Youre doing the math correct.
Speaker Change: And there's really a couple of things there to point out first is as we as we've said in the past we were anticipating.
Speaker Change: About a 200 basis point headwind to growth.
Speaker Change: On the ADT Google transition.
Speaker Change: So we expect that to really start next year and that's what we've modeled the second one is that if you remember this year, we got about it we've got a meaningful bump when we closed out some litigation.
Speaker Change: We had essentially no license revenue coming from IP licenses in 2023, and then we closed up litigation, we had a pretty meaningful bump off of that resolution this year.
Speaker Change: That IP license.
Speaker Change: Revenue is sort of straight lined into the early 2000 <unk>. So.
Speaker Change: We're not getting a bump there again this year and that by itself is sort of another.
Another 200 basis points in that.
Speaker Change: And the math, so if you add those two up.
Speaker Change: Reconciles with the 10, 5% that we're showing.
Speaker Change: Right now.
Speaker Change: Got it that's helpful and maybe just a follow up you mentioned I think EBITDA margins you can expect current levels to hold one quick clarification.
Speaker Change: <unk> and also a question on that the clarification that would be I think you did about 21% EBITDA margin this quarter.
Speaker Change: <unk> I think implies 19%. So when you say current levels I'm, assuming it would be off the kind of 19%.
The 21% you just did but just clarifying that number one and then secondly, Steve.
Speaker Change: Steve Trundle as you think about holding those very very healthy EBITDA margin, maybe you can speak about.
Steve Trundle: How you thought about the internal balance between growth and profitability.
Steve Trundle: On one hand, we could say.
Steve Trundle: A lot of room to potentially invest even more on that line. So just wondering how you thought about potentially balancing maybe investing a little bit more to bump up the growth versus holding EBITDA margins that correct. Thanks.
Speaker Change: Yes, good question again.
Speaker Change: So yes.
Speaker Change: The number we're guiding on.
Speaker Change: And the initial look is the 19% and I think what I said is we're going to we're going to hold things there it might be a little above that.
Speaker Change: If you do the exact math couple of 20 basis points or so above.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: And that's up from sort of where we've been the last couple of years, So thats a meaningful transition for us but.
Speaker Change: The plan at the moment as is.
Yes.
Speaker Change: We're sort of constantly scrutinizing the way that we allocate capital what things.
Speaker Change: Makes sense, what things have nice return characteristics.
Speaker Change: Through time, those things evolve some businesses have grown nicely and are now reaching a scale, where we see them.
As we look into the future beginning to actually contribute shift a bit more from sort of pure investment mode too.
Speaker Change: To a mode, where again, they're sort of more mature contributing cash back to the parent so we'll talk for a while about various.
Speaker Change: Gross businesses our growth initiatives.
Speaker Change: Specifically, we referenced energy hub, we referenced the commercial business and we reference.
Speaker Change: The international business and each of those now so it's larger than it's been in the past beginning to contribute more so that left us comfortable that.
Speaker Change: They are increased scale, we could we could.
Speaker Change: Could shift a bit more of the.
Speaker Change: Cash production capacity of the company into into the EBIT line, and we expect that to be the case.
Speaker Change: We will go forward.
Speaker Change: Very helpful. Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from Mason Marion with Jefferies. Your line is open.
Mason Marion: Hi, Thanks for taking the questions today.
Mason Marion: So your <unk> was really strong at 95% can you talk about some of the drivers there you alluded to the lower churn, but here are you also seeing better cross selling.
Mason Marion: Within your base.
Steve Trundle: Yes, I think it's a problem, it's Steve well, it's a combination of fewer moves and churn has really driven a lot by a moves but also we think that the video and it's very compelling with the analytics and I think we're starting to see the benefit of that we came up with video number of years ago analytics.
Steve Trundle: A couple of years ago, as well and we think that Thats really.
Steve Trundle: Tabling the users to really interact the system every single day, and so we think thats driving up the usage and driving up the retention quite nicely.
Steve Trundle: And you can almost think of that at times that is a a what you would call. It cross sell we sometimes refer to it as an up sell so if we have the same subscribers.
Steve Trundle: Moves from account without video to one with video obviously that creates a benefit and that would be a cross sell or if they already have.
Steve Trundle: Subscription and then they opt into a more advanced video analytics package that also would would help us on that revenue retention metrics. So theres, a little bit of all of that going on.
Speaker Change: It probably is true that the reduction in subscriber moves as the main driver, but as Steve just said.
Speaker Change: The account characteristics also looking more positive.
Speaker Change: Got you understood and then.
Speaker Change: Ebs integration I think you're largely complete with that now.
Speaker Change: Can you talk us through that what is early feedback Dan are you seeing benefits from that from that acquisition.
Dan: Yes, good memory.
Dan: We're right on the cusp of beginning to see.
Dan: The rollout of the technology and the capabilities that we.
Dan: When after when we did the UBS acquisition is sort of a refresher UBS is a.
Dan: Our business based in Europe that has.
Dan: A history of being able to support a wide range of various intrusion panels.
Dan: We wanted to be able to attack a different part of the market than just the new installs that alarm dot com typically get so.
Dan: So we are beginning the rollout now the ebs low cost communication product works with the alarm dot come back in at this moment and our belief at the moment is that we will probably be successful in adding another 40 to 50000 subscribers in the rest of world markets next year.
Dan: <unk>.
Dan: Using the low cost communication technology from UBS and those would be subscribers, we otherwise would get so it's beginning to contribute to the growth story on the international side of the business.
Speaker Change: Great. Thank you.
Speaker Change: Sure.
Speaker Change: Our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from Adam Hotchkiss with Goldman Sachs. Your line is open.
Adam Hotchkiss: Great. Thanks, so much for taking the questions a nice speaking with you guys.
Adam Hotchkiss: Just curious on how youre viewing pricing opportunities here, particularly around some of the cost augmentation.
Adam Hotchkiss: That some of these AI initiatives are potentially providing to your customer base, how do you balance the ability to take price by allowing customers to manage costs more effectively versus this just being a bit.
Speaker Change: Our customer success tool to increase retention.
Speaker Change: Yeah. Good question so.
Speaker Change: Yes, AI provides some ability for costs cost augmentation and I spoke a bit about that in my.
Speaker Change: Prepared remarks, if we are using.
Speaker Change: What we call AI, deterrence, where an AI bot to replace.
Some of the previously expensive human monitoring activity that will be required to offer that same service than we are.
Speaker Change: We're helping our partners our service provider partners with.
Speaker Change: With their cost to serve and that does correctly give us.
Speaker Change: Some ability to price that capability in a way that's beneficial to us so.
Speaker Change: So we work with our partners, we try to figure out sort of what's the right.
Speaker Change: The right pricing that works for them, we are careful not to price things at a level that we sort of corner ourself in a niche market and sort of we prefer to be broad and we prefer to be broadly applicable and that's that's really probably the primary focus was what we're doing with AI and that necessitates keeping the cause.
Speaker Change: <unk> at a level that our partners can afford to bring it to a broad swath of the.
Speaker Change: The market otherwise with pricing, it's sort of normal course, we look at pricing in there.
<unk>.
Speaker Change: Pricing increases that are sort of part of the plan.
Speaker Change: Youre correct. The AIP is particularly interesting to think about right now.
Speaker Change: Okay, Great. That's really helpful. And then could you just refresh us on.
Speaker Change: Turning to top of funnel opportunity on the commercial side I guess in your view, whereas the rest of the market behind there and then how does open and some of these other investments on the technology side Youre, making open up more conversion opportunities for you over time.
Speaker Change: At the top of funnel opportunity Im trying to.
Speaker Change: But.
Speaker Change: Adam.
Adam Tindle: You mean by that when you say what are we seen in the top of funnel opportunity.
Speaker Change: Yes, more just in terms of commercial prospects and being able to convert those commercial prospects into customers whats driving I guess, how are you viewing the demand for Saturday products.
Adam Tindle: Marshall.
Speaker Change: Our ability to convert that.
Speaker Change: Okay I understand.
Speaker Change: The man to us looks fairly constant maybe picking up a tad.
Speaker Change: If we're trying to read the tea leaves in the fourth quarter there was increased demand.
Speaker Change: Particularly on the access control side, we had a meaningful beat on the hardware number so I set forth climate third quarter had a meaningful beat on the hardware number and I think.
Steve Trundle: Steve you indicated some of that was driven by access control hardware. So that's a good indicator often times those solutions are sold on pull through.
Video, we also saw pretty good behavior on the video side.
Steve Trundle: So I feel like we feel like the.
Steve Trundle: The market is pretty healthy on the commercial side.
Steve Trundle: Right now we attack it a couple of different ways through through integrators on the very high sort of enterprise side of the market.
Steve Trundle: Through our regular service provider partners in the mid market and then we do run some demand generation activity.
Steve Trundle: There as well on the commercial side and everything I am hearing and seeing is that it.
Steve Trundle: Steady state sort of slightly better than maybe it was in the first half of the year.
Speaker Change #100: Okay incredibly helpful color. Thanks, so much.
Thank you.
Speaker Change #101: Again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone.
Speaker Change #102: Our next question comes from Matt <unk> with William Blair. Your line is open.
Speaker Change #103: Hello, everyone, Matt <unk> on for Stephen Sheldon. Thank you for taking my questions.
Speaker Change #103: Starting with one on hardware given the strong performance. There this quarter curious on what you would think it would take to see hardware revenue returned to growth. In 2025 is I think the early look expectations imply more flat growth in 'twenty five.
Speaker Change #104: Hey, Matt.
Speaker Change #105: Yes, I think at this moment.
Speaker Change #105: We're sticking with our sort of initial look.
Speaker Change #105: Estimates on hardware revenue I think that if we saw sort of unexpected strength.
Speaker Change #105: On the commercial side, where you saw.
Speaker Change #105: I talked about sort of the.
Speaker Change #105: The headwind a.
Speaker Change #105: A couple of headwinds, but one being the ADT Google rollout, if we saw that sort of.
Speaker Change #105: Dampen then obviously that might result in.
Speaker Change #105: More hardware sales as well, but I'd say the biggest one that would be.
Speaker Change #105: Nice to see but not we're not.
Speaker Change #105: I think the model we run into one we present with their forecast as to the best of our knowledge the right model, but we could see upside if we saw in particular more take off on the commercial side of the business.
Speaker Change #106: Got it that's helpful color. Thank you and then had one on R&D just thinking about priorities.
Speaker Change #107: In the R&D department over the coming year or are there any capabilities. You are focused on building out or is it more about enhancing the existing product catalog.
Speaker Change #108: No we're pretty focused on.
Speaker Change #108: I would say building out new capabilities, particularly in the video and the analytics.
Speaker Change #108: Space that would mean new form factors different cameras, we've got.
Speaker Change #108: We just had our partner summit and we had the opportunity to.
Speaker Change #108: View.
Speaker Change #108: Couple of different form factors on video cameras.
Speaker Change #108: Some technology that were some battery powered video camera technology that.
Speaker Change #108: We're excited about we previewed the UBS stuff with our international partners.
Speaker Change #108: We're pleased to get that outcome.
Speaker Change #108: All of these are sort of contributing and focused on the markets that we're already.
Speaker Change #108: Driving in so we don't envision next year.
Speaker Change #108: Really introducing something that takes us into a different market, we're going to stay focused on the commercial the residential and the international markets with most of the R&D effort that we are.
Speaker Change #108: Deploying right now.
Speaker Change #109: Very helpful. Thank.