Q4 2024 Alarm.com Holdings Inc Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Alarm.com 4th Quarter and Full Year 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'll need to press star 1-1 on your telephone. You will then hear an automated message device and your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Zartman, Vice President Strategic Communication and Investor Relations. Please go ahead.
Matthew Zartman: Thank you, Kevin. Good afternoon, everyone. Joining us today are Steve Trundle, Alarm.com CEO, and Steve Valenzuela, our CFO.
Matthew Zartman: During today's call, we will be making four looking statements, which are predictions, projections, estimates, or other statements about future events.
Matthew Zartman: 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.
Matthew Zartman: We refer you to the risk factors discussed in our annual report on Form 10-K and our Form 8-K, both of which will be filed shortly with the SEC, along with the associated press release.
Matthew Zartman: This call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update these forward-looking statements or other information that speak as of their respective dates.
Matthew Zartman: In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of GAAP to 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 fourth quarter and four-year results that exceeded our expectations.
Steve Trundle: Our SAS and license revenue in the fourth quarter was $165.7 million, up 11.7% over the last year. Our adjusted EBITDA for the quarter was $46.4 million.
Speaker Change: I want to thank our service provider partners and our employees for their contributions to our 2024 performance.
Speaker Change: We continued to see nice momentum in the business as we finished out 2024, particularly in the commercial security and energy hub parts of our business.
Speaker Change: On today's call, I'll review our performance in the primary areas of the business, and then provide more details on our recently announced acquisition of CHECT.
Speaker Change: In 2024, our North American residential business continued to be the largest component of our diversified business.
Speaker Change: Our advantage in this area comes from our scale, the quality of our offerings, and the outstanding relationships we have built over the years with our service provider partners.
Speaker Change: We've been focused on this market with a sustained commitment of resources for longer than anyone else.
Speaker Change: While the market remains competitive, our service providers generally have little patience for less complete offerings.
Speaker Change: Consumer demand for professionally installed and serviced smart home security solutions remains solid.
Speaker Change: One product that we recently released for residential, and particularly for the residential rental market, is the new Pro Thermostat HQ.
Speaker Change: This unique thermostat product connects to our cloud directly via an on-board cellular communicator.
Speaker Change: The ProHQ does not depend on a Wi-Fi network to provide connected thermostat capabilities.
Speaker Change: So, a builder that builds a home and wants to remotely control the temperature and humidity of the property before it's sold now has a connected thermostat solution that does not require an internet subscription for the property.
Speaker Change: Similarly, rental property managers frequently want to remotely manage the HVAC system for a property between tenants.
These temporarily vacant properties often do not have Wi-Fi service.
Speaker Change: Property managers can now install and use the ProThermostat HQ to manage and monitor vacant properties all the time.
Speaker Change: Our growth initiatives also continued to scale during 2024. These include our commercial business, the international business, and energy hub.
Speaker Change: Collectively, 26% of our total SAS in 2024 was generated by these businesses.
Speaker Change: And collectively, their SAS revenue grew nearly 25% on a year-over-year basis.
Speaker Change: I'll review each of these businesses and highlight several recent developments that provide a nice backdrop for 2025.
Speaker Change: I'll start with our commercial business, which produced over $80 million in SAS revenue in 2024.
Speaker Change: Physical security solutions continue to evolve into cloud-based software solutions that are more capable and cost-effective.
Speaker Change: Alarm.com purposely designed our commercial offering to seamlessly integrate across access control, intrusion, and video monitoring all into a single cohesive platform accessible and easily managed through a single app.
Speaker Change: We believe that our solutions align with what the market wants, and our service provider partners offer the professional design, installation, and maintenance services that the commercial market requires.
Speaker Change: Included in our commercial business is OpenEye, our enterprise video business. OpenEye continues to post strong growth, generating nearly $20 million in SaaS revenue in 2024.
Speaker Change: As I have discussed on recent calls, Remote Video Monitoring Service, or RBM, should also further expand the addressable opportunity we have in the commercial market. Historically, the primary use case for video solutions was to support investigations.
and determine when an incident occurred and who was involved.
Speaker Change: Our VM is transforming video surveillance cameras by enabling them to now also deter crime before it happens.
Speaker Change: Our system can then engage the potential perpetrator with a generative AI voice that is dynamically tailored to the environment and the individual.
We do all this in real time.
Speaker Change: Our recent acquisition of CHECKED takes this a step further and expands our position in the RVM space.
Speaker Change: We believe that Checht has built the best SAS software solution for control rooms to professionally monitor properties through an array of security video cameras.
Speaker Change: The checked platform can ingest active surveillance events from nearly any video camera and enable those events to be effectively escalated and handled by control room personnel.
Speaker Change: CHECT also provides a bridge appliance for installation at the customer site that service providers can use to connect legacy video cameras directly to the central station control room.
Speaker Change: CHECK supports most open-eye cameras today and will continue to support many third-party cameras.
Speaker Change: Over time, Alarm.com cameras will also be integrated into the checked control room solution.
Speaker Change: The company is small but has nice momentum in the RVM space. We've been impressed by the entrepreneurial energy and culture of the team and are very pleased that they will now be joining Alarm.com.
Speaker Change: Shifting to our international business for a moment, we continued to see solid contributions to our growth in 2024 as we expanded our product offerings and our service provider footprint in over 70 countries.
Speaker Change: In 2024, total revenue from outside of North America reached 6% of our consolidated total revenue as reported in our 10-K.
Speaker Change: We have the right set of marquee service provider partners internationally to support further growth in this area. In 2025, we'll continue to focus on growing our support for regional and local service providers to further grow and diversify our international revenue streams.
Speaker Change: The final element of our growth strategy is the continued development of our venture businesses.
Speaker Change: These SAS-based businesses consist of Energy Hub, Building 36, Point Central, and Shooter Detection Systems.
Speaker Change: Each is developing innovative IoT-enabled applications that further expand our addressable markets.
Speaker Change: I'll spend a moment discussing Energy Hub, which is the most developed of these businesses.
Energy Hub provides software technology for grid-level energy management.
Speaker Change: The Energy Hub platform interfaces to various IoT devices to aggregate distributed energy resources such as smart thermostats, residential batteries, electric vehicles, and charging infrastructure.
Speaker Change: Energy Hub then enables utilities to harness these grid edge devices into a virtual power plant that provides grid flexibility and load management during periods of supply and demand imbalance.
In 2024, Energy Hub began introducing dynamic load shaping.
Speaker Change: This first-to-market capability uses machine learning algorithms to automatically dispatch granular groups of grid-edge devices to provide more precise and sustained load shaping.
Speaker Change: With dynamic load shaping, utilities have greater flexibility for leveraging the virtual power plant production that Energy Hub offers.
Speaker Change: Dynamic load shaping functionality proved successful across three proof-of-concept tests last summer.
Speaker Change: Energy Hub pioneered the residential DERMs space and now manages over 1.6 million enrolled grid edge devices for over 70 utility clients in the U.S.
Speaker Change: The business is in a strong position to unlock additional value streams in the rapidly evolving energy ecosystem.
Speaker Change: Finally, I would like to let our investors know that my colleague, Steve Valenzuela, our CFO, has decided that he will be retiring from Alarm.com.
Speaker Change: We are very thankful for all of Steve's contributions over the years, which I would like to recognize.
Steve joined Alarm.com in November 2016.
Speaker Change: At that time, Alarm.com was a much smaller company with total revenue of just $248 million and earnings of $44 million.
Under Steve's financial leadership, we have grown revenue by 280%.
Speaker Change: Today is Steve's 33rd earnings report with us, and we are reporting more SAS revenue this quarter than the business generated in the entire 12 months preceding his arrival.
Speaker Change: He has led countless calls with our investors and ensured that we always provide high-fidelity reporting on our business.
Speaker Change: As importantly, he has built a great finance team at Alarm.com that is geared up to continue executing our plan going forward.
Speaker Change: We will immediately begin a process to identify our next CFO.
Speaker Change: We are grateful that Steve will stay with us as long as needed to support the transition to a new CFO.
Speaker Change: It's important to note that Steve's decision to leave is not due to any disagreement concerning the company's financial statements, operations, policies, or practices.
Speaker Change: So we get to have him help us for a while longer, but he will be retiring from the company this year.
Speaker Change: Steve, I've enjoyed working with you, and we thank you for your service to Alarm.com.
Speaker Change: And with that, let me turn things over to you to report on how we finished out 2024.
Speaker Change: Thank you Steve for your very kind words and confidence in me. It's been a true partnership which for me has been very special. After nearly eight and a half years, this is a good time for me to retire from Alarm.com and consider the next chapter in my journey.
Speaker Change: I'm committed to remaining in my role for a sufficient period of time to ensure a smooth transition.
Speaker Change: It's been my greatest pleasure to play a part in Alarm.com's growth from 248 million to over 900 million in annual revenue and raising over 1 billion dollars in cash.
leaving the company with a strong balance sheet.
Speaker Change: I'd like to thank the employees of Alarm.com, in particular the finance team, for their support.
Speaker Change: I'm especially proud of the strong finance team that I've had the pleasure of developing and leading over these years.
Speaker Change: This gives me great satisfaction knowing that Alarm.com will be in very good hands.
Speaker Change: I'd also like to thank the board of Alarm.com, our partners, investors, and analysts for their support.
Speaker Change: I am confident that Alarm.com will continue to be the leading platform provider of connected properties for the next decade and beyond.
I look forward to following Alarm.com's progress.
Speaker Change: And with that, let me turn to review our fourth quarter and full year 2024 financial results and then provide guidance for 2025 before opening the call for questions.
Speaker Change: Fourth quarter SAF and license revenue of $165.7 million grew 11.7% from the same quarter last year as we continue to see good growth in our commercial, international, and energy markets.
Speaker Change: For the full year of 2024, SAS and licensed revenue of $631.2 million grew 10.9% over 2023.
Speaker Change: Our SAS and licensed revenue visibility remains high with a revenue retention rate of 95% in the fourth quarter above our historical trend and higher than our long-term target range of 92 to 94 percent.
Speaker Change: Hardware and other revenue in Q4 2024 was $76.6 million compared to $77.9 million in the year-ago quarter, mainly due to slightly fewer sales of cameras and thermostats.
Speaker Change: Total revenue $242.2 million for the fourth quarter, grew 7.1% from Q4 2023.
Speaker Change: For the full year of 2024, total revenue grew 6.6% year-over-year to $939.8 million.
Speaker Change: SAS and license gross margin of 85.6% for the fourth quarter increased approximately 100 basis points from the year-ago quarter mainly due to the contribution of license revenue.
Speaker Change: Hardware gross margin was 22% for the fourth quarter compared to 25% for Q4 2023 mainly due to product mix.
Speaker Change: Total gross margin was 65.5% for the fourth quarter, up from 64.1% for Q4 2023, mainly due to a higher percentage of SAS and license revenue.
Turning to operating expenses.
Speaker Change: R&D expenses in the fourth quarter were $62 million, up slightly from $61.3 million in the fourth quarter of 2023.
Speaker Change: We ended 2024 with 1,127 employees in R&D up from 1,118 employees at the end of 2023.
Speaker Change: Sales and marketing expenses in the fourth quarter were $30.9 million, or 12.8% of total revenue, compared to $25.9 million, or 11.5% of revenue in the same quarter last year.
Speaker Change: As we increased our investment in some marketing programs to help drive awareness of our professional service providers for smart property installations.
Speaker Change: Non-gap adjusted EBITDA in the fourth quarter was $46.4 million compared to $45.6 million in Q4 2023.
Speaker Change: For all of 2024, adjusted EBITDA was $176.2 million, an increase of 14.5% from adjusted EBITDA of $154 million for 2023.
Speaker Change: In the fourth quarter, GAAP net income was $30.1 million, compared to GAAP net income of $31.2 million for Q4 2023.
Speaker Change: Non-GAAP adjusted net income was $32.6 million or $0.58 per diluted share in the fourth quarter compared to $33.9 million or $0.62 per share for the fourth quarter of 2023.
Speaker Change: Gap net income for the full year of 2024 was $122.5 million compared to gap net income of $80.3 million for 2023.
Speaker Change: Non-GAAP adjusted net income for 2024 was $127.1 million, or $2.28 per diluted share, compared to non-GAAP net income of $113.2 million, or $2.07 per share, for 2023.
turning to our balance sheet.
Speaker Change: We ended 2024 with $1.22 billion of cash and cash equivalents up from $697 million at December 31, 2023.
Speaker Change: Through the 12 months ended December 31st, 2024, we generated $206.4 million of cash flow from operations, up from $136 million for 2023.
Speaker Change: Our free cash flow for 2024 was $196.3 million compared to $128.4 million for 2023.
Speaker Change: The increases in operating and free cash flows for 2024 were mainly due to our higher profitability levels and positive working capital trends.
Now turning to our financial outlook.
Speaker Change: For the first quarter of 2025, we expect SAF and license revenue of $160.2 to $160.4 million.
Speaker Change: For the full year of 2025, we expect SASM's licensed revenue to be between $671.2 to $671.8 million.
Speaker Change: We are projecting total revenue for 2025 of $978.2 to $980.8 million, which includes estimated hardware and other revenue of $307 to $309 million.
Speaker Change: We estimate that adjusted EBITDA for 2025 will be between $188 million to $192 million.
Speaker Change: We expect the adjusted EBITDA for the first quarter of 2025 to represent approximately 20.5 to 21% of our annual guide.
Speaker Change: Non-GAAP adjusted net income for 2025 is projected to be $130 to $131 million, or $2.28 to $2.29 per diluted share.
Speaker Change: EPS is based on an estimate of 60.6 million weighted average diluted shares outstanding.
Speaker Change: We currently project our non-GAAP tax rate for 2025 to remain at 21% under current tax rules.
Speaker Change: We expect full year 2025 stock-based compensation expense of $43 to $45 million.
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 a comment at this time, please press star 11 on your telephone. If your question has been answered, or you wish to remove yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster.
Speaker Change: Our first question comes from Saquette Kelly with Barclays, your line is open.
Speaker Change: Okay, great. Hey guys, thanks for taking my questions here and congrats Steve Valenzuela on your retirement.
Speaker Change: Thanks, Zach. It's been great to work with you. I'll be around for a little bit while longer, though. Yeah, absolutely. Listen, tip my cap to you, nonetheless. Thank you. Steve, maybe for you.
Speaker Change: You know, on the quarter, it was great to see SAS and licensed revenue growth accelerate versus the growth that you saw in Q3.
Speaker Change: Can you just maybe talk about what drove that acceleration and how you sort of marry that growth versus the the the guided growth for SAS in 25 at somewhere between 6 and 7 percent growth?
Speaker Change: I would point to, first and foremost, Energy Up overperformed in the quarter. Typically, Energy Up has a strong season-wide Q4. They actually overperformed in terms of their savings for the utilities. They also brought in a new utility partner as well.
Speaker Change: And so that was a very good contribution. I would also point out to OpenEye. OpenEye continues to roll out SAS to their new subscribers and new customers, and they perform really well.
Speaker Change: So those are really some of the major contributions to Q4. You also saw that international is now 5% of our total revenue. In the past it's been 4% of total revenue.
Speaker Change: So those are the key points. 6% of total revenue in the quarter, right? It was 5%. So those are some of the points that I would point out for overperformance in the fourth quarter.
Speaker Change: Comparing to 2025, in the past we've talked about some of the headwinds from ADT+. We've modeled in a 25 the transition to ADT+. That's about a 200 basis point headwind.
Speaker Change: And also with the license revenue in 2025 being mostly flat to 2024, that's another 200 basis point headwind to growth.
Speaker Change: And then we also modeled in a stronger dollar. We've seen, you know, the dollar strengthen over the last couple of months, especially related to the Canadian dollar. So we modeled in a 20 or 30 basis points headwind against growth for 25 related to currency.
Got it. Got it. That's super helpful. Very helpful, Bridge.
Speaker Change: Steve T., maybe for my follow-up for you, obviously hardware is not the core business here, but just to make sure the question is asked, I'm curious if you could just talk about...
Any potential impact of tariffs on that hardware business?
Sure, good question.
Speaker Change: It wasn't that long ago that we were spending a lot of time dealing with
Speaker Change: with Tara. So, we're in a posture now where we're sort of reviewing
Speaker Change: tweets and other news releases each morning to anticipate what type of reaction we should have. Fortunately, we made a lot of effort previously to move the majority.
Speaker Change: of any manufacturing we do out of China. So, very little exposure to China at the moment. Most of that, most of the hardware that we produce is made either in...
Speaker Change: Southeast Asia, the U.S., there's a little bit in Mexico and a little bit in Europe.
obviously watched the
Speaker Change: This is sort of the back and forth on Mexico, but it's fairly minor.
Speaker Change: So, we're not at the moment, you know, sitting where I sit today, but again, waking up each morning and reading the news and being ready to react, but at the moment, we're not.
Speaker Change: We're not impacted much by the new tariff activity. That said, we have taken steps to bring in some inventory over the last quarter and expect to continue to do that where possible.
Speaker Change: You may see a little bit of a trend line in our financials, actually, that reflects our desire to bring in inventory and be in a little bit more of a defensive posture should there be tariff activity that ensues.
Very helpful. Thanks, guys.
One moment for our next question.
Thank you for watching!
Adam Tindall: Our next question comes from Adam Tindall with Raymond James. Your line is open.
Adam Tindall: Okay and my congrats to Steve as well. I know you're not done quite yet and look forward to having you at our conference here in a couple weeks but congratulations on the announcement. We'll certainly miss you.
Adam Tindall: Thanks Adam, looking forward to seeing you in a couple weeks.
Yeah
Speaker Change: So I wanted to ask on the growth businesses collectively have become obviously a big part of the story growing about 25% I think you said last year. For Steve Z, I wonder if you could maybe just touch on the growth expectations for that piece of the business that might be embedded in your 2025 guidance and the contribution from the acquisition here embedded in that.
Speaker Change: And then for Steve T., maybe a bigger picture question in light of this, just the strategic view on that bucket of the business. It's almost as if we've got kind of two different businesses we're running here, one that's growing over 20%, and when we back into the, you know, other piece of the business growing closer to mid-single digits.
Speaker Change: I wonder if you might just kind of assess the two different pieces of business that you have there, the synergies between the two, and what would prompt you to think about maybe strategic options, whether that's spinning, splitting, those sorts of things. Thanks.
Speaker Change: This is Adam. I guess I'll start with the growth initiatives for 2025. We're potentially modeling the same growth we've seen in 2024.
Speaker Change: And you did talk about the acquisition of Chex, it is an early stage company. It is included in our guidance for 25. There's a modest contribution in SAS revenue for 25. And we bumped up our guidance for 25 for SAS from the initial look. So part of that is related to the acquisition of Chex. And then I'll turn it over to Steve Trundle. Sure.
So, yeah, on the strategic view...
You know, our view is that we've...
Speaker Change: One of the primary sort of intangible assets of the company are the set of relationships that we've developed.
Speaker Change: around the world in the channel, and when we got started, of course, we were almost exclusively focused on the residential intrusion part of the market.
Speaker Change: and what we're focused on doing now is unlocking the potential of that channel.
Speaker Change: in a broader set of areas. And almost everything we're doing kind of...
Speaker Change: maps directly to that, with the exception of Energy Hub. But even there, there's some overlap.
So, I think...
Speaker Change: There is a lot of synergy between the R&D piece on residential and commercial.
Speaker Change: You know with a lot more diversity in our revenue streams on the energy hub piece specifically We just think we have a you know a nice business there that is still strategic and has a long runway ahead so
Speaker Change: There's some overlap, the more people we can enroll in the different types of DERMs or demand response services, the more valuable Energy Hub becomes and of course the rest of our channel is installing IoT devices.
Speaker Change: you know, every day and we'll continue to do that. So we get this kind of unique opportunity to drive enrollment up and enable the energy hub business to be even more valuable. So there, there's not quite as much overlap on the R&D but it's a business that we think is, will continue to be strategic.
Speaker Change: Got it, that's helpful. Maybe just as a follow-up, I appreciated all the additional disclosures on kind of breaking out those growth businesses. Certainly caught my eye, I think I heard it correctly, that open eye is nearly 20 million at this point and I was going back through my notes and I think it was about a tenth of that size.
Speaker Change: five-ish years ago when you acquired it. So I guess the heart of that question would be, if we use that as a case study, presuming that we're going to continue to invest in sort of growth areas like an open eye, what were the key attributes that led to this level of a successful outcome? And as you think about opportunities to potentially replicate the open eye type of growth trajectory, where would be the key areas of focus?
Speaker Change: I'd say the, you know, in terms of key attributes and something we look for every time is the quality of leadership.
Speaker Change: We're very pleased with that the founder of the business, the Open Eye Business, still leads the business and has has been very adept in helping the business continue to grow. Now the special sauce, I guess, that we have brought to that business, and we look for opportunities where we can do this,
is, we know how to build a fast business.
Speaker Change: So, in this case, with OpenEye, we had a great company with a great set of customers, primarily focused on monetizing through, you know, through hardware sales.
Speaker Change: And we saw an opportunity to shift into much more of a cloud format and render services in the cloud. And, you know, from that have been able to drive.
Speaker Change: really nice growth, albeit off a small base, but now it's becoming, on a SAS basis, pretty relevant, and that $20 million doesn't capture the hardware piece that also exists there.
Speaker Change: So we'll continue to look for that, and I think when we, you know, both of those...
Speaker Change: are key attributes. When we look at the business we just acquired, we still get very good about
Speaker Change: leadership there. We think we're early and we think we can help format the business to, you know, drive even more contribution in SAS and meet the needs of the market. So that's kind of what we're looking for.
Got it. Thank you.
One moment for our next question.
Speaker Change: Our next question comes from Mason Marion with Jeffries, your line is open.
Mason Marion: All right, thanks for taking my questions and congrats to you, Steve, on the retirement.
So I wanted to...
Mason Marion: I want to stick to the 2025 outlook here. So residential home sales have remained pretty subdued. What are you guys assuming regarding churn, NRR? Should we continue to expect stability in the NRR around that like 95% level?
Mason Marion: is contributing to a high revenue retention rate at the 95% level. We think that probably holds.
We also have a dynamic where
the more recently acquired customers.
are typically using a...
larger component of our services and almost
Mason Marion: More than half are also using video services. So that results in two things. The subscriber is a bit more sticky because they're using the system every day. The other dynamic at play, though, is the ARPU is higher. So what attrition we do have right now tends to be of the lower ARPU accounts.
Mason Marion: And what's sticking around are the higher ARPU accounts. So we think those two dynamics probably persist into 2025.
Mason Marion: Understood. And then you launched your AI deterrence product at CES. What's the initial feedback been from customers and partners so far? And then you think this can help drive your video penetration higher in 2025 and beyond?
Mason Marion: Yeah, I think so. To answer the last question first, I think...
Mason Marion: You know, that type of functionality is currently novel in the industry, so it gives you something to talk about, get people excited about. It has the capacity to really unlock.
Mason Marion: a lot of the cost associated with remote video monitoring and take that offering from...
being sort of a commercial, maybe high-end residential niche offering.
Mason Marion: and turn it into more of a mass market, you know, small business and residential offering. So, the enthusiasm is definitely there and, yeah, as you know, if you follow us for a while, it takes our channel a bit.
Mason Marion: from the time we release something, sort of build enthusiasm to the point where they have it on the price list that all their salespeople are using everyday when they go out and visit customers. So that would be a little bit of a lag, but we...
Mason Marion: We're seeing encouraging, I would say, enthusiasm around the product, and it actually is being installed in some set of installations already today, and working, which is good. So far, so good.
Great, thank you.
Thanks. One moment for our next question.
Mason Marion: Great. Thanks so much for taking the questions. And, Stevie, I'll add my well wishes to you as well going forward. I guess to start with you, I wanted to dig in on margins for next year. I know we've talked historically about the sort of 18% margin level, and you outperformed that in Q3, and we're a little bit ahead of that in Q4. I think the guide next year is for around 19%. What are the puts and takes there? Where are areas of investment next year that you're really focused on?
How should we think about sources of upside?
Sure.
Hey Adam, this is Steve T. speaking.
Mason Marion: So, at the moment we're in a pattern where I would say R&D expense, which is the primary expense driver that impacts EBITDA margin, is going to grow at roughly the same.
level as revenue, and we are getting increasingly some
Mason Marion: leverage out of our G&A cost structure and then sort of out of the increasing maturity of some of the growth venture businesses.
Mason Marion: We did, notably, so you're seeing a slightly higher telegraph on the EBITDA margins going into this year, a little bit of a walk-up seems to be continuing, and I do want to point out that that's
Mason Marion: happening even after we just completed an acquisition of an early stage business which you can imagine probably has some associated burn associated with it given where where they are today. So we're going to continue to kind of
Mason Marion: rationalize costs look for efficiencies and and and gradually move this number forward but what we're comfortable with is we look at 25 is sort of this 19 to 19 and a half percent margin level
Speaker Change: Okay, got it. That's super helpful. And then Steve T., just another follow-up for you on ADT, I think you mentioned.
Mason Marion: For the second consecutive quarter, you're still expecting that roughly 200 BIPs headwind for the year. Just maybe any changes from three months ago in terms of, you know, what you're seeing in the beginning of the year, year-to-date around the ADT component, and that headwind would be helpful. Thank you.
Mason Marion: Sure. No real changes. I mean, this quarter they report, I think, after us in about a week or so. So we'll look for their public updates on, you know, where things are. We're still modeling, though, that...
Mason Marion: You know, the corporate residential business will move off entirely. The alum.com platform, as we've said before, there are other parts of...
Mason Marion: and then potentially some of the areas in small business may not be ripe for transition just yet. But we'll let them update on where that rollout is.
Understood. Thank you very much.
Sure. One moment for our next question.
Speaker Change: Our next question comes from Stephen Sheldon with William Blair. Your line is open.
Stephen Sheldon: Hey, thanks, and I'll pass along my congrats to Steve on the retirement as well. On the, maybe just on the international side,
Stephen Sheldon: Can you talk some about expanding service provider partners there, you know, how much that might help your distribution?
Stephen Sheldon: and what that might mean to the growth profile within the international piece over the coming years, which as you kind of mentioned, 6% of revenue now up from 5% before, just kind of how are you thinking about the growth up there now with better distribution?
Yeah.
Stephen Sheldon: So we continue to believe that we can drive a higher growth rate on the international piece than on the rest of the business in aggregate, so we're going to continue to focus there. At the moment, if I think about sort of the last
you know, five, six years, we've probably been...
Stephen Sheldon: mostly focused on the whales, if you will, internationally, the largest service providers that...
oftentimes have a multi-country footprint and therefore have
Stephen Sheldon: than an operator that is regional in nature, doesn't have to deal with multiple languages, multiple localizations, that sort of thing. So that's been our focus as we get to a little bit more scale, which is where we are now.
Stephen Sheldon: I just want to build out the ballast in that business, which requires really opening our arms to more of the regional players.
Stephen Sheldon: and the smaller, in some cases, smaller local players. Oftentimes, those are the ones that are handling the most bespoke solutions that leverage the most components of our platform for a single installation. So we're going to work towards that. It should be a long-term...
Stephen Sheldon: If you look at North America, the long tail of our Parker base drives a lot of business, and over time we would hope to assemble a similar long tail.
Stephen Sheldon: internationally and you know it doesn't happen overnight. It's sort of a steady commitment of four or five years but should be an additional contributor to international growth through time.
Good to hear, makes sense. Maybe just as a follow-up...
Stephen Sheldon: Within the kind of core residential piece in SAS and license, I guess, how are you thinking about the ARPU expansion opportunity?
Stephen Sheldon: at 2025, 2026, some of the bigger factors that could help near-term as we think about increasing tax rates, especially for things like video solutions, pricing increases, etc. Do you think you can drive the ARPU higher here as we think about the next couple years? Yeah, good question.
Stephen Sheldon: So when we think about the residential piece, we just have to remember we have a pretty...
Stephen Sheldon: massive base of existing subscribers there. And while we can upsell some of those subscribers, you still have a sort of an anchor on the overall average ARPU that we report.
Stephen Sheldon: It's hard to move that average number too much. That said, new subscribers are coming on with a richer set of...
services. Thank you.
Stephen Sheldon: You know, over half of all new subscribers residentially now are...
Stephen Sheldon: are being installed with an Alarm.com video system in addition to an intrusion system.
Stephen Sheldon: and 99% of those customers are getting our video analytics package. So those two things together drive a little bit of ARPU lift on your new installs.
Stephen Sheldon: and as we look at the emergence of this RVM space and what we can do with AI deterrence.
Stephen Sheldon: we would hope that we find an additional sort of tailwind to ARPU. The benefit, though, in the macro number sort of unfolds through a long period of time as the older accounts tread off and the newer accounts sort of become the average, and that will take a bit.
Makes sense. Thank you.
One moment for our next question.
Speaker Change: Our next question comes from Darren Aftot with Roth. Your line is open.
Darren Aftot: Yeah, thanks for taking my questions, and I'll offer my congratulations. Great to work with you, Steve. Too, if I may, in the past you guys have talked about the acquisition of PBS.
Darren Aftot: How to pull in and integrating your software with the communicator there, I guess.
Darren Aftot: Where do we stand with that integration? Is that going to be a needle mover in 25, or is that something that's still kind of a work in progress, and then second question, just a clarification on the SAS bump relative to your preliminary outlook, is that entirely from the checked acquisition, or is it part of that organic?
Thanks.
Thanks, Darren. I guess I'll start with the
Darren Aftot: with the EBS question, and I probably know the answer on the other one too.
Darren Aftot: This should be the year that we start seeing some meaningful sales, I believe probably mid-year from EBS.
Darren Aftot: Just to refresh memories, the EBS platform is designed to be a very low cost.
Darren Aftot: So we're not going to see it as a place where we're driving a ton of ARPU. It's designed to allow service providers and a bigger set of service providers to...
be not quite, you know,
Darren Aftot: Not quite a massive bluebird, but it will be a little bit of a bluebird for the international business in the second half of the year. On the SAS BOMP versus the initial look,
Darren Aftot: I guess what I'd say on that is we did not need to...
complete an acquisition to hit our initial number.
Darren Aftot: Check that we're modeling in, but it's less than less than the aggregate of the of the initial look.
Darren Aftot: increased. We, at this point, there's also potentially some hardware contribution. At this point, though, the hardware contribution is still pretty minor and we don't like to be too aggressive in forecasting hardware sales, so we didn't bump that number at this point either.
Darren Aftot: And I guess I should make the point, we also didn't lower EBITDA, despite it being sort of an earlier stage business that will require, you know, some investment as they ramp. I think it will be a fast-growing, but early stage business this year.
That's helpful. Thank you.
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.
Thank you.