Alarm.com Holdings, Inc. (ALRM) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Alarm.com 2015 Third Quarter Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Jonathan Schaffer with The Blueshirt Group. You may begin.

Thank you, Abigail. Good afternoon, everyone and welcome to Alarm.com's 2015 Third Quarter Earnings Conference Call. As a reminder, this call is being recorded. Joining us today are Steve Trundle, President and CEO; and Jennifer Moyer, CFO. Before we begin, a quick reminder to our listeners. During today's call management may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion, anticipated market demand or opportunities and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and the reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and the company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. Please refer to our SEC filings as well as our financial results press release for more detailed description of the risk factors that may affect our results. Also during this call, management's commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the tables of our earnings press release, which we have posted to our Investor Relations website at investors.alarm.com. This conference call is being webcast and is also available through the Investor Relations website. So with these formalities out of the way, I'd now like to turn the call over to Steve. You may begin.

Thanks, Jonathan, and thanks, everyone, for joining on our call this afternoon. We had another solid quarter and continue to work our plan. As you likely saw in our earnings release, our results for the period showed year-over-year growth in our core SaaS and license revenue of 27%. We also maintained solid profitability as we continue to grow. After completing our IPO at the end of the second quarter, I was able to get back out in the field and spend more time with our service providers, both large and small. What I saw and heard was that the demand for our services remain strong. An increasing number of service providers are standardizing on Alarm.com. Many of our partners are working to scale up their base of installing technicians so that they can satisfy the demand that they are seeing. The customer continues to be a security-first customer, but all customers now expect interactive security with the mobile app, and most expect some form of an enhanced system by either adding cloud-based video or automation capabilities. The indicators we are hearing from our partners reflect broader market data as well. Consumer interest in smartphone services continues to grow, and security remains one of the top smart home features of interest for consumers. Installation also continues to be a pain point for the adoption of smart home technology. Most consumers prefer to hire professionals to set up and maintain their security and automation systems. Given the direct market feedback from our service providers and consumer trends, we continue to believe that our go-to-market approach is the right strategy to capture the broadest segment of the smart home market. A couple of weeks ago, we hosted our Annual Partners Summit. The event was oversubscribed this year with expanded attendance by our growing base of rest-of-world service partners from Europe, South America and Australia. One of the areas of focus at the summit was our enterprise services platform. We look at the end-to-end process of what it takes for the professional service provider to create a better user experience, and enterprise services helps them deliver it more efficiently and effectively. The suite of services includes tools and apps for customer acquisition, installations, support, training and business intelligence to improve operational efficiency and overall customer service. We hear directly from our service providers that enterprise services differentiates us from competing platforms. In addition, they make our service providers more efficient in sales, installation and support. This increased efficiency translates into higher sales productivity and higher customer satisfaction as well as better bottom line results for our service providers. As they fully adopt enterprise services, our service providers get more leverage out of Alarm.com, and therefore, become more loyal to our platform. We announced at the partner summit a new addition to enterprise services called SecurityTrax. It's a CRM platform that our service providers can use to drive more efficient account creation and deliver exceptional customer service. They will be able to integrate e-contracts, inventory management, technician scheduling and billing information into the existing enterprise services suite to get powerful customer life-cycle management capabilities. It further integrates the core aspects of our service providers businesses into the Alarm.com platform. We also previewed several upcoming product releases at the summit. One that generated solid interest from our service providers is our system enhancement module. This product has not yet shipped, but is being tested now. The system enhancement module will help our service providers upgrade their existing customers who have old-fashioned legacy security equipment installed. We believe that our service providers will continue to move towards standardizing on Alarm.com for new installations, and the system enhancement module will also allow them to accelerate the process of upgrading their legacy customers to Alarm.com. We also continue to add new Internet of Things devices to our platform. As there are more and more connected devices, our platform is able to integrate these things together in meaningful ways. One recent example is the addition of the water shut-off valve. Water is the second most common cause of property damage. Paired with a water sensor or flow detector or even a free sensor, the water shut-off valve can prevent major damage. When certain events are detected, we can automatically shut off water to the home and alert the Alarm.com user and the central station. This is a use case for connected devices that resonates well with homeowners and fits our go-to-market strategy. I also want to call your attention to the product announcement we made with our partner, Verizon, during the quarter. Alarm.com has always been a leader in leveraging the latest generation cellular and mobile Internet technology to benefit the smart home and the secured enterprise. About a year ago, we were first in the market with an LTE cellular module that enables our services. A year later, we believe that we are still the only company in our space that has shipped an LTE-compliant product. This last quarter, we were pleased that we were able to significantly enhance our LTE-based offering by leveraging the network's next-generation voice service capability called Voice over LTE. This capability allows us to deploy gateway module technology, which not only handles all data communication on the LTE network, but also enables our central station partners to engage in two-way voice communications with the premises when there's alarm. Looking forward, we continue to see runway in our core North American business. We're still in the early stages of transformation in the security market, and this is helping to drive growth for us in 2 ways: first, the existing install base consist mostly of legacy security systems that are in the process of transitioning to smart home security systems; second, the added value that smart home services provide to the consumer is expected to drive overall growth in the market. In addition to the success in our North American business, we continue to demonstrate progress in our international efforts. During the quarter, we announced availability of Alarm.com products and services in Turkey. We entered the market in partnership with Pronet, the leading electronic security provider in that market. They have a footprint of more than 200,000 subscribers. Pronet is already actively deploying Alarm.com services. We also just announced a strategic partnership with Securitas AB. Securitas is the second largest security company in the world with over 320,000 employees and operations in 53 countries. In many non-U.S. markets, private guard companies respond to alarms instead of municipal police. Securitas is dominant in private guard services, and about half of their business is from residential and commercial security operations across Europe. This new partnership should allow us to begin deployment in parts of Europe by the middle of 2016. So to conclude, we're very pleased with the performance of our business in the quarter and our outlook for the remainder of the year. I would like to thank all of our partners and our own employees for their hard work and confidence during the quarter and thank our shareholders for their support. And with that, I'll now turn the call over to Jen Moyer, our CFO, for a more detailed discussion of the financials. Jen?

Thank you, Steve, and to everyone participating on this afternoon's call. I'll begin by summarizing our third quarter results and end by updating our guidance for the remainder of the year before we open the call to questions. As Steve noted, we had another strong quarter. Alarm.com experienced growth in our domestic business as more of our service providers standardized on the Alarm.com platform and scaled up their operations to drive future growth. And we also continue to add new service provider partners who are now selling Alarm.com's interactive security and automation products and services to their residential and commercial customers. We also made progress in expanding our rest-of-world footprint and announced new strategic partnerships with international service providers. And the quarter saw us release additional first-to-market products and enhancements to the Alarm.com platform that will enable our service provider partners to grow their businesses in the future. Before I turn to our financial results, for those of you who are new to the Alarm.com story, I will quickly summarize the components of our revenue. We generate 2 primary sources of revenue. The first is SaaS and license revenue, which is recurring in nature and comprises about 2/3 of our total revenue today. It is also our fastest growing source of revenue. We also generate hardware and other revenue, which contributes about 1/3 of our total revenue. It is principally derived from the sale of hardware that enables the Alarm.com services. In some instances, we selectively choose to design, produce and sell our own proprietary hardware, while in many other instances we integrate hardware produced and sold by our ecosystem partners for use within the Alarm.com platform. Our third quarter was strong and exceeded our expectations. Total revenue for the third quarter increased 26% over the prior year to $54 million, with SaaS and license revenue contributing the majority of the growth. SaaS and license revenue of $36.2 million, increased 27% over the prior year. The growth in SaaS and license revenue was primarily the result of the year-over-year increase in the total number of our service provider customers who subscribe to the Alarm.com services. As you heard Steve mention, our service provider partners are standardizing on our offerings and continue to aggressively deploy our technology to their customers, driving growth in their customer base. We also recognized about $485,000 of SaaS revenue in the current quarter from SecurityTrax and Secure-i, 2 small acquisitions we closed in the fourth quarter of 2014 and the first quarter of 2015. Our SaaS and license revenue renewal rate was 93% for the 12 months ended September 30, 2015. The rate was 94% for the same period in the prior year. Hardware and other revenue of $17.8 million increased 24% over the prior year, resulting from higher sales volumes in most product categories with video cameras sales contributing about half of the overall increase in hard revenue. We are seeing then an increasing percentage of new customers are including our cloud-based video service in their systems. Hardware revenue for the third quarter was also bolstered by the timing of some orders where our partners build inventory late into the third quarter. We expect that these partners will utilize this hardware in the fourth quarter, and therefore, expect that our fourth quarter hardware revenue will decrease sequentially as it has generally, historically. As we stated in the past, hardware revenues can be lumpy, and this is why we only guide on annual hardware revenue. SaaS and license revenue gross margin was 81% during the quarter, a 200 basis point increase over the prior year, with the margin expansion driven by realizing economies of scale from growth in our subscriber base. Hardware and other revenue margin increased to 26% as compared to 20% in the third quarter of the prior year. Hardware and other revenue gross margins fluctuate from quarter-to-quarter based on product mix. The increase in hardware margin in the third quarter was partly due to reductions in the cost of certain hardware SKUs, and additionally, we recently implemented improvements to our supply chain logistics, which reduced the carrying costs of some of our products. Our total gross margin for the quarter was 63%, up from 59% in the comparable quarter of the prior year. Turning to operating expenses, we continue to reinvest the cash flow generated by our core interactive security and automation platform business in North America back into the business. Our investments are primarily in research and development as we continue to hire engineers to accelerate the pace with which we bring new innovative products and services to market. We are also adding headcount and resources as we expand internationally. Our investments also include developing home and commercial automation platforms as well as energy management solutions for markets adjacent to our core business. We report the results of these businesses in a separate segment in our financial statement. Total sales and marketing expenses in the quarter increased to $8.4 million and represented 16% of total revenue during the third quarter of 2015, a decrease from 19% of total revenue during the third quarter of the prior year. On a total dollar basis, sales and marketing expenses in the quarter increased 4% over the third quarter of 2014. The increase resulted from additions to headcount to support the growth in our core domestic business as well as international expansion. The increase in compensation expense was partially offset by a decrease in discretionary spending, including advertising events. This was largely attributable to a shift in the timing of our Annual Partner Summit event from the third quarter of 2014 to the fourth quarter of 2015. General and administrative costs increased 47% to $9.9 million over the comparable quarter of the prior year. The third quarter of 2015 included $3 million of legal expenses related to intellectual property litigation, which we exclude from adjusted EBITDA. The third quarter of 2014 included no legal fees related to litigation. Exclusive of these legal expenses, general and administrative costs were $6.9 million in the quarter, an increase of 3% over the prior year and represented 13% of total revenue in the third quarter of 2015, a decrease from 16% of total revenue in the same quarter of 2014. The 3% increase in total G&A expense resulted from higher rent expense as our headcount increased company wide as well as a small increase in personnel and G&A-related functions. Research and development expense was $9.8 million in the quarter. This is a 61% increase over the prior year and represented 18% of third quarter total revenue as compared to 14% of total revenue in the third quarter of 2014. The growth in total R&D expense was driven by compensation expense as we continue to hire into engineering and other R&D-related functions. The total number of employees in research and development grew to 247 on September 30, 2015, as compared to 164 employees on September 30, 2014. As I mentioned last quarter, we plan to continue to increase our investment in R&D throughout the remainder of 2015 to extend our leadership position in the development of smart home and enterprise technology. Total operating expenses, excluding amortization and depreciation, increased to $28.2 million in the third quarter of 2015, or a 35% increase over the prior year. On an adjusted basis, excluding stock-based compensation, amortization and depreciation and legal fees related to intellectual property litigation, total operating expenses increased to $24.4 million, which is a 21% increase over the prior year. On the same adjusted basis, total operating expenses represented 45% of total revenue during the third quarter as compared to 47% of total revenue in the third quarter of 2014. Adjusted EBITDA improved to $9.7 million as compared to $5.1 million in Q3 2014. Adjusted EBITDA represented 18% of total revenue in the third quarter as compared to 12% of total revenue in the third quarter 2014. The growth in adjusted EBITDA and margin resulted primarily from the year-over-year growth in SaaS and license revenue and higher associated gross profit and to a lesser extent, from the increasing gross profit on hardware and other revenue. Leverage in certain operating expenses also contributed to the increase in adjusted EBITDA, specifically in general and administrative costs. A decrease in sales and marketing expenses as a percent of revenue in the quarter also contributed to the increase in adjusted EBITDA. However, marketing initiatives vary from quarter-to-quarter, and we expect to increase our marketing spend in the fourth quarter of 2015. That said, our efficient go-to-market approach of partnering with our service provider partners should be a source of sales and marketing leverage in our core business over time. We ended the quarter with cash and cash equivalents of $126.6 million, up from $20.9 million as of June 30, 2015. The company raised $98 million in net proceeds from its initial public offering, which closed in July 2015. The company generated $13.5 million in cash flow from operations during the quarter, an increase of $13.6 million over the third quarter of 2014. The increase was primarily due to the timing of payments for trade payables and other liabilities and to a lesser extent, cash collections and accounts receivable and an increase in net income and noncash charges. Capital expenditures of $4.5 million during the quarter increased from $3.9 million during the same quarter of 2014. Over 2/3 of our capital expenditures in the quarter were subsidized by buildout incentives related to the buildout of our new office space. I'll conclude by providing our guidance for the remainder of the year. We are raising our full year 2015 total revenue guidance to a range of $197.7 million to $200.1 million as compared to the previous guidance range of $193.9 million to $195.3 million. Full year SaaS and license revenue expectations are being raised to a range of $139.9 million to $140.1 million or $37.7 million to $37.9 million in the fourth quarter of 2015. We're also raising our hardware and other revenue guidance now forecasted to be between $57.8 million and $60 million for 2015. Our expectations for full year 2015 adjusted EBITDA are being raised to a range of $27.7 million to $29.1 million versus our previous guidance range of $20.3 million to $21.3 million. The increase in our annual adjusted EBITDA guidance also reflects about a 3% increase in our expectations for full year 2015 adjusted EBITDA margins. Note that while we are significantly raising full year adjusted EBITDA guidance, we do expect that Q4 will show sequentially lower adjusted EBITDA versus Q3 as we continue to execute our plan to increase our R&D spending and product development capability. Fourth quarter R&D costs will increase from the significant number of university engineering and other technical role hires that began their employment with the company in late August and September. Additionally, fourth quarter marketing expenses will increase sequentially over Q3 by approximately $1 million, in large part due to the shift in the timing of our Annual Partners Summit event into the fourth quarter, as I previously mentioned. Non-GAAP adjusted net income for the full year guidance is raised to an estimate of $14.9 million to $15.6 million, and our non-GAAP adjusted net income attributable to common stockholders is also raised to a range of $5.2 million to $5.4 million or $0.20, $0.21 per diluted share based on an estimate of 26.5 million weighted average diluted shares outstanding. We project full year 2015 stock-based compensation expense of about $3.8 million, and our full year tax rate is expected to be approximately 37%. In summary, we are pleased with our third quarter results, and our outlook for the remainder of 2015 is positive as reflected in our updated guidance. We will now turn the call over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Heather Bellini with Goldman Sachs.

This is Shateel Alam filling in for Heather. Just one on subscriber growth in North America. You said that more dealers are standardizing on your platform, and you're adding more dealers in general. You had a change in relationship with one of your largest dealers, Vivint, this year. I know you don't give out specific subscriber numbers, but have you been able to offset any loss from Vivint with some of the new dealers you're adding? I mean just any commentary you can give on subscriber growth in North America, in general, would be helpful.

This is Steve. Yes, so we've seen, basically, the rest of the base make up for any loss of production from Vivint for the most part. So that trend has been underway, really, for about 1.5 years, we have seen particular strength in the smaller sort of part of the dealer base, what we call the carriage trade dealers who tend to serve us more commercial accounts and service more of the high-end residential accounts. So in general, we're happy with the trend line, and we have seen strong performance there, which has transformed into pretty reasonable results.

Our next question comes from the line of Michael Nemeroff with Credit Suisse.

I've actually got a couple. A couple of them relate to some of the exciting announcements that you've made on the international front. I know that it was something that you intended to do pre-IPO. You told us you're going to go Pre-IPO, and then you're actually starting to do it. On the Pronet side, 200,000 residential subs. How many of those do you think that you can actually convert? Or is it going to be the same thing where you're really not -- the conversions are going to be a little bit difficult, you're just looking for net new from Pronet? And then as it relates to Securitas, they got a lot of employees, but I don't think they've got any residential subs. I'm curious how -- what the structure of that relationship is. Are you going to have to -- how are you going to do the installs? Is that some brand-new service that they're starting up over in Europe?

Yes, Michael, so on -- 2 questions there. I'll start with Pronet. I think what we'll see with Pronet is similar to what we've seen with most North American service providers where they'll get started basically using our offering as a way to increase the size of their market to reach new customers and to more efficiently service those customers, so we'll see the predominant use be on new installations, and that's not atypical of what we've seen here. After a couple of years, what you normally see is once that sort of new sales process stabilizes, things are going well, the service provider will come back and say, "Okay, I've now got a dynamic where 20%, 30% of my existing base are using Alarm.com, working great. I'm able to more efficiently service those customers. They seem to be happy, they're attritting at a lower level, how can I accelerate the pace of upgrading my legacy base?" I don't think we'll see that happen initially, but I think we'll see it happen over the course of 2, 3, 4 years, because that's sort of the same dynamic we've seen in other markets we serve. So we're excited to have that opportunity and see the progress there. As it relates to Securitas, Securitas is a huge security company. They do actually have a set of residential subscribers and commercial subscribers in the European market. They go to market through what here in the U.S. we would refer to as a dealer program type of model where they have a number, like hundreds, of small dealers who are actually in each of the local markets in the EU and go out with an offering that runs against a Securitas central station. So they operate, I believe, 11 or 12 different central stations in Europe. That's important, because each country has their own set of regulatory requirements. And really, if you're going to sort of pick a partner in Europe that's already dealt with a lot of the regulatory challenges, that's already sort of localized itself to be effective in each local markets, I think you would probably -- we're super excited to have that opportunity. So they will go to market through their dealers using our service. They'll roll that service out gradually beginning in the middle part of next year. Alarm.com will connect eventually to all of their different European central stations, and those dealers in the local market will compete with other dealers in that market, but they do already have some history of doing this and have a number of subscribers that's in -- my recollection is in the hundreds of thousands, if not close to a million that are already working with their central stations.

That's helpful, Steve. And then you mentioned in your prepared remarks the system enhancement module. I'm curious what the strategy is with that. Is that meant to eliminate some of the pain point of replacing some of the legacy hardware that's been in there for years? Just trying to understand what the intention is with the release of that product next year.

Right. Yes, you got it right. Basically when we look at the market right now, we've been very effective penetrating new installations, helping our service providers grow their market. We haven't really made it easy for them traditionally to go in and go to a customer that they maybe created 10 years ago that has some legacy hardware already installed and then upgrade that customer to Alarm.com services. So what we've done with the system enhancement module is go back and look at all of those legacy control panels that existed really before we did as a company, look at the protocol on those control panels, figure out which ones we can integrate with, and you'll see that product evolve through time. Initially we'll target a few legacy controls that we think are most commonly installed already that our service providers have given us feedback on. And then as we roll the clock forward, we'll continue to add support with that product for wider and wider component of the install base. And I think it will give us a chance to let our service providers get out there and bring their customers sort of up to par in terms of functionality more quickly.

That's helpful. One for Jen, if I may. Jen, you'd be -- I know that you're not providing any 2016 guidance, but how should we think about the SaaS and revenue growth for next year? Do you still anticipate that we should model that around 20%, maybe a little bit higher, given the strength that you've shown over the last couple of quarters?

You're right. We're not giving guidance in 2016 at the time. We're in the middle of our strategic planning process for 2016. And so once we complete that over the next couple of months, we'll be providing guidance on 2016 when we release our Q4 earnings.

Our next question comes from the line of Nikolay Beliov with Bank of America.

Jen, nice uptick in EBITDA guidance. Is that a result of the revenue outperformance? Or are you seeing more leverage and return on investment at some of the initiatives you have?

Yes, the leverage -- the adjusted EBITDA beat, if you will, mostly it's the overperformance in the SaaS and license revenue and the associated gross profit, to a lesser extent, from the hardware revenue. But also we are starting to see some leverage from the operating expenses. As you could see, G&A flat year-over-year. We did have lower expenses in the third quarter around sales and marketing, specifically marketing, which will shift into Q4. So I think I was pretty explicit in the release, in my comments, that I would expect that Q4 adjusted EBITDA would be lower than Q3. But yes, it's starting to see good leverage from SaaS and license revenue growing and some operating leverage as well.

And on the cash flow statement, cash flow from operations came in really strong, double the rate of EBITDA on an absolute basis. Is it like one-off other item going on there? Or that's going to be more of trend going forward?

Really, it's a lot of timing, frankly, and the collection of receivables and the timing of payments on liabilities. There's no shift that we see in the future around the capital spending requirements for the business, so I wouldn't guide you to think about that differently. But yes, you're right. It was a strong quarter for operating cash flow and a lot of it had to do just with the timing of receipt of receivables and payments on a day [ph].

And Steve, one for you. From your point of view, how do you see the competitive landscape? First, you have the vendors that approach the market from nonsecurity point. Are you more of the automation angle talking about Apple, Google net and dropcam, Samsung smart thing? And second, if you have the vendors that approach the smart home from security point of view, such as the -- now we have cable companies and the telcos gaining increasing share of net new subscribers, and you guys clearly focus on the security channel. Just wanted to get your thoughts on so like refresher on the sustainable advantage of Alarm.com. Is it the platform? Is it the go-to-market channel? And how do you fit in this like rapidly-evolving landscape? What's the moving pieces here?

Right. To begin with, we believe that the average consumer, the biggest chunk of the market really wants to purchase smart home services as a service. They want to have a professional service provider to come help them specify the system, help them install it, help to maintain it. A really good system is a fairly customized system. There are lots of different things that work together nicely, and we really like where we are with the channel we built for meeting that demand. When we look at some of the other products that are coming at it from sort of a nonsecurity angle, the story is pretty mixed there. We've seen a couple of companies in the last quarter fold either due to bad business models or lack of demand. There are some positive stories as well. But in general, that chunk of the market to us appears to be a lot of noise without a ton of production, and we really like sort of where we're positioned and the business model that our service providers have and the way we go to market. Cable is -- at times, we'll talk about cable even as a customer, so it's true that we actually have a couple of meaningful cable companies that use our product already. We have a couple of meaningful carriers -- cellular carriers that use the product. So we don't exclude them from our addressable market. I think we're most pleased with the traditional security channel, but we wouldn't exclude necessarily some of the others that might go after the market. I think at the moment that more and more folks are beginning to realize that the security channel is really best equipped to take the Internet of things to the home. So I think that will continue to be the case for the next couple of years and that we're pretty well positioned with them.

Our next question comes from the line of Bhavan Suri with William Blair.

First one for Steve. Just as you look at the DIY market, just to follow-up on the previous question, you've got Frontpoint, which is doing a great job and obviously a clear partner, how do you see that market actually evolving? Is it a mix between kind of the Google guys? Or given sort of the security nature of things, it's going to be more sort of guys who are selling a panel that added to all those features, like a Frontpoint? How does that evolution look to you over the next, say, 3 to 5 years from a strategic perspective?

Well, I think it's -- as much as anything, it's about what's the quality of service that you as a provider provide to your consumer. And whether you're in the DIY business or whether you're in the professional install business, if you really, really focus on providing great service to consumer, making sure that their systems are always operational, that they're have a great experience, I think you'll do well, whether that's again DIY or professional services, either one. I think over a long period of time, I should say that I think we'll see more and more of those who have traditional models making it possible for the consumer to make some additions to their systems on their own. So you can imagine a day where a service provider really provides a great platform, keeps that platform working, makes sure that it has best-in-class security, so that if your fire alarm goes off someone's actually going to come to the home and respond. But the consumer may want to add a water valve, and they may want to add a thermostat or something of that nature, and I think you see us and our service providers make that more possible for the consumer to do on their own. So I think you'll see a little bit of a hybrid model emerge in the out years.

Got it. Got it. And then just one on a competitive front. Obviously, you and sort of the other main guy, and sort of self-service sort of new age monitored security, controlled security space, and you guys are the pioneers in sort of the cutting the wire line and moving to cellular. Have you seen any of the traditional guys or even ADT outside of the pulse platform start to head that direction? Any new competitors start to say that's the way to do it, and sort of move to a pure cellular-based service just of the firmware built-in as opposed to sort of something either proprietary or landline-based?

So if I understood the question just to make sure, are we seeing others that are moving to being comfortable with a pure cellular implementation, getting rid of kind of the landline [indiscernible] in its entirety.

Right.

Yes, I think we are seeing that as a trend. I think -- we were excited this quarter to announce all the innovation we've had around the LTE network, and bringing that more to our service providers. You look at the bandwidth and the capacity on that network and the things you can do with it, and it's even becoming more possible to untether yourself from some sort of traditional or proprietary wired connection. I can't speak for ADT specifically, but I think if you ask them, you would probably hear that some -- sometimes their customers are cellular-only, and so in general I think that the market is very comfortable with a technology that's sort of always works for the consumer. That's most important. And the more things you can do to provide that level of reliability, the better. And you could imagine that if you're rendering service to the consumer, and in between your service and the consumer's experience as a router that no one is really maintaining a cable modem, et cetera, the reliability oftentimes suffers. So I think we're kind of on the right side of that trend line there. More and more of the service providers are looking to move to a pure cellular implementation.

Got it. That's really helpful. And one quick one for Jen, just on -- as you look at next year and you look at the expansion into international, the SMB all those opportunities, do you think there is more incremental sales and marketing spend that needs to be done? Or do you think you kind of absorbed a bulk of that as you sort of front loaded some of that expenses? Just any color on for next year would be helpful.

Yes, again, we're still going through the planning process now. But we did sign up 2 very large international service providers, and I anticipate we'll be applying the appropriate amount of resources to make sure that those are successful launches. But we'll give more clarity around that when we go through our planning process and prepare to give guidance for 2016 with our Q4 earnings.

Our next question comes from the line of Tavis McCourt with Raymond James.

I apologize for the background noise. I'm in an airport. But -- so a few questions, Steve. In the prepared remarks, I think you mentioned kind of the commercial opportunity. I'm wondering if you could remind us what percentage of your subs are commercial today, kind of the competitive environment there. And what are some of the features and functionalities that you need to add to the platform to succeed in the commercial market? And then secondly, follow-up on the last question about cellular. Today, do you use a cellular link for video? Or do the customers that subscribe to some sort of video application, are they using broadband for that?

Okay. On the commercial side, I think, as a reminder, in the past, we've said that fewer than 5% of our existing customers are commercial customers. I think that the truth is, we don't know exactly what that number is. Sometimes we'll see a service provider use our product for commercial. It may not be obvious to us, but we do see a positive trend line there, and we've taken some steps that I think are beginning to have impact. The most substantive one was is in -- I think, the second quarter we announced a cord for a new control panel from Tyco DSC called DiMeo that's commercial UL grade control panel. We also completed an acquisition in the first quarter of a company called Secure-i that offers commercial-grade video services that work with the access commercial cameras. So we're making some investments there. In terms of the competition, it looks to me a lot like our residential market looked 10 years ago where there's -- the competition is really sort of inertia, and the way that people have been sort of doing things for the last 10 or 20 years, there's not a real obvious direct competitor to us today, I think. Therefore, we see an opportunity. The service providers are asking us to deliver functionality like what we've delivered residentially for the benefit of their commercial customers. And we've already done a fair amount of that. So that's kind of what we see there. With regard to cellular, we do not, today, transmit at least not in a standard way live video over a cellular path. That's a possibility that we see coming. That said, we have for some period of time now, and this is sort of important, made it possible for our service providers to pull images out of a property both when there's an alarm and when there's just routine activity in the house with a product that we call the image sensor. And the image sensor works in a pure cellular environment. If your door opens, pictures are taken by a device that looks sort of like a motion detector. Those are transmitted to the cloud, and then ultimately transmitted to the consumer. So it creates a lot of the same benefits of video without the bandwidth cost of a live streaming video connection.

Our next question comes from the line of Jeff Kessler with Imperial Capital.

The -- one of the things that I've noticed with -- Securitas AB, obviously, has just acquired a significant provider of electronic security services with 2 5-diamond star central stations in North America. And while it's mainly for enterprise-sized clients, there probably is a middle -- a meeting ground between the 2 of you somewhere along the line. And I'm wondering if you've had any discussion with Securitas beyond residential into small business which could include some of the old Diebold clients.

Right. So I was with Securitas last week and spent a lot of time talking to them, and I think when you look at their recent North American acquisition, their near-term intent is to stabilize and integrate that operation, and they don't want to necessarily bring a ton of change there sort of right out of the gate. And our focus therefore with them is very much in an area that I think is even more accretive to Alarm.com, which is making our services available in Europe and country by country. So that's where we're both focused right now. That was really the basis for our commercial agreement. That said, as you know, Jeff, I mean if you do a good job servicing a partner and a customer over time, opportunity tends to manifest itself. And we would certainly be on the lookout for opportunities like the one that you've suggested might be possible in the future.

Okay. Secondly is right now, the legacy alarm industry is in the middle of somewhat strenuous and arduous, if you want to call it, upgrade. I call that, from 2G to 3G. You for -- you are already on an LTE 4G-type of platform. Is there the opportunity for you to take some customers to either leapfrog them or to -- and/or to just basically upgrade those that can take the upgrade to a 4G platform?

Right. So the 2G upgrade cycle is exciting for us in a lot of ways. The -- we're fortunate. We've always been pretty nimble with the way we operate with cellular carriers. So fewer than 20% of our subscribers are 2G today. And even a much smaller subset are going to be subject to any sort of sunset. We're looking therefore to market where most people that have used other products for cellular are needing to invest in their customers to upgrade those customers to either 3G or 4G. And certainly if you can go out there and you can say, "Hey, I have a solution that's going to allow you to leapfrog 3G entirely and put your customer on LTE, which has far more than a decade of network life ahead of it," that's a compelling message, and that's something we're focused on. So when we think about a product like the system enhancement module and how that product will evolve over the next year, definitely making that product available in an LTE form factor is a goal, and we think that'll be compelling for the market.

Right. Because I haven't -- with the market doing what it's doing right now and companies just beginning -- some of them beginning to really ramp up their spending, others further on it seems to me that this is a big opportunity for you to get them to a 10-year life as opposed to having them upgrade again in 4 or 5 years.

Right, we agree.

And that's just one man's opinion.

No, you're right on.

Okay, the final thing is -- the final question would be around as your partners or your user partner conference, one of the things that you've been investing very heavily in is your education. One -- and upgrading and helping your partners to upgrade their personnel so that there isn't extra cost and/or the inability to provide service on cellular and basically network wireless interactive network systems, which some of these customers who are upgrading are a little bit low to do because they're a little bit scared of what's going to happen if they try to do more than just on/off type systems and try to go to a lot of apps. What types of investments are you making in education? What did you do -- what did you say or do at the partners conference to give your customers the confidence that you're going to be behind them and effectively help them -- help educate them so that this -- I guess, this conservatism on the part of some dealers gets melted away?

Yes, I think you're right on that it takes great training and great support. And at the partner conference, we really focused on making them aware of what we call our full spectrum of enterprise services, which includes training, great support. We have an entire team referred to as the technical account management team that goes out in the field with our service providers, helps them do their first set of installs. If something is unfamiliar to them, helps them troubleshoot. So we're pretty focused. And it's something I think if you go out and talk to some of our service providers and ask them, "Aside from technology what does Alarm.com really do well.?" I think they would say, "Well they do a great job at training, and their support is phenomenal. When we call them, we get a person within 20 seconds, and that person is qualified to answer a question." And that's not just important for the 2G migration, that's important for the Internet of things, because we're constantly thrusting upon our service providers a wider and wider range of solutions that they can take to the market. And the only way to do that, I mean, it's -- technology is part of it, but it really does when you're working with the channel require a lot of service, a lot of support and then a lot of backend systems that help them manage and supervise all of that activity. So again, the partner summit, we really focused on building their awareness, getting them signed up for more training, making them aware of our field training opportunities. We're doing training in partnership with a few distributors right now that are actually at the local distribution centers where service providers go to pick a product. So we didn't -- the partner summit tends to be more of a executive level function, so we didn't necessarily do installation training there at the summit, but we did make them aware of all the different tools we make available for them to be successful.

Our final question comes from the line of Brad Reback with Stifel.

Great. A quick question for Jen. Jen, if I look at my model historically, this is the first quarter where you've shown a sequential increase in subscription revenue as far back as I go for a couple of years. Could you talk about what the drivers were that led to that?

I don't have the numbers in front of me that you're looking at, but yes, we had a very strong quarter in terms of putting on new subscribers, making some gains like we talked about before; some international expansion and some other things that contributed. We also, like I pointed out, added about $485,000 of revenue in the quarter from 2 acquisitions that we made within the year. So there were a lot of good things that happened in the first 9 months and in the quarter that contributed to that.

That concludes today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.