Alarm.com Holdings, Inc. (ALRM) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Alarm.com 2015 Fourth Quarter and Year-end Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Jonathan Schaffer with The Blueshirt Group. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to Alarm.com's 2015 Fourth Quarter and Year-end Earnings Conference Call. As a reminder, this call is being recorded. Joining us today from Alarm.com 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 our call this afternoon. We were pleased to end 2015 with higher fourth quarter revenues than anticipated on both the SaaS and hardware lines. Our core SaaS and license revenue grew 25% year-over-year. This upside, combined with better-than-expected operating leverage, translated into solid adjusted EBITDA performance for the quarter and the year. I want to thank our service providers for their enthusiastic and growing support as well as my Alarm.com teammates for their many contributions as we continue to execute our plan. For today's call, I'd like to spend a few minutes talking about what we achieved in 2015 and our outlook for 2016. We began 2015 with a plan to take the company public and with the successful offering in June, we added about $100 million to our balance sheet and we adjusted to the cadence of operating as a public company. Our service providers continued to expand the use of our platform throughout the year, and we worked hard to make ourselves more valuable to them. Throughout 2015, we broadened our product portfolio with new software and user interface capabilities and the addition of new devices to our ecosystem. Some notable highlights include releasing the industry's first LTE-based offering, integration with Apple's Watch and TV as well as Amazon's Fire TV and Echo products. We also added support for control panels relevant to the SMB market like Tyco's DSC Neo and we introduced a new 7/24 commercial-grade video solution. And we launched our own award-winning Smart Thermostat, which leverages both security sensor data and remote temperature sensor data to deliver a superior user experience. We also continued to see favorable trends in the market. Early in the year, we saw a lot of hype around the loosely defined Internet of Things theme. Every week it seemed like there was a new consumer gadget tethered to a single-purpose mobile app that had sleek marketing but no use cases. As the year progressed and some of these faded into the background, it became more clear that the consumer doesn't really want a set of disparate devices that they have to install and maintain themselves. Today's smart home consumer is increasingly looking for a holistic home control system that is easy to use with robust security at its core. In a recent survey conducted by TNS on behalf of Intel indicated that 82% of Americans agree that integrated security is a priority for living in a smart home and that all smart devices should be secured through a single integrated security package. This is consistent with what we are seeing in the market today and hearing from our service providers. It is becoming more apparent to us that Alarm.com and our service provider partners are in a position to lead the market as consumer interest in smart home technology continues to grow. We also believe our scale today and the corresponding volume of data generated on our platform is an important differentiator for us and an advantage for our service providers. Alarm.com is now in over 2.6 million different properties and the data generated by tens of millions of connected devices informs our road map. This provides us insights that nobody else enjoys and allows us to continually enhance the value of our platform to both our service providers and the end consumer. As further indicators of scale and reliability, we have now processed over 1 billion central station monitoring events and 1 billion video clips. These numbers seem large until you consider that our platform is much broader than just alarm signals and video clips. By the end of 2015, we were processing more than 475 million events per week and 40 million notifications per week from a range of devices, including panels, smartphones, video cameras, thermostats, door locks, garage door openers and lights. Looking at 2016, I believe we're in a good position to continue to benefit from broad consumer interest and interactive connected services. We have grown our headcount from 400 to 507 during 2015 and our team members are another year more experienced in our business. We have grown our active base of service providers from about 5,100 at the end of 2014 to about 6,100 at the end of 2015. And our service providers are also more experienced and confident in selling our platform than ever. Throughout 2015, we worked to design, test and deliver a product we call our system enhancement module or SEM for sure. The system enhancement module allows our service providers to upgrade many properties to Alarm.com services without replacing the customer's legacy equipment. In 2016, many of our service providers will be visiting homes and businesses that have cellular 2G communicators. SEM provides them with a cost-effective upgrade path to LTE connectivity and also enables the consumer to experience Alarm.com services. Because many of our products are associated with light safety, we are intentionally deliberate in how quickly we deploy a new product to the market. We expect to steadily increase distribution of SEM as 2016 progresses and this should expand our addressable market. We have also continued to invest in our enterprise services platform. Traditionally, a service provider installs devices into a home or business and then never knew when those devices fail to operate as intended. With our platform, the service provider can now remove remotely monitor the progress of the installation, program devices as needed and service the customer through repair common problems without rolling a truck. We hear directly from our service providers that this suite of capabilities significantly differentiates us from competing platforms and improves their operational efficiency. We believe that enterprise services will increase the loyalty of our service providers and their confidence in taking our full set of solutions to market in 2016. We also heavily invested in creating the foundational elements for our international business in 2015. As examples of our progress there, we announced significant wins with Pronet in Turkey, Spark in New Zealand and Securitas in Europe, and we have an encouraging pipeline. Our team worked hard to integrate with different flavors of hardware that meet various non-U.S. market requirements, and we have integrated network connectivity from 10 different international cellular carriers into our network operation centers. By the middle of 2015, we had seen some early success, and we reported that our international service providers had reached an installation rate of over 1,000 new installations per month. By the end of 2016, we expect our international service providers will be installing more than 4,000 systems per month. Lastly, as we begin 2016, we have seen some M&A activity in the security industry. Earlier this month, a deal was announced in which Apollo Management Group, who already owns Protection 1, would acquire ADT. We think this deal reinforces our belief that service providers, who can combine robust security services with innovative smart home features, will be key enablers behind the Internet of Things movement. We look forward to continuing to serve both Protection 1 and ADT Canada, where we already have productive partnerships, and we hope to have the opportunity to expand our relationship in the combined entity over time. Taking a moment now to look at our full year 2016 outlook. We are targeting SaaS and license revenues of $169 million to $169.5 million. We expect total revenues to be in the range of $236 million to $239.5 million. We anticipate continued investment in our core technology, the development of our international business and several other initiatives that will drive future growth. And we are targeting between $40 million and $42 million of adjusted EBITDA as we start to see some leverage flow through the model. So in conclusion, we think that 2016 will be an exciting year for Alarm.com, and we look forward to updating you on the progress that we are making on many fronts as the year unfolds. With that, I'll turn things over to Jen. Jen?

Thank you, Steve, and to everyone participating on this afternoon's call. I'll start with a summary of our fourth quarter results, and then provide guidance for the first quarter and full year 2016 before opening the call to questions. We are pleased with our fourth quarter results, which exceeded all of the guidance metrics we provided in our third quarter conference call. Total revenue for the fourth quarter increased 25% over the fourth quarter of the prior year to $56.9 million. SaaS and license revenue also grew 25% over the same period to $38.7 million. The vast majority of the growth in SaaS and license revenue was from our core security business, which is comprised of recurring monthly fees paid by service providers for both platform access and for the services they provide to their customers and to a lesser extent, licenses to our intellectual property paid on a recurring monthly basis. We also saw healthy SaaS revenue growth, while off a small base, from non-security markets like energy, HVAC and remote access management. Total revenue from these businesses, which we report on our Other segment, more than doubled over the fourth quarter of the prior year. Our SaaS and license revenue visibility remains healthy, as evidenced by our 93% renewal rate in the fourth quarter of 2015, consistent with the prior year. This growth in visibility contributed additional economies of scale. Our SaaS and license revenue gross margin increased to 83% during the fourth quarter, up 300 basis points over the prior year. Hardware and other revenue of $18.2 million in the fourth quarter increased 24% over the same period of the prior year, resulting from higher sales volumes in those product categories. Video camera sales in our core business contributed approximately 45% of the overall increase and hardware revenue in our Other segment contributed approximately 37%. Hardware revenue in the quarter substantially exceeded our expectations although, as we've stated in the past, hardware revenues can be unpredictable from quarter-to-quarter, and it should be noted that not all of the hardware sold in the quarter has yet to be installed by our service providers. Hardware and other gross margin increased to 26% during the fourth quarter, a 290 basis point increase over the same period of the prior year. Hardware and other revenue gross margins generally fluctuate from quarter-to-quarter based on product mix. So as we mentioned last quarter, in 2015, we implemented changes to our supply chain logistics, which reduced the carrying cost of some of our products in a persistent basis. Our overall strategy is to continue to add third-party devices to the ecosystem to provide the most complete and seamless smart home experience for our customers. Our strategy is not to maximize profitability in a hardware revenue, and we expect some fluctuation in hardware margins in 2016 as we bring new products to market and enable a wider range of devices. The breadth of our hardware ecosystem differentiates the Alarm.com platform and delivers more value to our service provider partners and end-user customers. These devices include both proprietary hardware that we design and manufacture like the Alarm.com smart thermostat as well as hardware produced by third parties. Total gross margin increased to 65% for the fourth quarter, a 330 basis point increase over the same period of the prior year. Turning to operating expenses. We continue to invest heavily in research and development to give our service providers a growing advantage in the market as well as to support future growth in adjacent areas. We also continue to invest in the sales and support infrastructure necessary to expand our international operations. Total sales and marketing expenses incurred during the quarter were $7.8 million, an increase of 31% over the same period of the prior year. This increase was partially driven by higher headcount to support the growth of our domestic and international businesses. Headcount in sales and marketing functions increased to 188 at the end of 2015 from 159 at the end of 2014. Additionally, during 2015, we expanded investments in marketing programs on behalf of our service providers. These included a new co-advertising program and the continued expansion of the Alarm.com Academy training program. Looking ahead to 2016, we expect sales and marketing expenses to increase in absolute dollars as well as on a percent of revenue basis. We plan to add headcount to support our international expansion and other growth initiatives, and increase investment in our core business with the marketing programs I just mentioned. General and administrative costs increased 37% to $9.5 million over the same period of the prior year. In the fourth quarter of 2015, G&A included $2.8 million of legal expenses related to intellectual property litigation, which we exclude from adjusted EBITDA. The fourth quarter of 2014 included no comparable litigation fees. G&A was also impacted by the addition of costs related to becoming a public company, including professional fees incurred to assist in the implementation of Sarbanes-Oxley compliance. These increases were partially offset by a $650,000 noncash gain recorded to reduce a contingent liability related to the purchase accounting for an acquisition. Net of the effective legal expenses and stock-based compensation, both of which are excluded from adjusted EBITDA, and net of the noncash gain recorded, G&A would have been $6.6 million in the quarter, an increase of 10% over the same period in the prior year on an adjusted basis. This would have represented a 100 basis point decline in G&A expense as a percent of revenue. Looking ahead to 2016, we expect additional leverage in G&A expenses, excluding IP litigation cost. Research and development expense was $13.3 million in the fourth quarter, which represents a 98% increase over the same period in the prior year. R&D expense in Q4 2015 was impacted by charges we recorded related to the renegotiation of a contract with a manufacturer. The manufacturer was working with one of our other segment businesses focused on the retail channel, and we reduced the scale of that initiative and reallocated much of those resources to the core business. Excluding these charges, R&D expense increased 36% over the same period of the prior year, which is largely driven by compensation expense as we hired into engineering and other R&D-related functions. The total number of employees in research and development grew to 261 at the end of 2015 as compared to 187 at the end of 2014. Looking ahead to 2016, we plan to continue to increase our investment in R&D, both in absolute dollars as well as on a percent of revenue basis to further extend our leadership position in the market. Adjusted EBITDA improved to $9.7 million in the fourth quarter of 2015 as compared to $9.2 million in the same period of the prior year with the increase driven by growth in SaaS and license revenue. We ended the quarter with cash and cash equivalents of $128.4 million, up from $42.6 million as of December 31, 2014. The company raised $98 million in net proceeds from the initial public offering, which closed in July 2015. We generated $6 million in cash flow from operations during the quarter, a decrease from $9.1 million in the fourth quarter of 2014. The decline in cash flow was driven by higher IP litigation expenses and an increase in the noncash items impacting net income, including deferred income tax assets. Capital expenditures of $3.8 million during the quarter increased from $700,000 during the same quarter of 2014. Over 63% of our capital expenditures in the quarter were subsidized by tenant improvement incentives related to the build-out of new office space, which we relocated to this January. I want to conclude by initiating SaaS and license revenue guidance for the first quarter of 2016 as well as for the full year and total revenue, adjusted EBITDA and non-GAAP earnings per share guidance for the full year 2016. For the first quarter of 2016, we expect SaaS and license revenue in the range of $39.3 million to $39.5 million. For the full year 2016, we expect SaaS and license revenue in the range of $169 million to $169.5 million. Total revenue for 2016 is expected to be in the range of $236 million to $239.5 million, with hardware and other revenue projected to be $67 million to $70 million. Our expectations for full year 2016 adjusted EBITDA are in the range of $40 million to $42 million, which reflects an adjusted EBITDA margin of 17% versus 16% in 2015. Non-GAAP adjusted net income for the full year is projected to be $22.2 million to $23.3 million or $0.46 to $0.48 per diluted share based on an estimate of 48.3 million weighted average diluted shares outstanding. We project full year 2016 stock-based compensation expense of about $6.9 million. Our full year tax rate is expected to be approximately 37%, with the increase in the effective tax rate as compared to 2015 related to additional R&D credits realized in 2015, which reduced the 2015 tax rate by 400 basis points. In summary, we are pleased with our fourth quarter and full year 2015 results, and we have a positive outlook for 2016 that is driven by ongoing strength in our core business as well as encouraging progress in our international and other initiatives. We will now turn the call over to the operator for Q&A.

[Operator Instructions] Our first question is from Michael Nemeroff with Crédit Suisse.

This is Chris Rochester on for Michael. Just one quick thing. I mean, the hardware revenue has been a lot stronger than we've expected and stronger than has been forecast, but is there any way we should think about that as sort of a stream for future subscription revenue, or how should we kind of look at that, what are the puts and takes there?

Chris, Steve speaking. Yes, the hardware revenue has come in strong a couple of quarters in a row now. I think we're seeing dealers installing a few more devices in each of the properties than maybe what we were seeing in the early part of the year. So the average consumer instead of getting 1 video camera is opting for 2. Some of that is because we've actually driven down the COGS on some of those components. And therefore, the dealer with sort of the similar level of creation cost can afford to put in another device or 2. So I think that's the trend we're seeing. I don't think I would use it as a leading indicator of SaaS growth because I -- yes, the reality is we're going to sort of see the same revenue per property, not always but for the most part regardless of the number of different peripherals that may be installed. So 2 cameras doesn't necessarily generate more revenue than 1 camera, for example, on the SaaS line. So I don't think I would go to the extent of making it -- trying to tie that exactly to the SaaS growth line.

Okay. That's helpful. I guess, kind of along those lines, thinking about sort of attach rate of home automation sort of within the dealer base, if adding cameras doesn't really going to add too much to the SaaS line, what should we think about as adding to that SaaS line going forward? And what sort of trends are you seeing in adoption?

Yes, so just to be clear on cameras, adding the video service does improve our revenue per property. So a customer that has no video would not generate the same yield as one who does have video. But if the customer opts for 4 video cameras instead of 3, that doesn't necessarily change things for us. We don't charge per camera, we charge for the service as a whole. So I think we will see increasing attachment, for example, of video. The consumer both -- commercial has been comfortable with video for some time. The residential consumer is increasingly comfortable with video as a part of their security apparatus. The quality of the outdoor cameras and the price points on outdoor cameras both are kind of moving in the right direction, so it's a purchase that's now within reach for a growing part of the market. So there, I think that's probably a good driver in our business. As we look at more on the automation side, things like a connected light, connected thermostat, shades, some of the automation features are a bit more table stakes, where consumer wants automation, they're excited to have it, it may push them over the top and want -- cause them to want an overall Alarm.com system. But if you try to tell the consumer, "Hey, to control your light through your mobile app, you're going to pay an extra couple of dollars per month." That doesn't float very well. So there, I think our strategy really is to use the desirability of the automation features to continue to sort of drive adoption of the overall platform and then to drive stickiness within the consumer base.

Great. Then maybe I can squeeze one more in for Jen. Just kind of looking at the international growth that you had and looking at the guidance. I mean, what assumptions you're kind of baking in, maybe 4,000 a month, the new subs from international, lower or higher? Can you give any kind of color around that?

Sure. So right now, we're putting on about 2,000 accounts per -- 30 -- every 30 days internationally. I think we see by the end of the year, we should be able to scale that growth rate up to about 4,000 accounts per month, but as we get to the end of '16. So we're seeing progress there, we're seeing momentum, and that's essentially what we expect.

Our next question is from Nikolay Beliov with Bank of America.

Jen, just wanted to talk about the EBITDA leverage you showed in the quarter and the guide to -- relative to the share. Can you talk us -- talk to us about the puts and takes here? What's happening, the deemphasizing of the retail business is flowing through the -- from the margin structure? Or just what's going on here, just want to understand better.

Nikolay, are you talking about the Q4 2014 EBITDA or our 2016 outlook?

I'm talking about the actual EBITDA performance in Q4 '15 and the EBITDA outlook for 2016.

Sure. Yes, so our 2014 -- Q4 2015 adjusted EBITDA was certainly higher than we had anticipated. A lot of that came from our over performance in revenue in the fourth quarter as well as the fact that we did spend less in certain expense categories, which fell through to the bottom line. Looking forward to 2016, as we issued in our guidance, we are expanding our EBITDA margins. That's coming from growth in revenue, which is increasing our gross profit and also it's coming from some leverage in general administration expenses. We do expect some leverage in G&A in 2016. But I would also say that at the same time, we very much remain in an investment mode and as we also discussed, I articulated in our guidance, we do expect R&D expenses to increase as a percent of revenue in 2016 as well as sales and marketing expenses in 2016 as we both invest in marketing in our core business domestically in some of the co-marketing programs that I mentioned in the call as well as internationally in the support of end markets where we already have strategic relationships in place likes Securitas in Europe as well as entering new markets internationally.

Got it. And Steve, one for you. Can you update us please on the Securitas deal. Where you are right now? When are they going to start deploying? You mentioned earlier you had 1 million homes under management. What could possibly be -- the penetration be there over time?

Right. So I think we know that we signed the Securitas deal after a fair amount of evaluation by them in the late part of last year. I believe I indicated at that time that we expect to begin to see some traction in terms of production from that in the middle part of this year, and that still holds true. Things have been roughly proceeding as we expected. They're a large company and they service 13 different markets with 13 different central stations in Europe alone. So there's a fair amount of legwork that each of the parties needs to do. They're very, very focused on quality of service as well, so to get everything in place in terms of hardware support, language support, what not. So I think what you'll see there is -- we'll begin, I think we've baked that in, some initial production, into our model, and Jen talked about an exit velocity of 4,000 per month, and that will be a contributor in the second half of the year. And then in terms of penetration, you've got 1 million customers out there. It's one of the reasons that we like the product SEM. We think that's going to go -- some vehicle to help them go back over time and upgrade some of those customers, but I think their initial focus will be just getting to market with a great full-fledged interactive service.

Our next question is from Heather Bellini with Goldman Sachs.

This is Jack Kilgallen filling in for Heather. I had a couple. Just firstly, you mentioned the SEM initiative and the traction you're seeing there. Are you starting to see -- are the service partners starting to have an acceleration in converting some of the legacy security systems to Alarm's platform? And if not, I guess, what's holding that opportunity back at this point?

Jack, just can you repeat which initiative are you referring to?

The SEM.

The SEM. Okay. Got it. Got it. Yes, I mean, the update there is we began to put the product in market at the very tail end of the fourth quarter. As I noted, we're somewhat deliberate about how quickly we push something out, how broadly we push it out. It is a light safety product and -- so we work with a set of pilot dealers in the fourth quarter. We're continuing to work with them. And I think as the year unfolds we get into sort of the April time frame, we'll begin to open up the gates a little more on that. But so far, so good. Folks are having a good experience with it. We'll add support for an additional control panel in the -- which will be the Powerseries control panel in the second quarter and let it flow as the year progresses.

Great. And then you mentioned the 2.6 million properties. Could you give any color on ARPU trends? Is it -- the growth being driven by customers adding on cloud-based video? Anything else you can sort of share?

Sure. That's a good question. We did see throughout 2015 an uptick in ARPU over the course of the year. Much of that is coming from the fact that as you just said and Steve mentioned, more dealers are attaching more devices and using more services in subscribers' homes. As well as, frankly, we've got a tranche of lower quality accounts with a prior service provider that were put on at lower ARPUs, and those are trading off at a faster race -- rate than the remainder of our dealer base. And because of that, that impacted our blended ARPU and drifted it up a little bit. But our expectations for ARPU in 2015 were kind of in line with our expectations.

And our next question is from Bhavan Suri with William Blair.

So just to dive into the dealers a little bit here. I guess, the first question is, you had a nice growth in dealers, but you've always also given us some sense of the penetration idea. And I know it's hard. It's not easy, given these dealers are sort of running it. But sort of penetration within those dealers that you have today, any sense that, that would be great?

Sure. Yes, you kind of hit the nail on the head. It's hard for us to know exactly what our penetration rates are within our existing partner base because they don't report to us the full spectrum of their production. So we have to kind of rely upon our gut feel and our anecdotal feel. At some level, our what we generally see are new dealers where we're typically only getting 10%, 15%, maybe 20% of their production at best as they begin to get comfortable and the typical guy will basically start installing the product and then sit back and wait for 3 or 4 months to make sure everything goes well. And then once we have a year under our belt, we get to half and we begin to really optimize. And in some of our best partners, we're getting 90% of their new account production. So most of our growth really didn't come from those 1,000 new dealers that I noted. I think it came primarily from increasing penetration in the existing partner base. And those 1,000 additional new dealers really just kind of give us as they move through that pipeline of becoming kind of new-to-Alarm.com to becoming experienced installers, they give us some additional kind of tailwinds and confidence about the future.

Got it. Got it. And then maybe just turning it over to Jen a little bit. Here, when you give guidance, you typically look at the dealers you have today and then it doesn't assume sort of any net new dealer additions. Can we assume that's true for the forward outlook of '16, too, sort maintain sort of that guidance approach?

Yes, I think that's right. I mean, we have a large pool of existing dealers. We put on about 1,000 dealers in 2015, but -- and we'll continue to add dealers in 2016 and beyond. But given the size of our subscriber base today and the size, the scale of our dealer base, the majority of our growth is going to come from the dealer base that we have in place today. So our forward growth is not dependent upon us continuing to add a material amount of new dealers in 2016 and beyond.

Yes, that's helpful. And then maybe just the last one, if I can squeeze it in. You, guys, certainly touched on international, but obviously some of the investments, if I recall correctly, in '15 were also in the SMB opportunity. And again, I suspect it's very early but update on sort of how that's progressing would be helpful, too.

Yes -- no, it's a good question. Yes, we were excited last year to announce for the DSC Neo panel. We also did the acquisition of Secure-i to get a more commercial-grade video solution. So we got a full team focused there now. I think we're -- I can't say that SMB was a material contributor last year, but I think as we get into sort of the middle part of this year, and we really begin to fire on all cylinders with regard to marketing sales and training around the technology we have for our existing dealers in the SMB space, I think we'll begin to see some progress there that gives us a little bit of upside really. So we've made progress. We've got, I think, a growing body of technology relevant to that market, and you'll probably see us begin to do some branding work in that market in the middle part of the year, maybe a little earlier, and look for some growth there.

And our next question is from Jeff Kessler with Imperial Capital.

Could we talk a little bit about what could possibly be the beginning of what you might call a virtuous circle of both branding and dealer affiliation resulting in increased production, meaning that some dealers were perhaps taken aback by -- originally by the excess, the complexity and the cost of installing wireless systems. As you bring them into your education programs, they get a little bit better and you begin to sell a little bit more to them. They come back to you, again, for more hardware and perhaps, obviously, more services later on, which require some -- perhaps some more education on your part, but it also ties them in a little bit more to your system, so to speak. Can you talk a little bit about how this -- how you can create this kind of branding, higher penetration circle that could be developing? In other words, kind of a self-sustaining growth model.

No, that's a very good question, Jeff. I can tell you about that. I would add that in that sort of virtuous cycle, there's an additional component, which is the feedback from our service provider, which we are really in a great spot and gives us a little bit of a mode. It's not just one way where we're the training the service provider. We also, by working with 6,000 of them, are sort of at the epicenter of more feedback on how you actually get the stuff sold and installed on the property than anyone else is possibly getting, and we really value that feedback. So we have that as a benefit. I think the service provider is getting more confident. We're very focused right now on how to make sure that as they expand -- I mean, they're very comfortable with us when they go out and install a security system that's interactive. What we're really focused right now is expanding their view of themselves into really being an entity that's capable of deploying a full remote monitoring Internet of Things type of system in either a small business and a home, and making sure that we're providing all the tools that they need to be able to supervise that installation and manage that installation just as easily and effectively as they have been doing for security over the last 10 years with Alarm.com. So I think that gives us a leg up. It's one of the reasons we bought the Trax business to really tie in to the CRM and the text scheduling component that the dealer has to use. And I think you brought up branding as well. Jen noted that we're committed to taking the marketing spend up a tad this year. I think most of that investment will be in the core channel, and especially the regional and the midsized dealers, I think benefit from the brand if the consumer is aware of what we offer, then it makes it easier for them to sell, it gives them some credibility and you do get a level of stickiness and sort of increased penetration as a result. So you've hit upon a component of our strategy and the only thing, I think to add is, again, it's a two-way street. We teach, but we also get a lot of feedback and that helps us.

Okay. As a corollary to that, Tim Will [ph] and particularly Don Yang [ph] over at T1 [ph], who obviously use you, have been particularly focused for the last 10, 15 years on the scorecard on feedback from their own service people. Are you able to start plugging in? Is that the goal for you to sort of plugging in to their so called scorecard as they take over a larger company and get more customer feedback back to you? So again, this virtuous circle gets a little bit bigger?

Right. I mean, Tim is very focused on quality, very focused on execution. He's got a rock-solid management team there that's focused on really delivering high-quality services to the consumer and being able to supervise that process and supervise the organizational efficiency through the entire cycle. So yes, we think that aligns very nicely with, not only our culture, but with the technology that we deliver. And have in the past worked with Don [ph] and expect to continue to be able to work with Don [ph] to make sure that we're supporting them in that initiative.

And our next question is from Brad Reback with Stifel.

Can you guys talk to any changes of substance that may have come about with the Monitronics renegotiation?

Brad, I would say that, obviously, when you have a partner that is very significant to us, very important to us like Monitronics and you renew an agreement with them that by itself is significant because the alternative would be kind of negative. So we were excited that we were able to really renew our commitment with Monitronics. I think the press release we put out on it described at a high level the terms there where we would remain in a position as a preferred service provider to them and their dealers. It's worth noting that, of course, Monitronics works with about 600 authorized dealers and they essentially act as a strong trade regulator, but the dealers have some ability to also make product selections on their own. So there will continue to be a minority of other products that a few dealers use. But we were pleased that they're really tying in to their operation and talking about how we can both work together to continue driving up customer satisfaction that we're able to renew into something that's, hopefully, as productive of a relationship as it's been in the past.

Great. And then Jen just a quick question with respect to the guidance. Besides the conservatism of not adding new dealers into the mix for '16, the year-over-year sub growth rate decelerates at a fairly healthy clip to get to the $169 million guide that you laid out. In '15, it was fairly consistent in the mid-20s. Are there any other issues we should be aware of that go into the guidance?

No, no particular issues. Yes, we're not looking to be overly conservative in our guidance at all. It's early in the year and we're publishing guidance right now that were comfortable publishing given the fact that it is very early in the year.

And our final question is from Tavis McCourt with Raymond James.

Steve, I wonder if you could talk a little bit or -- and remind us on the 2G end-of-life and the timing on that and the financial implications. Obviously, I assume that the SEM program helps out quite a bit with that. But what are some of the financial implication, both good or not, over the next couple of years as your dealers have to deal with that? And then secondly on the hardware strategy. In general, when you're developing new products like the thermostat this year, are you looking to come in at a price point that is below the branded third-party players or at a premium?

Sure. You sounded fine. So on 2G, we've been out now for a long time with 3G and latter technology. We're actually in the market right now with LTE technology and no other competitor yet is out with LTE. So most of our service providers have for some time been using something other than 2G. If you get down into the sort of specifics of 2G, there are 2 universes, there's the AT&T universe, there's the T-Mobile universe. With AT&T, in our case, there are around a couple hundred thousand remaining 2G models out there that will be upgraded throughout the year. The dealer needs to basically move their customer to 3G or latter by the end of 2016. On the T-Mobile side, there isn't nearly the same imperative. It's actually looking like -- that those units will continue to work just fine for some period of time. We're being a little bit optimistic with it, meaning, we're giving people right now the chance to jump from 2G to LTE. And when you get to LTE, you're buying -- you're getting into a decade plus of network life, and it's a pretty compelling message. So I'd say, if anything, the financial consequences to us are, gives us a chance of a little opportunistic and spread our wings and talk about why someone should use our module to provide services to a property. With regard to the hardware strategy and our pricing strategy there, I think in the case of thermostat, we felt like there's an opportunity to dramatically drop the price point for very high quality connected thermostat by moving most of the logic out of the actual device and into the cloud, so that's what we did. And therefore, our thermostat is lighter weight in terms of the componentry versus some of the more retail-oriented thermostats that are $200 plus and I think not as reachable for a decent [indiscernible] consumer. So in that case, I think we saw an opportunity again to be very cost effective, and we wanted to get a product to our service providers that they can work into the connected home without dramatically increasing their creation cost per customer, and that's what we did. In general, we're motivated to help our service providers control their creation cost by giving them best-in-quality hardware, either -- occasionally by ourselves but most often through, third-party partners at a price point that allows them really to focus more on the service and not absorb a huge upfront hardware cost. So that's generally our strategy.

And then a housekeeping one, Jen. I didn't get a chance the read the press release, but did you give -- or are you giving a subscriber count metric for year end? And then as part of your guidance, if you gave a capital spending estimate, I missed it. So can you repeat that one?

Sure. Yes, we did quote our subscribers -- about 2.6 million subscribers, a little over 2.6 million subscribers at the end of 2015. We did not give capital expenditure guidance for 2016, but it's generally in line with that on percentage revenue basis as you've seen in the past, a point or so of revenue. I think a good number to guide to next year is probably around $10 million.

Thank you. This does conclude the Q&A portion of the call. 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.