Good day, ladies and gentlemen, and welcome to the Alarm.com First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference call over to Jonathan Schaffer with The Blueshirt Group. Please go ahead.

Thank you, Abigail. Good afternoon, everyone, and welcome to Alarm.com's 2016 First Quarter 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 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 a 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 thank you, everyone, for joining us today to discuss our first quarter results. We're off to a solid start in 2016. SaaS and license revenue increased 25% from a year ago and exceeded the high end of our guidance range. Adjusted EBITDA grew 45%, and adjusted EBITDA margin increased almost 200 basis points on a year-over-year basis. Operating cash flow doubled over Q1 2015, and we ended the quarter with over $135 million of cash on the balance sheet. In addition to our strong financial performance, we also made progress in the areas of product innovation, customer engagement and international distribution. Let me take a few minutes to discuss each in greater detail. We strive to be at the forefront of product innovation and continuously make enhancements to our platform that improve the system capabilities and user experience for both residential and commercial subscribers. Each week, our development and quality engineering teams release a new cloud-based build of Alarm.com, and our end customers and service providers instantly obtain the benefit of whatever has been improved. The changes week-to-week can be modest but, over the course of a quarter or a full year, are quite substantial. By way of example, we took several steps to grow our video offering in the quarter. Video is an increasingly important area for us. Subscribers who purchased an Alarm.com video solution from one of our service providers tend to invest more and engage more with their systems. Video is also a core component of most commercial security deployments. In the first quarter, we expanded our line of indoor and outdoor cameras. Our broader lineup at different price points will allow us to engage a wider set of customers and continue to drive higher video attachment rates. We also migrated our recently acquired…

Thank you, Steve, for the kind words. I very much enjoyed my 7 years with Alarm.com, and I am proud of what the company has accomplished during that time. While I'm excited about this next chapter of my career, I will miss being a part of what is a very exciting time for Alarm.com. I leave knowing we have a deep bench in financial reporting and compliance as well as a board with substantial public company and financial expertise to guide the company through this transition. With that out of the way, I'll start with a summary of our first quarter results and then provide guidance for the second quarter and full year before opening the call to questions. Total revenue for the first quarter of 2016 increased 28% over the first quarter of the prior year to $59 million. SaaS and license revenue grew 25% over the same period to $40 million. The vast majority of the growth in SaaS and license revenue was from our core interactive 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, albeit off a small base, from nonsecurity markets like energy, HVAC and remote access management. SaaS revenue from these businesses, which we report in our other segment, increased 150% over the same quarter of the prior year. Our SaaS and license revenue visibility remains high, as evidenced by our 94% renewal rate in the first quarter of 2016, up from 92% in the first quarter of 2015. SaaS and license revenue gross margin increased 83% during the first quarter, up 200 basis…

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

This is Jack Kilgallen filling in for Heather. So I guess you talked about -- in terms of your growth initiatives, you talked about investing in the core technology, international expansion as well as other initiatives. And I was wondering if you could talk a little bit about the other initiative. Is there anything in here that you're particularly excited about over the next 12 to 18 months? And then I had a follow-up.

Sure. Jack, this is Steve speaking. So yes, we've outlined some of the other initiatives in the past, and we are continuing to invest in really, at the moment, 3 key areas in addition to international. One is the business of satisfying a need for unattended delivery and unattended showings of properties. The other is energy and particularly demand response, providing the ability to aggregate a ton of devices, a ton of thermostats and other sort of electricity-consuming devices and present that consumption to a set of electric utilities who would like to take some consumption off the grid. So that business is energy hub. And the last is an effort we have underway to take the thermostat that we shipped last year and really leverage that into an offering that the HVAC channel can take to market every time they install a new HVAC system. So those are 3 areas where we're particularly focused in addition to international.

And then Jen, I guess, first of all, best of luck in your future endeavors.

Thank you.

And secondly, on the 25% subscription revenue growth, was this driven by a similar mix of subs growth and ARPU growth as we saw in 2015?

It really -- the 25% growth in SaaS revenue is driven by a number of factors. I can't point to just one thing. So obviously, growth in subscribers is the primary driver of SaaS and license revenue, but it's a combination of things. So we saw some contribution from license revenue this quarter. As we reported, our SaaS and license revenue renewal rate improved this quarter. So that obviously helped. And then some of the initiatives that Steve just spoke to that we report on our other segment, they started to show some contribution to the growth rate as well. So I can't really point to one thing. It's really a combination of a number of things.

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

I was hoping if you can provide us some more update on the Securitas deal. And also last quarter, you gave specific guidance that you're going to exit the year at 4,000 international subscriber additions per month versus 2,000 exiting last year, and I was wondering whether you're on track with those targets.

I'll start. This is Steve with the question regarding Securitas, and then I'll hand off to Jen on kind of an update with regard to how we're tracking relative to some of the metrics we've presented in the past. With Securitas, it's going well. We're launching in one market -- let's see. We're in May -- later this month, a solid trial. We've worked out a lot of the testing that needs to be done to deploy a serious security offering. And then we're expecting in the back half of the year to build off of that effort and introduce the offering in several other markets. So it's going at about the pace, I think, we expected. Securitas is a company that takes great care to make sure that what they take to market is of a high-quality state, and they're very comprehensive in the type of testing that they do. So we're pleased with the progress. As we said before, they're going to be deliberate, but it's going roughly to plan. Jen?

Yes. Yes, you're exactly correct. So we were putting on about 2,000 accounts per month at the end of the year, and our expectations we outlined were up to 4,000 accounts or getting to 4,000 accounts by the -- per week by the -- I'm sorry, per month by the end of 2016. We're well on track. We're not going to publish those numbers every quarter, but when we look at our business plan, we're making -- we're exactly where we are expected to be at the end of first quarter to track towards that 4,000 per month goal by the end of 2016.

Got it. And my second question is around the dealer mix. You have local dealers, DIY dealers, large dealers and dealer programs. Can you update us on the trend of these 4 different buckets? What is in there? And at this point in the company evolution specifically to the U.S., which dealer channel is driving the business the most right now?

Okay. In terms of an update on those different segments and sort of the trend lines, I may have missed the second half of the question, but as you said, yes, there are what we call the carriage trade base of dealers, lots of small dealers that are very focused on bespoke installations, both commercial, residential. From our perspective, that segment is doing very well. We think that they're well prepared to deal with the increase in complexity on a lot of these installs, where the consumer wants to cover not just sort of 5 doors and a couple of windows and maybe a motion detector, but instead wants to put in a full Internet of Things platform that does security and a lot more. So that takes someone going to the house, inspecting what may need to be installed, looking at the product mix and doing the job right. And those folks are pretty well-equipped to meet that need, and we're seeing strength in that segment. I think they also tend to be tied in pretty tightly to the local custom builders in many markets. So as the builder market does a tad better, I think we see a little more business there. The DIY segment, for us, this is sort of professional-grade security DIY as sort of in contrast to a set of retail DIY products. And that segment also continues to do very well. I think other companies have reported progress there as well. So we're seeing solid growth there. The large dealers that have the capacity to market also are making good progress. If they can blanket a market with coverage and they have a good brand in the market, we're seeing the phones ringing for them. So that seems to be working out well. I would say probably, the one place where we're a little more steady as she goes is -- would be in the dealer program segment, where you have a dealer program that then works itself with lots of different mass market dealers. And that part of the 4 pieces, I would say that part is more flat than the other 3, not bad but just not growing at quite the same pace at the moment.

Got it. And Jen, it's been great working with you, and good luck with your future endeavor.

Thank you. It was my pleasure as well, Nikolay, and hope to meet up with you in the future at some point.

Our next question comes from Michael Nemeroff with Credit Suisse.

This is Chris Rochester on for Michael. So I was curious. Have you seen any early impact from ADT going private? I mean, has there been any change in dealer activity there? Or can you give any color?

This is Steve speaking. So they haven't had that many days yet. I think they've had 8 days to really recalibrate the management team and focus on what their next steps are. So we haven't seen any material impact whatsoever in the market as it relates to either our existing ADT relationship or in our Protection 1 relationships, so no real impact yet. I think everyone is sort of guessing a bit what the impact will be, but we can't say we've seen anything just yet.

Okay. And then on the Customer Connection product, is that a free or a paid service for dealers?

The Customer Connections product is part of our platform, which means that a dealer that's using our platform gets access to that service for free.

Okay, great. And then maybe one more follow-up. It might be too early to say on the contribution from SEM, but could you maybe provide some color on the opportunity there, maybe how many subscribers you think could potentially be addressable currently?

Yes. So it's still a bit early, but we were pleased with the progress we made in the first quarter with that product. It's been -- as we said last call, we expected a fairly deliberate roll-out. We required technicians who are going to be installing that product to go through an LMS-based training sequence to make sure that they understand the way the product works with different types of control panels, but we did begin deploying. And it wasn't tens or dozens. It was thousands, and we're seeing the product work pretty well. So we're pleased with that. As far as the TAM on that product, it's -- we think it's a significant TAM. There are really 2 primary purposes. One is to help our service providers with the migration from 2G to LTE. We're the only ones in the market, we believe, right now with an LTE-based hub product. And a number of service providers still have some AT&T 2G units out there that will need to be migrated over the next 6, 7, 8 months. So that's one part of the market. That's probably the smaller part, but the bigger part are all of those homes who were installed before interactive security went mainstream. And while we've been around a long time and we've always promoted interactive security, the big chunk of the market really came on in the last 3 years. So anything installed much before that likely is what we would refer to as a plain old security system. And a lot of our service providers tell us, "Hey, we've got to get back to some of these customers and we need to get them upgraded to something that's current, and we need a less expensive way to do that than install an entirely new control panel." And that was one of the reasons we built this product. So I think you can say, if you look at the overall size of the security TAM in North America, call it 22 million properties, and you assume that there are probably 6 million, 5 million to 6 million installed with some form of interactive security and automation, that still leaves us 15 million that, assuming no market growth will over time, need to be upgraded to some type of offering. And whether that upgrade occurs with a product like SEM or whether it occurs with a dealer going back out and really renewing the entire body of hardware in the home, that will be made -- those decisions will be made probably in the field on a case-by-case basis, but we think the overall size of the TAM is pretty decent.

Great. That's helpful. And Jen, best of luck with your future endeavor. It's great working with you.

Thank you. I appreciate it very much.

Our next question comes from Matt Pfau with William Blair.

I just wanted to get a little bit more detail, Steve, on the commercial piece. It's good to hear that you're able to integrate the new video product. But in terms of what additional functionality you think you need to really make the product start to take off, I guess, one, what is that functionality? And then I guess in terms of getting your customer base maybe to push the product a little bit more, what sort of needs to happen on your part to start getting a little bit more traction on the commercial side?

Sure. So it's a good question. On the commercial side, the way I look at it is there are sort of 2 levels of capability that I think we need to bring to the market. And to date, we've been, for the most part, focused on what I characterize as Level 1. Level 1, basically, is you have to have a portfolio of hardware products, cameras and signaling capabilities that meet the minimum standards for a commercial installation, and you need to evolve -- or we need to evolve and we have evolved the portal such that an entity that has multiple locations can easily manage all of those locations through a single interface. So you saw us do things, like the Neo control panel last year in partnership with Tyco. We rolled out the Secure-i offering, which was -- which we obtained through the acquisition to gain access to the commercial-grade access cameras. And we really put in place the pieces required to be viable in the commercial side of the market. And then we think our software already is best-in-class. So anyone deploying an interactive solution that happens to also do an energy management, we think, would be well-suited to use our technology. And luckily, a lot of our service providers serve both residential and commercial segments. So the channel is there. The second gradient of functionality, in my opinion, needs to look at commercial not really as just one market but instead a grouping of 5 or 6 different verticals that all have somewhat differing needs. So it's not really true, in my opinion, that a restaurant has the identical needs, in terms of commercial protection, as a drugstore. And for us to really kind of take advantage of the strengths we have in software, I think you'll see us move towards building in more drivers that are specific to certain verticals that we think have more mass than -- or at least have the mass to justify some more vertical-specific drivers into the offering.

Our next question comes from Mike Koban with Raymond James.

Really, just a couple of simple housekeeping questions. You might have said -- and I apologize if you did, but would you tell me the sub renewal rate -- the subscription renewal rate, excuse me?

Yes, sure. This is Jen. So we look at our SaaS and license revenue renewal rate, and it was 94% in the second quarter. And that's on a trailing 12-month calculation, and that was up 200 basis points from the same metric at the end of Q2 -- I'm sorry, Q1 2015.

Awesome. And Jen, I believe you spoke a little bit about OpEx. I just missed the G&A. Did you say it was going to be flat throughout the rest of the year in R&D and...

Yes, I said I -- I'm sorry, I didn't meant to cut you off. I apologize.

No, please go ahead.

We expect to show leverage in G&A over the course of the year, excluding the IP litigation expenses, which we exclude from adjusted EBITDA. So we do expect to show some leverage as G&A as a percentage of revenue for the full year of 2016 even though the first quarter was higher than it was in the prior year.

Okay, great. And then finally, just kind of a general question about -- I know you don't want to put too much emphasis on the hardware segment, but as far as your releasing of new products, I know you have done so up to this point year-to-date. I was just wondering if you could give us a little color on what you kind of see as far as your product road map going forward, if that's something that you want to continue, if it's something that you want to just kind of keep as a lever to pull or if you see it becoming something more important in the future. And that would be it for me.

This is Steve speaking. So of those 3 options, I think the middle one, the lever to pull, is probably the right answer there. We don't -- we're not projecting at the moment that we're going to really significantly attempt to expand our hardware footprint. Our preference is always to work with partners on the hardware side, and that's generally what we do. There have been a few places through time where we felt that we had specific expertise that we needed to capitalize on to really deliver a high-quality solution to the market. And radios and the LTE technology are an example of that. I think SEM has been an example of that, the image sensor and video cameras. But generally, our outlook is, let's let the market build the ecosystem and then let's make sure we're well positioned to participate in that ecosystem. And occasionally, there may be something where we think this is a place where we should bring something to market for some reason, but generally, we want to be an ecosystem participant. So that's how we view the world.

Our next question comes from Brad Reback with Stifel.

Steve, with Monitronics seeming to undertake a modification of its go-to-market strategy here recently, has that impacted your relationship with them at all?

No. I don't think it has impacted our relationship with them at all. I think they are taking the steps they need to take and have done, I think, a great job articulating their plan to their service providers, who also often happen to be our service providers. Obviously, if the dealer is obtaining a slightly lower multiple for each new account, the dealer will need to adjust their business model in some way, shape or form to lower their subscriber acquisition cost. So we may see some trend there that hasn't yet really shown up, but at the moment, it looks to me like the relationship is more or less the same. And I think they're taking the right steps in their business.

And our final question comes from the line of Jeff Kessler with Imperial Capital.

Jen, first, it's been a great long period working with you, and I wish you all the best in your future endeavor.

Thanks, Jeff. I certainly -- sorry.

And secondly, Steve, I want to congratulate you guys on your ISC West award. There's tons and tons of product awards, just very few services awards, and you guys got it. And it means -- it probably means something in terms of branding when you go out there with your dealers as opposed to one of 15,000 product awards.

Thanks, Jeff. I appreciate that recognition. And I definitely agree. I mean, training of all the things you can do well is one that you have to do well to support the service providers. So we were thrilled with that.

The first thing I wanted to ask was the types of service platforms and then some of the new services that you've been offering here. How quickly is this going to be ported? Or how quickly is this going to be put into the international arena? Is there a -- are you working on separate types of schedules there?

Yes, when you say all the different services, I think what you're referring to are just the various things that we talked about as sort of new releases or capabilities in the other segment that we're developing.

Exactly, exactly.

And the playbook there really is the market for our core offering internationally looks very good to us right now. So it's a great way for us to get out, stay focused and build a toehold in a number of different international markets. And we don't want that team to become -- that team, meaning our international team, to become distracted with too many products in the trunk, so to speak. We want them to be very focused on helping the service providers that we're identifying internationally get up and running with their offering. And that's a big undertaking. The time when a partner is most support-intensive is during the first 12 months of the relationship. It's all new, and sales people need to be trained, the technicians need to be trained, et cetera. So that's really our focus. It's take the core offering and do the R&D necessary to make sure it works reliably internationally, put in place the servicing team and the sales team to make sure we're able to take that message out there, and that's it. Now it just so happens that we also have other things waiting in the wings that once we've established a toehold and we feel like we've got the right presence in the market and the right infrastructure there to be highly supportive, we can bring in other products and services through time. And we'll likely do that, but it's not on our sort of next 6- to 12-month deployment road map.

Okay. Secondly, with regard to Protection 1, who has been one of your dealers, they have a fairly significant commercial presence, which they hope to, obviously, leverage through whatever ADT was setting up. I'm more interested in whether or not you folks have been providing any interactive platform capabilities for their commercial business.

Right. At the moment, Protection 1's commercial is primarily -- I believe they call the offering eSecure, and that is not running on the Alarm.com platform at the moment. We obviously do our best to support Protection 1 and look forward to opportunities, potentially gain additional traction there, but that's not part of the Alarm.com platform use at the moment.

I don't have any further questions. I just -- also, congratulations on getting Darius. He should be a really great addition to your board.

Thank you. Hopefully, he's on the call. All right.

Thanks so much, Jeff.

That does conclude the Q&A portion of today's 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.

Thank you.