Good day, ladies and gentlemen, and welcome to the Alarm.com Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. [Operator Instructions] As a reminder, this conference is being recorded. Now I'll turn the conference call over to your host, Jonathan Schaffer with The Blueshirt Group. Please begin.

Thank you. Good afternoon everyone, and welcome to Alarm.com's 2016 second 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 AJ Gollinger, Corporate Controller and Principal Accounting Officer. 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 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. Steve, you may begin.

Thanks, Jonathan, and thank you everyone for joining us today. I'm pleased to report that Q2 of 2016 was another solid quarter for Alarm.com. SaaS and license revenue of $42 million increased 23% from a year ago, exceeding the high-end of our guidance range. Adjusted EBITDA margin improved 300 basis points year-over-year to approximately 18% as we realized leverage in our model while also continuing to invest in our state of growth initiatives. Non-GAAP earnings per diluted share was $0.15. Let me now highlight some areas of progress in the second quarter. In June, we announced the definitive agreement to acquire the Connect and Piper business units from privately held Icontrol Networks for $140 million in cash and debt. The Connect business unit develops and sells a custom on-premise software platform used by industry-leader ADT to power its Pulse Home Security and Automation offering. Piper sells a Wi-Fi enabled video and home automation hub. We believe this deal is appealing for our shareholders as it will allow us to increase our R&D capabilities and will provide us with a clear path to greater participation in the Internet of Things secular trend. We are subject to confidentiality obligations until this transaction closes but I did want to share a few high level points on the deal. First, Connect is a growing business as evidenced by the close to 100% increase in ADT Pulse subscribers from Q3 of 2014 to Q1 of 2016. Surely before ADT was taken private, Pulse had over 1.6 million subscribers which represented approximately 25% of the company's 6.6 million residential and business customers. New pulse same-stores reached 59% of ADTs total gross subscriber additions in Q1 of 2016. If this level holds, Pulse penetration rate should continue to move higher which should benefit our new Connect business…

Thank you, Steve. I'll start with the summary of our second quarter results and then provide updated guidance for the third quarter and full year 2016. Total revenue for the second quarter of 2016 increased 24% over the second quarter of the prior year to $64 million. SaaS and license revenue grew 23% over the same period to $42 million. The vast majority of the growth in SaaS and license revenue was from our core interactive security business, which is comprised primarily of recurring monthly fees paid by service providers for platform access and services, and to a lesser extent, licenses to our intellectual property paid on a recurring monthly basis. We also continue to experience healthy SaaS revenue growth, albeit of a small base from non-security markets like energy, HVAC, and remote access management. SaaS revenue from these businesses, which we report in our other segment increased 108% over the same quarter of the prior year. Our SaaS and license revenue visibility remains high as evidenced by our 93% renewal rate in the second quarter of 2016. This was right at the midpoint of our historical range of 92% to 94%. SaaS and license revenue gross margin increased to 83% during the second quarter of 2016, up a 100 basis points over the prior year. This improvement was largely due to our increased scale. Hardware and other revenue for the second quarter of 2016 increased 26% over the prior year to $22 million. Camera and video doorbell sales were up 86% year-over-year. We are pleased to see our efforts to help drive video related hardware sales through our service provider channel were successful as these customers tend to invest and engage more with their systems. Total hardware revenue in our other segment also increased 177% over the prior year.…

Thank you, ladies and gentlemen. [Operator Instructions] First question is from Heather Bellini of Goldman Sachs. Your line is open.

Hi, this is Jack Kilgallen, filling in for Heather. Thanks for taking the question. Steve, in your prepared remarks, you mentioned increasing competition from the telecom and cable companies. Just curious, I guess, what you've been seeing from this category of competitors and if there are any specifically that you would call out as being particularly aggressive? And then I had a follow-up.

Sure. I think we continue to see the cable and telco operators compete in the market place. I think probably the best evidence of that actually in the second quarter was -- you'd have to look at the move that Comcast made to acquire the Verge business; you know, sort of an aggressive move, if you will. They intend to not only deploy the technology but also operate it and advance that technology. I don't think they would do that if they weren't seeing some success and committed to the space. So I think we, obviously, we're excited to help all of our partners compete against those inputs from the MSO space but we're definitely seeing them continue to have a presence in the market place and I would say Comcast has probably at this moment been the most successful.

Great. And then I guess this is a follow-up. You know you've been targeting the 4,000 pub-adds per month exit rate in terms of the international growth, but I guess, can you share an update there and do you remain on track, and then can you give us a sense of when we should think about international being sort of a material revenue and EBITDA driver?

Yes, I think we're roughly on track with the international segment. And we put out a number earlier in the year that you restated, which is 4,000 subs per month by the end of the year. We're tracking towards that. There will be some bumps along the way, a little trap in the water at times, but I think generally we think that's still an attainable goal and in terms of even at that level, will it be an absolute dial move on our business? It'll begin to make a difference, but I think we're treating international as really a long-term initiative. We've seen evidence that peer companies are producing as much as half of their revenue, meaning well-established peer companies that participate in the automation or in the security space can produce almost half their revenue if not more from the global market. So with that as the target long term, we intend to continue to invest in the space. And I think in terms of updates, probably the place where we've seen the most progress in the last quarter has been in the Australian market. We brought on -- I believe we announced in the first quarter that we brought on ADT Australia as well as Chubb, we began to see contribution there. Saw a little more contribution from New Zealand, we of course had some geopolitical events in Turkey, but didn't really see that wreck our business in that market, so we continue to do okay there. And then we're working through the pilot with a large customer in Europe, that being Securitas, and would hope toward the back side of the year that we begin to see more and more contribution there.

Very helpful, thank you.

Our next question is from Michael Nemeroff from Credit Suisse. Your line is open.

Hey guys, thanks for taking my questions and nice results. Steve, I wanted to maybe pick your brain on the hardware revenue. I know it's something that -- you're very conservative in how you're guiding it. But for the last couple of quarters, you've noted that the video components are really performing particularly well and it's also driving a lot of engagement on the platform. So I'm curious: Are there any number of video units per sub, something that you're tracking, that you're seeing this notable uptick from? And is there any reason why you shouldn't continue to see an uptick in the number of video units that subscribers are buying initially, to continue to trend up?

So in the second quarter -- thanks, Michael -- I think last call we had announced that we were excited to be shipping the doorbell camera in partnership with Skybell. When we made the announcement, of course, it's a new product, new category for our partners; you don't know exactly how the product's going to do in the market, how quickly the dealers will adopt it, that sort of thing. It was adopted pretty quickly in the second quarter; we were pleasantly surprised by the rate, I mean, to get -- ballpark 20,000 or so came out and were activated in the second quarter, which was higher than we expected. So that drove the hardware sales and really the video category a little -- to be a little more frothy than we anticipated. I'd say at a macro level, we're going to continue to see increases in the attachment of video as a percentage of subscribers. At the same time, remember that our goal is to drive down the creation cost for our dealers and our partners as much as we can. So we're not particularly motivated to maintain average sale price on the video units. And in fact we would be working to -- as much as we can -- drive down average sale costs so that the product becomes accessible to an even wider audience. So I think the macro -- and that will, of course, dampen the hardware revenue a bit. Those two together, the goal being really to drive better attachment and to help us sort of maintain our SaaS and license revenue rate by, as well as customer engagement and the low turn, by getting product out there, those products out there more broadly. So that's more or less what we saw in the second quarter and I think the trend towards higher attachment will likely continue.

That's great. And then, also, I'm curious if you're seeing -- if maybe you could talk about the impact you're seeing from the SEM module, or is it still too early? It's been a couple of quarters now, is that giving you any material contribution to the new subscriber additions in the quarter?

Yes, we brought the SEM on in the first quarter, late -- I believe as well, and have been training dealers, just getting them up to speed. I think at this point, we have more than 250 service providers that are installing SEM. There was some contribution during the quarter, more than $0.5 million in hardware revenue, I believe, came from SEM, so we're starting to see that ramp. Each month's a little better than the last month. We're imminently going to put out a version of SEM that supports additional panel family, and that's DSC power series panel family, so expect to see that hit the market in the third quarter. So I think that SEM's growing about as expected. I think it's neither radically above our expectations nor below our expectations. It's going about as expected and we'll seemingly continue to ramp up through time.

Okay, great. Thanks for taking my questions.

Thank you. Our next question is from Nikolay Beliov from Bank of America. Your line is open.

Hi, thanks for taking my question, and nice performance in the quarter. Steve, the InSight Engine, that you did such a great job telling us what it's going to be and what it's going to do; is there an incremental monetization opportunity for you guys or always going to be embedded in the broader platform?

Yes, I think in the case of InSight Engine, the incremental monetization will be that -- will be one of those sort of things that put some wind in the sails long term and it will have more service providers that opt to use our more advanced service plans for their customers if they find the feature to be exciting for the consumer. I don't think we'll go out and try to charge an incremental couple dollars for that feature alone, because what we're really trying to drive there is that the beauty of the capability is that even if the customer never takes the time to set up triggers and alerts for their home, they'll begin to get triggers and alerts, and the InSight Engine will anticipate things that the consumer might want to be aware of. And then the algorithm is sophisticated enough that if the consumer doesn't like something they're getting, they can essentially retrain the algorithm. And so, our goal is -- if you're a consumer, the more points of engagement you have with your system, and the more you see the value of getting Inside for your home or business, the more devices you want to have in your home or business to produce data. Because the more data we have the more insight we can generate in some ways. So I guess the long-term trend you might see is a bit more -- a few more devices per property going in. The consumer would seem to want those, and I think we will get some benefits on engagement. Maybe a little bit of a shift to the higher service plans. But it's not a capability -- I think it's a really cool and important capability where we're leading the industry, but not something where we're going to imminently anticipate monetization strategy that would be dial moving.

Got it. And when you look at your subscription revenues for the quarter, the 23% growth there, what would the puts and takes between unit growth and like ARPU dynamics?

Yes, puts and takes there what we saw were -- that sort of increased growth came from solid sub-creations of positive quarter there, nice contribution from our other segment as well and some increases in the license revenue. Our total was trending slightly up. I think we've commented in the past that we're seeing a slightly different mix of unit; mix meaning our more traditional service providers and those that use all of our services are creating more units and a legacy dealer, Vivint, is creating fewer units, so as that mix evolves, the ARPU has a little bit of a trend upwards. But most of the outsize growth in the second quarter came from just poor subcount from our traditional service providers and then, as I said, a little bit of contribution from the other segment and from the license revenues.

Got it, thanks so much.

The next question is from Tavis McCourt from Raymond James. Your line is open.

Hey, thanks for taking my questions, Steve, a couple. First, I wonder if you could update us on timing on any CFO, and then secondly on the Connect and Piper acquisitions, can you remind us on the financing front how much debt, credit line we'd draw down on for that deal? And then just a clarification on your comments in your prepared script; when you indicated that the gross margins were better than Alarm.com's, was that corporate gross margins or Alarm.com's SaaS and license gross margins? Thanks.

Okay, so I've got three there. Let me start with the CFO. Yes, we've been recruiting and interviewing a lot of candidates for the CFO position. I'd say maybe towards the back end of the second quarter, we got pretty focused on completing the Icontrol acquisition, so I took a few weeks off from interviewing at that point, but I think I start again later this week. The process is moving along. We're talking to a lot of candidates. You know, obviously, we are excited to fill that position at the right point in time as quickly as possible. At the same time, we're fairly choosy, so we're going to continue to meet folks, and would hope to have that position filled by the end of the year, if not sooner. With regard to the next question which was the balance of cash and debt on the Icontrol transaction, I think I've commented in the past that, roughly what we're thinking is half and half. So we would use a fair amount -- some cash and if you think of the deal as sort of a $140 million deal, use cash for about half of that, use debt for the other half. It may not be exactly that ratio but in that sort of ballpark is what we're expecting. And then, Tavis, remind me of the third question?

Third question was a quick clarification: In your prepared remarks, you mentioned…

Right, yes, I was referring to gross margins on the actual service revenue stream itself. And what I was attempting to point out is in the Alarm.com world, we embed a lot of service with the -- with what we charge for, so we're embedding the cost of M2M Communications, we're embedding the cost of training, of service to the technicians, that sort of thing. And then in the Icontrol world, the model is closer to sort of a peer software model, and the software is actually installed for the most part on the customer's premise so there's not a hosting cost associated with that. And so therefore, we expect somewhat higher gross margins there and, at the same time, expect -- or are kind of advising folks that given that model, the ARPU would also be lower.

But it is -- even though it's on premise, it is a recurring monthly revenue stream that you get from the customer?

That's correct.

Okay, thanks very much.

Thank you.

Our next question is from Matt Bow of William Blair. Your line is open.

Thanks for taking my questions. Steve, just wanted to know if you can update us on the competitive environment now that Icontrol is up for sale, when you're going for deals with new dealers, who are you typically competing against, has that changed at all? And then secondly, along the same lines, does the Icontrol acquisition or being pieced apart between you and Comcast? Has that potentially opened any new doors in terms of customers that you may be potentially couldn't have gone previously, now you might have a shot with some of those customers?

Sure. Let me start with the competitive landscape. I think our world really hasn't changed that much, meaning when we go out and we're recruiting our new service provider, we bump in -- we work really ever bumping into Icontrol other than at ADT. And so everyone else the entity that we typically run into is going to be Honeywell in our little world and then the pressure -- competitive pressure comes at some level from some of the hero products and DIY products that are being sold through retail and our service provider needs to be able to articulate and deliver a service proposition that is better than what the consumer may be able to obtain if they go acquire a NAST [ph] or some other type of automation product on their own and install it, that's what I think. So that itself creates some competitive pressure, we talked about service providers routinely about how we can fill the value proposition that allows them to continue to be successful in the market. And then on the MSO side, yes, we'll continue to see some pressure there as well. Nothing that we're particularly intimidated by but I don't think that the acquisition itself will really change the day to day dynamics that we see when we're out in the field, tempting the market itself to dealers and/or to consumers. With regard to the potential for us to expand the type of service provider that we are able to recruit and maybe go after some new customers, some -- I think it's early days and probably too early to tell. Obviously in the case of Icontrol, you had an independent company, Icontrol servicing the entire or much of the cable world. We have a couple of cable customers we're very pleased with as well but they had quite a few. I think as the acquisition completes, we'll be available and we'll talk to some of the other cable entities that may want to evaluate their options but it's probably little early to indicate that we have a degree of certainty that we'll be successful in that effort.

Great. And then last one for me, just want to know if there is any update on progress that you've made in the commercial market?

Yes, we have made some progress in commercial I'd say. We're seeing a higher percentage of our service providers actually installing commercial. We've been reviewing the product roadmap with those who are most successful with commercial and planning out what we're going to deliver later this year and first half of next year. So is it enough that we can call is out something that's impacted the second quarter, no. But are we seeing meaningful quarter-over-quarter improvement in the percentage of installations going into commercial, I would say the answer is yes. I think that's coming from a couple of things. First, when we added support for the DSE Neo Panel last year, one of our ambitions was to access a broader part of the market and build a go-after us -- what we call SNBs. We really position the offering as an SNB offering. Second, we've done a lot of work to allow folks to manage multiple sites through a single interface. Third, the secured acquisition and integration has driven some performance there. And then frankly, just learning how to talk about the commercial when we're out in the field and getting our own sales reps conditioned and trained and comfortable to communicate a commercial vision, it has been something we've worked on during the quarter and really even during the first quarter we're working on that. I think we're beginning to see some results from that. So that's a bit of a bright spot for us and we're hopeful that trend will continue.

Great, that's it for me guys. Thanks for taking my questions.

Our next question is from Brad Reback of Stifel. Your line is open.

Great, thanks very much. Steve, on the IT litigation cost, should they remain inflated at these levels for the back half of the year?

Brad, that is a hard one for me to answer. It's active -- the regular sort of excuses for why we can't answer the question apply here which is, it's -- the litigation is active, we're dealing with it in the best manner we know how. I don't know that we could telegraph any sort of change in what that IT expense structure will look like at this moment; so sorry about that.

That's okay. Is there a trial date set for this yet?

I don't believe so, no.

Got it, okay. Thanks very much.

Sure. Thanks, Brad.

Next question is from Jeff Kessler of Imperial Capital. Your line is open.

Thank you. Hi Steve, hi guys, good quarter. I've got a couple of questions here. First, when you take a look at the protocols and the backend of what you're using currently and you described it previously for both your essentially SaaS version, the other which is essentially a software version, the other being Icontrol. What are the types of things that you can do to start creating -- if you want to call it a hybrid, I know you're going to say you're going to keep them separate for a while but at some point in time for the benefit of your installers and your trainers and your end user experience, you're going to want to start -- you're going to want to start getting a more common customer experience in terms of both service installation and just training for your service people, how do you go about doing that?

I think probably the thing we're going to look at there Jeff, and that we're excited about is the -- some of the R&D synergies we see, so for example, if you think about the Z-Wave stack, we have an entire implementation of the Z-Wave stack for hundreds of different devices, Icontrol has the same, those are not the same heavily written the code exactly the way they would have written the code, no. We're finding that they have a lot of expertise in that domain and we thought we have some too but I would think something like that is a good example of a place where we're going to look for some synergies and try to work with both, the ecosystem partners, mainly the people that make door locks, people that make thermostats etcetera to get to a more common -- and I'd say we're probably most focused on the installation and service experience. So to get to a more common and reliable and certain installation and service experience for the market, there will be other places I think when you look at the way that Video is delivered to the consumer and some of the UI paradigms that are used for quickly scanning lots of video to ascertain what's important, there will be places there where we can again get some cross team synergies and really deliver a better offering to the Pulse consumers but also the -- to Alarm.com dealers and the Alarm.com dealer customers. So that's what we're really thinking about, I don't think that we're necessarily going to be focused on trying to get a one-size-fits-all type of offering out in the market. In fact, most of our service providers enjoy the differentiation that Alarm.com provides them today. And likewise I think if you talk to ADT, they would appreciate the differentiation that they have with Pulse and we don't necessarily want to marry those and drive everything to sort of a single-user experience, different market size, slightly different needs. So I think we're going to be more focused on the things that really make the technology reliable and trying to focus there in a way that sort of lifts all boats as oppose to driving to this sort of a single consumer experience.

Can you move this toward a more secure -- particularly from the home, the moldering station, a more secure Pipe in terms of getting those users who are on Icontrol now on -- ultimately onto the LTE 4G network?

Yes, that's a good question. That's another one where we really hope that we can see some R&D synergies, meaning, we've been out with LTE now for close to two years and you want to be on LTE if you're deploying end-to-end communications today. And so in our early discussions with ADT that's a place where we think that with our new friends at Icontrol we can really hopefully drive some movement pretty quickly and we're familiar with the chip side manufacturers are ready, we're familiar with the way the network is deploying and how you have to interface to it. So that will be a good example of the place where I think where we can get some positive R&D synergies pretty quickly?

Okay. You self-described yourself as an aggregator of very disaggregated, both aps and end-users to try to put a relatively common experience together. Is this something that other companies that are looking at you saying that, that is going to take a long, long time to do and it's very, very hard to do. Do you see yourself in four or five years as being the aggregator of hundreds if not, perhaps thousands of different -- not just businesses but obviously, the thousands of sensors that each one of these businesses and homes will be using?

I think we will have an even greater say in what types of devices are delivered to a home or business and what the standards for quality of those devices actually are. If you think about it, roll the clock forward another year or so and our ecosystem will consist of close to $5 million properties that are being serviced within Internet of Things offering. If you happen to be someone at that point who is going to make a new window sensor or make a new type of door lock and you wanted to gain access to that base of installed customers, you would probably want to come talk to us and we'd want to talk to you about how to make that device in such a way that it's easy to install, very reliable and going to meet the consumers' needs. So I think we'll continue to be an influencer of those who hope to bring new devices to market or maybe even those that already have some devices in market. I don't know if we'll be the aggregator of every type of device, I think we remain committed to supporting our service providers deeply and it's difficult to support a service provider if you try to support and integrate every single device under the Sun. So I think we'll continue to be an entity that with the input of our service providers and now with the input of ADT and curate a set of devices that we've chosen to accept and approve and that meet the requirements and then help those devices get to market.

All right, great. Thank you very much.

Thanks.

Thank you. Our final question is from Howard Smith of First Analysis. Your line is open.

Yes, thank you for getting me in here. And then you spoke geographic international and commercial businesses. I was hoping to get some additional color on some of the other businesses that are early energy, HVAC, obviously up 100% plus on the SaaS, so maybe a little quality of color on what you're seeing in some of those businesses over the last quarter?

Well, I think a couple of the places where we saw strong contribution there -- two really. First, is the -- one of our offerings that targets vacation rental management properties, as well as rental properties that did well in the second quarter. So those -- if you're an entity that you ran out lots of vacation homes, we make an offering for points control that is years to help the property manager control the flow of housekeeping or people that clean the hot tub, all those types of things in the property during the one day that it's vacant between renter. So that offering did well and we easily see or we expect to see kind of higher installation rates there in the second quarter, then you get into summer and most of properties are rented most of the summer, so we would expect a slight ebb in the third quarter and then pick back up in the fourth quarter but we're pleased with the results there in the second quarter. The other place I think we were pleasantly surprised was with our demand response offering, this energy hall, we've been working to really develop what we call bring your own thermostat type of category in that space, so the electric utility doesn't -- no longer has to worry about getting all the demand response device installed in our home themselves, instead they can come to someone like us who already interfaces to hundreds of thousands of thermostat, and subscribe to access to those thermostats. And that business is sort of getting some form now, is what I would say, I mean deals that are starting to sort of look the same, one after the other and we saw a couple in the second quarter that looked good, repeated themselves without a lot of esoteric sort of add-ons or customization and we're pleased with that progress as well. So little bit of qualitative color I would say there on those two items.

I appreciate it, thank you.

Thank you. This is the end of the Q&A portion of today's conference. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.