Good day ladies and gentlemen, and welcome to the Alarm.com's fourth quarter and Full-Year 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the floor over to Jonathan Schaffer with The Blueshirt Group. Please go ahead sir.

Thank you. Good afternoon everyone, and welcome to Alarm.com's fourth quarter and full-year 2016 earnings conference call. As a reminder, this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO; and Steve Valenzuela, 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 Trundle. You may begin.

Thanks, Jonathan, and welcome to everyone joining our call today. We're pleased to report that the fourth quarter exceeded our expectations closing out a solid 2016. Our SaaS and license revenue in the fourth quarter was $46.9 million increasing 21% over last year. Our adjusted EBITDA in the fourth quarter was $14.3 million increasing 47% over last year. Throughout the year, we drove growth and improved profitability at the same time we introduced innovative new technology and invested strategically in long-term growth opportunities. I want to thank our service provider partners as well as our Alarm.com team for their dedication and many contributions in 2016. On today's call I'd like to spend a few minutes discussing our very recent acquisition of Icontrol's Connect and Piper businesses. I will also discuss key areas of our business and the progress we made in 2016 on several growth initiatives. Steve Valenzuela, our recently appointed CFO will then review our financials and guidance for 2017. Let me start with Icontrol. We are obviously pleased to have completed the acquisition. After a lengthy and very thorough regulatory review we closed the deal last Wednesday and are now able to welcome the Connect and Piper teams to Alarm.com. We are already hard at work and to integrate these businesses into the Alarm.dot operations. Simultaneous to the closing, we settled the recent lawsuit brought against Alarm.com by Honeywell. As a reminder, Connect provides an interactive security on home automation platform but powers several service provider solutions including ADT Pulse As I noted, when we announced the acquisition, the Connect business model differs from Alarm.com. The Connect software is deployed and operated by the service provider in their own network operations center. This requires the service provider to purchase their own server capacity network operations bandwidth and cellular…

Thank you Steve, and good afternoon everyone. This is my first earnings conference call since joining in November and I'm excited to be on board as part of the Alarm.com team. The pace of innovation here is very impressive and the opportunities in the markets we serve are large. We are well positioned as a leader in this dynamic industry. I look forward to working with the team to drive continued growth and profitability. I also plan to reach out to our investors to expand on our Investor Relations practice going forward. With that let me begin with a review of our Q4 and 2016 financial results before turning to our guidance for 2017, which includes our expectations for the Connect and Piper business units we acquired last week from Icontrol. In the fourth quarter, SaaS and license revenue grew 21% over the same period last year to $46.9 million. Total revenue for the fourth quarter of 2016 increased 23% to $69.8 million. For all of 2016, SaaS and license revenue grew 23% to $173.5 million with total revenue of $261.1 million up 25% over 2015. Our SaaS and license revenue visibility remains high as evidenced by our revenue renewal rate of 94% in the fourth quarter of 2016. However, we did start to see some impact from AT&T 2G Sunset program which will likely continue into this year. Taking this into consideration, we still expect our revenue renewal rate to stay within our long-term expectation of 92% to 94%. Hardware and other revenue was 22.9 million in the fourth quarter, an increase of 26% year-on-year. This was driven by doubling in video camera and video doorbells sales as well as a 67% increase in total hardware revenue in our other segment. We were encouraged to see another solid quarter…

[Operator Instructions] Our first question comes from the line of Gabriela Borges from Goldman Sachs.

Steve, I was hoping you could give a little more detail on the contributions that you are expecting for Icontrol over the course of the year and what I'm really trying to get at it, any kind of trajectory on the underlying organic Alarm.com business versus some of the contributions that you're expecting from Icontrol.

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And then maybe for Steve Valenzuela if I could, same sort of question but on the cost profile, could you discuss little bit the opportunities for cost synergies with Icontrol and as we go through the year how we should think about that EBITDA number ramping? Thank you.

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Thank you. And our next question comes from the line of Michael Nemeroff from Credit Suisse.

Can you hear me guys?

Yeah, hi Michael.

Oh hey. Congratulations on many different fronts and for closing the Icontrol acquisition. I want to build a little bit on the previous questions around Icontrol. First, I'd love to understand how you settled the lawsuit with Honeywell, it looked pretty serious by my reading and I didn't expect them to just go away lightly. And then the second one is on the number of subs that you're expected - that you're taking on from Icontrol. I don't know if this is for Trundle or Valenzuela, but if I look at the margin profile of Icontrol, it's a little bit higher than Alarm and I'm just curious as you seek to migrate or - that is part of the question, as you seek to migrate the Icontrol subs over to the Alarm.com platform over time, are you going to see some margin decrease or margin dilution from taking on those subs. Thanks.

Michael, this is Steve Trundle. With regard to the litigation, I think people are a little bit surprised by that, you have a company that's a $93 billion company going after a $1 billion company on the grounds of sort of antitrust. So we felt pretty strong going into that situation and I think we are fortunately able to resolve it in a way that's just fine for us, unfortunately the exact terms of how we settled it are under seal and I can't communicate those but suffice to say we're comfortable with the resolution. With regard to the sub counts, I think the number that I provided was we're at 5 million total subs now. You can probably kind of piece together you know where those come from, the majority are still Alarm.com subs, we were I think we last put out a 2.6 million number at the end of last year. At this point, we're going to report kind of combined subs, but without - not including any licensees other than those that are running on our software. So that's we're going to do there. With regard to the margin profile that's a good question. A couple of things going on in there, one is the Icontrol business has less of a hardware revenue component in it currently than the Alarm.com business. So naturally, there's some margin improvement there. Secondly, the software is actually hosted by the customer. The customer is incurring almost all of the costs associated with hosting, so that drives higher margin as well. And in terms of what will happen or might happen if the subs or if ADT begins to shift some of the subs to the Alarm.com platform, you're correct, yeah, the Alarm.com platform offers a richer or a more comprehensive suite of services where we're incurring any end to end costs. We're running it with our own operations personnel, absorbing all the bandwidth costs, the servers, et cetera. So over time, you could see the potential for that shift to generate either more revenue and some of that revenue though would be slightly decreased margins. So at this point though, saying that that's going to occur would be speculative. So we're just getting started and we'll take the direction really from our customer, but that's one opportunity we do see.

Thank you. And our next question comes from the line of Nikolay Beliov from Bank of America.

Hi. Thanks for taking my questions and adding my congratulations too. Steve Trundle, a question for you. When you look at the strategic direction of the company right now, after all the changes, Icontrol, video acquisitions, where do you think the platform goes in the next two to five years. Does Alarm.com go in to tracking people, [indiscernible] just becoming a more comprehensive IoT platform for residential customers and commercial businesses?

Yeah. Nikolay, I think we're attempting to put in place the platform and the infrastructure that's capable of sort of a steadily broadening platform footprint, if you will, meaning even some of the businesses we're in now like the energy hub business or like the point central business are examples of taking technology we developed for a core purpose of security and then finding interesting ways to sort of redeploy that technology to do more things that value either businesses or homeowners or in some cases landlords. So the ObjectVideo acquisition I'm particularly excited about in terms of what it does for us on the platform and some of the types of applications it opens up in the future. This is a team that does have the ability to track objects to make determinations about license plates, to make determinations about flow of either people or vehicles through a given location. So fortunately, with our service provider footprint, quite a few of them are already selling in to the commercial and sometimes what is called the integrators space already and we see an opportunity to significantly upgrade our platform to make it suitable for a wider range of applications through time like that.

Got it. And my second question for you Steve Trundle is in terms of the international traction, you came in slightly below plan for last year, what contributed to that and what are you doing to fix that and improve execution internationally and if you can give us an update on the Securitas relationship?

Sure. Yeah. So last year, I think in the middle part of the year, I indicated that we had hit a few choppy waters internationally. We had a coup attempt in Turkey that I don't want to point at any sort of single excuse, but we had some challenges for a month or two there. We had some challenges actually really getting the hardware dialed in terms of getting the right partners in place, getting the, what's called the EN grade 2 certification on a set of control panels that our European customers could use. So kind of stumbled our way through some of those obstacles in the middle part of the year and I think the last couple of months on our plan, the number that I put out at the beginning of the year was a bit of a leap when we were doing 1000 and I said by the end of the year, we'll do 4000. If I had to do over, I probably wouldn't have put that out, but nonetheless, we got to 3500 and rolling into this year, I think we've dealt with most of the, most of those obstacles and are seeing a clear path to continued growth internationally. Regarding Securitas specifically, they continue to be a great partner. We've been working through a set of pilots and a number of the different individual European markets. In the second quarter, we'll begin full launch in the Netherlands and Belgium. I think we've wrapped up more or less getting in place the right hardware portfolio for them. So I think especially in the back half of the year, we'll start to see further contribution from them and we're still as excited as ever about their role in our international business.

Thank you. And our next question comes from the line of Bhavan Suri from William Blair.

Great. Nice job and I'll just jump in with first one for Steve Trundle here. When you look at the Piper business here and you think about sort of the DIY space, do you think that's something that you're going to sort of continue to partner around where you're integrating with Echo and things like that or do you start actually offering a full DIY sort of competitor offering to Apple, home and Google and things like that. How should we think about what you're going to do with that part of the business?

Yeah. Bhavan, that's a good question. And we're still thinking through that right now. We've been in sort of a hands off mode with both of these businesses for the last six months and now have had five days to sort of begin to get into what they're doing and what their outlooks are as teams. I think our experience is DIY, we love our current set of DIY service providers that are already selling Alarm.com every day. That's been a good business for us. We are probably not as conditioned to believe that retail DIY is a great place for us to be. So we're going to look at that carefully and look at the capabilities of the product on the Piper side and see if there's a fit for that product that's more synergistic with our traditional channel strategy. That said, we're going to look at things open minded and we haven't yet made a decision, but our general bias is to find a way to support our service provider partners with most of the development that we're doing so that's where we would look first.

Got it. Fair enough. And then one more for you and then I have a quick one for Steve V in a second, but when you look at now, you have Monitronics and ADT and some of these large guys. When you look at the security space and felt like everyone is going kind of after ADT as is very large Bohemians player, any color from your dealer channel, your customers, your actual customers about what they think of ADT now being a biggest customer for you or a very large customer for you guys, have they given you any feedback. Do they worry about that? How should we think about that?

Yeah. I think there's been a bit of a shift over the last three years really in that. Three years ago. It was sort of a, we versus ADT type of mentality in the channel. But then we saw the entry of cable and with Comcast, with Time Warner, with Cox, with AT&T and we also saw the entry of a number of point products such as Dropcam, Nest and others that are competing for the customer's attention as well. And I think the result of that is, in the eyes of most of our service providers now, ADT is really not the bad guy. They're sort of a part of the family if you will and folks are conditioned to believe that what makes sense is for us to scale up our R&D capacity so that we can deliver capabilities that keep them competitive with all of these emerging channels. So that's what we're trying to do and I think that's a reasonable position for most of our partners to take.

Great. And then a couple of quick ones for Steve V here quickly and welcome. The first one I guess is just on the sales and marketing size for the business, the Icontrol business. Obviously, it's a license based business, you might add subs there, but you're not going to go sell that product, it doesn't feel like you're going to go sell that product to net new dealers. So can we expect some material sales and marketing leverage maybe over 12 to 18 months there. And I guess the inverse question on R&D, you don't have to support that platform while you've got stuff, you're obviously doing a term development on the core Alarm.com platform integration, do you keep adding R&D on the Icontrol side to support that and all the new integrations that might happen, say Amazon comes in something different than Alexa or Echo and you have to integrate that. Is that a plan, so would you have to double up, or not double up, have a little extra R&D just because you've sort of gotten out two sort of platforms, but how should we think about those two pieces of the businesses you bought? Thank you.

So, Bhavan, I'm going to take the piece on the R&D strategy a bit and then the first part of the question I think was on sales and marketing leverage, which I'll shift back at the end to Steve V for him to answer that. So on R&D leverage, I think the reality here is that the IoT is getting broader every day and we're in sort of a race to keep up. Each month I wake up and there's another device that we need to integrate, we need to support, it's either the Apple Watch or it's the Amazon Echo device or the Dot or new types of light switches or light bulbs, whatever it may be, we know the consumer wants to buy all of the stuff from one service provider if possible. And for us to be that sort of technology engine for the service provider, we have to sort of scale up and be able to quickly integrate and do so cleanly an ever broadening number of devices. So I think that when we think about synergy, it's not that we're thinking we're going to absorb this team and cut the team. We also have an obligation to continue to support ADT with the platform. So and they continue to be excited about the existing Pulse platform. So we'll do that. I think we will see some opportunities for us to get synergy in the form of more breadth on the R&D side, but I don't think we'll necessarily be looking for heavy cost type of synergies on the R&D side. And then, I'll let Steve comment on the sales and marketing side?

Sure. Thanks, Steve. In terms of sales and marketing, if you look at even in 2016, sales and marketing was 14%. In the past, it's been 15%. We have a very good model where we sell it to dealers and then to the end subscribers. Now if you look at Connect and Piper, you're talking a few customers. There's not a lot of investment in sales and marketing. Again, a lot of the investment really is in R&D and what we're requiring, if you look at the 120 employees, we're acquiring most of those folks who are in R&D. So as we move forward in the guidance we provided, we factored in the teams coming together, we factor that into our EBITDA margin of 20% for 2017, which we're very comfortable with. And again, we're focused right now on the integration. Will there be synergies, will there be additional opportunities? We think so. But I think right now, it's been a week. We want to make sure we bring the teams together, make sure we're focused on the right customer satisfaction, that's really our primary focus right now.

Thank you. And our next question comes from the line of Tavis McCourt from Raymond James.

Hey, guys. Thanks for taking my questions. I've got a couple and I'll ask them and then get on mute. I'm in an airport. Steve, I wonder, could you give us a sense of on Icontrol, annual revenue estimates you gave in the 8-K, how much of that is perpetual license versus term license versus maintenance and I guess what I'm getting at is, if ADT decided not to add any one theoretically to 82 Pulse this year, would that pace of revenues churn off at just the average churn rate of the industry or it would be down meaningfully because you're selling less perpetual licenses into that customer? And then the second question is on the video success in hardware and I suspect probably bit of an ASP uplift on the [indiscernible] as well, you've mentioned strong demand last several quarters. So maybe an update on how penetrated that traditional Alarm.com base is on video would be helpful? Thanks.

Let me take the first part of the question. This is Steve Valenzuela. In terms of the connect revenue, it's also a subscription, even though, it's on premise a software and it's not hosted in the cloud, it's accounted for very, in very much the same way. And in terms of the 12-month guidance we provided right, we provided guidance for the next 12 months are indications for Connect and Piper are 38 million to 42 million and if you break out hardware portion, the SaaS piece of that is 33 million to 37 million. Again, that's for 12 months. So as Steve Trundle discussed earlier, we want to make sure you understand as for a partial year, it's looking more at a 75% contribution within the guidance we've provided for 2017. And I'll let Steve Trundle take the second part or third part of those questions.

Yeah. And I would just add to what Steve V just said, which is that, if they were to stop adding Pulse accounts to the Connect platform tomorrow, they would in all likelihood be adding new customers to the Alarm.com platforms. So it sort of washes out unless that business stops entirely and then these are subscription fee driven licenses that are monthly per subscriber fees. The video piece, so yeah, video has continued to be a contributor. In terms of the overall penetration in the base, it's still early and I think, we're at around, right around, 15% right now in terms of new accounts coming on to video. So we see a lot of upside there. Over time, some of that upside will require the consumer to continue to get comfortable with video in the home, some will be driven by our increased commercial footprint, but we do see more opportunity there through time.

Thank you. And our next question comes from the line of Saliq Khan from Imperial Capital.

Great. Thank you. Hi, Steves. There's a few questions on my end. The first one being is, over the last several quarters, you've been able to very quickly enhance the analytics capabilities that you have, but how are the market dynamics changing now that are leaving you to want to ramp up, but also to be able to implement the solutions dramatically faster than your historically have?

So, yeah, I think that one of the features you're referencing is we rolled out the Insights engine during the Consumer Electronics Show this year and it may have seemed like that that was something we did very quickly, but that capability was 2.5 years in the making. There was just a ton of testing to make sure that when we generate something, we allege as an Insight that in fact it is an Insight and not an interruption or a distraction for the consumer. So quite a bit of work went into that and then we've been shifting now a lot of our focus to what we call HVAC analytics and then also video analytics and this acquisition we just completed on the ObjectVideo side I think strengthens our play in the video analytics space. You now look at pile on the Connect acquisition, the Connect and Piper acquisition and there we're getting sort of fuel that we can use to invest further in analytics of all types and we do believe that if you think about our background, our background for the most part is in data mining. So we tend to have a belief that accumulating data and then generating insight from it is sort of a core mission of the business and I think you'll continue to see us try to drive differentiation and real value that from the delivery of more analytics capabilities.

Steve, a few years ago, if you remember, ObjectVideo sold a portion of its IP 2 maybe [indiscernible], how does that impact your current acquisition and your ability to maximize the team's capabilities?

Right. It's a good question. It's a good memory and [indiscernible]. Right. So clearly something we needed to deal with, coincident with that acquisition and I guess I would say that we did deal with it and we don't anticipate being hampered at all in our capabilities for deploying video analytics to our service providers.

Is it just based off that, is it a fair assessment that the IP may have seen a point of conversation during the deal making, but not just that you were able to go ahead and bring all the people that are behind the IP. So even if a Vigilant has the IP, you have the brains to hide the IP, so theoretically, you can utilize the brain power to come out with newer and better solutions? Is that right?

I think that's - yeah, that's a reasonable way to look at it is there we inherited or absorbed and we're excited to have the people who had created that body of IP over the last 12, 14 years and then we have course have to make sure that we're capable and able to offer our service providers new capabilities without regard or concern for whether they have the rights to practice those capabilities. So we had to take care of that as well and we took care of both items, but the people are now part of our team and are integrating quickly with our video development group.

Thank you. And our next question comes from the line of Howard Smith from First Analysis.

Yes, Steve and Steve. Thank you for taking my question. First question has to do with a new enhanced functionality specifically on the Insights engine, is that an upsell kind of similar to video doorbell or is that something that's offered just to create more stickiness and loyalty and more broadly as you add more video components with the acquisition and things and video analytics, how do you think about what's a product itself versus just an enhancement of the core platform for that purpose?

Yeah. Both good questions and it gets a little murky sometimes. With Insights engine, so Insights engine gets better, the more devices you actually have. So in a way, even if we include the capability with one of our existing service plans, it drives some upsell activity because the value derived from the capability increases the more things you have that are producing data and what we're really at some level trying to do there is more and more people are getting lots of devices installed on their properties and the types of alerts that they're now able to get sometimes go beyond their patience for actually manually setting up those words. If I have to ask someone to go into a mobile app or a website and predetermine all the things that might be of interest to them, they may never get around to doing it. So now, we're doing it for them in many cases and as you do that, I think it makes each of the devices themself more valuable. Now, it does require that a customer be on one of our, in this case, the Insights engine capability be on one of our fully interactive plans, which are slightly higher value plans than say a wireless signal porting plan. With regard to the second part of the question, I'm trying to remember, was it -

Just more broadly how you think about when it's an upsell, like versus just like you said enhances the ecosystem and just dry sticking it and perhaps I guess more revenue?

Right. I think as we look at each one individually, I think Insights engine is likely to be more of a upgrade to the existing plans that will drive some ancillary upsell. Contrast that with maybe higher end video analytics, if we're doing vehicle recognition or something like that, that's a little in this year, but and maybe not broadly applicable to every single customer, but particularly valuable to a subset of the customer base, then we would treat that as an item that has its own value and would not be included as sort of just an enhancement of an existing plan.

That's great. Helpful color. And maybe for Steve V, or you can take it as well. The litigation, the non-ordinary course litigation expense remained relatively high. I was expecting a little bit of a retreat due to the patent office review. Was that just due to the timing of when that kicked in in the quarter or is this kind of the still the pace right now of the expense?

We really can't talk about forward looking litigation expense. That's something that's difficult to predict right. All I can say is in the fourth quarter, we did have, litigation expense was 2.1 million. It was down from 3 million in the prior quarter and down from 4.7 million in the prior quarter before that, but I wouldn't necessarily imply that's a trend again. We don't predict the litigation expense. That's something that's difficult to determine. Now, the good news of course is that we are through the FTC review with this acquisition. So that's behind us and now we're focusing on integration and we're excited to welcome the teams to Alarm.com and get working on bringing the business together and really looking forward to the future.

Thank you. And our final question comes from the line of Nehal Chokshi from the Maxim Group. Your line is open.

Thank you taking my questions. Congratulations on a good quarter and congratulations on closing the acquisition. That's really great. On the SaaS guidance for the first quarter, presumably, there is still some contribution from Icontrol since the deal closed on March 7. I guess I back that out to be about 2 million contributions is that about right?

Yeah. We didn't actually break that out Nehal, but that's a pretty good estimate. We actually closed the acquisition on March 8. So you're correct, it would take from March 8 to the end of March 31. You would take that contribution and that would be part of the guidance we've given for the quarter, the 49.3 million to 49.5 million SaaS and license revenue for Q1.

Okay. And then adding in effectively I guess another 24 million for the next June, September and December quarter, so that would then imply that you're encountering some guidance for SaaS, excluding the Connect portion is just a little bit north of 201 million or about 70% year-over-year organic growth, which is consistent with the 400 basis points of year-over-year deceleration of SaaS growth that you've been seeing and I guess the question I was trying to drive is, one, is that correct, two, how comfortable are you with that level of deceleration, do you feel like you can confidently beat that basically?

Nehal, I'm glad you asked this question because it's a very important one. If you look at the guidance we've given for the year for SaaS and license, the 231 million to 232.5 million, that includes a partial year contribution from the SaaS and license for the 12 months and you just can't take the 296 days remaining in 2017, which ends up being about 81% of the year. Again, you've got to take into consideration that that revenue from the Connect and Piper is growing over the next 9 months effectively. So again, you need to look at the 33 million to 37 million as SaaS and license revenue for the next 12 months. Take about 75% of that and I think when you do that, you'll find that the contribution from the Alarm.com if you will prior to the acquisition, is more higher to closer to historical levels or closer to around in the upper teens, which is a very good growth rate.

Thank you. And that concludes our conference call for today. We thank you for your participation and you may now disconnect. Everyone, have a great day.