Good day, ladies and gentlemen, and welcome to Alarm.com’s First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program may be recorded. And now I’d like to introduce your host for today's program David Trone, Vice President of Investor relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Alarm.com’s first quarter 2019 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. Management’s discussion during the call today will include forward-looking statements, which include future financial performance for the second quarter and full year 2019, anticipated timing of payment of certain liabilities and investments in our business, the potential impact of timing variations on our period over period results, business strategies, continued enhancements to our platform, anticipated market demand for our offerings, opportunities for growth in our markets and other forward-looking statements. These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Statements containing words such as anticipate, believe, continue, estimate, expect, intend, may, will and other similar statements are intended to identify such forward-looking statements. These statements are subject to risks and uncertainties, including those contained in our updated Risk Factors section of our most recent quarterly report on Form 10-K filed with the Securities and Exchange Commission and subsequent reports that we filed with the Securities and Exchange Commission from time-to-time, including our quarterly report on Form 10-Q for the period ended March 31, 2019 that could cause actual results to differ materially from those contained in the forward-looking statements. Please note that these forward-looking statements made during this conference call speak only as of today’s date, and Alarm.com undertakes no obligation to update these statements to reflect subsequent events or circumstances, except to the extent required by law. Also during this call, management’s commentary will include non-GAAP financial measures and provide non-GAAP guidance. Management believes that use of these non-GAAP financial measures provides an additional tool for investors to use in understanding the Company’s performance and trends, but note that the presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the financial statement tables of our earnings press release, which we have posted on our Investor Relations website at investors.alarm.com. This conference call is being webcast and is also available on our Investor Relations website. The webcast of this call will be archived, and a telephone replay will be available on our 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, David, and welcome to everyone joining our call today. We are pleased to report a strong start to 2019 as our first quarter results exceeded our expectation. Our SaaS and license revenue in the first quarter was $80.1 million compared to $68 million in Q1 of 2018. And our adjusted EBITDA in the first quarter was $24.3 million, compared to $23 million a year ago. During the quarter, we continued to focus on expanding our solutions with new capabilities for our service providers and their customers. We made significant enhancements to both our commercial services platform, called Alarm.com for Business and our residential solution. We also released a new award-winning capability to help our service providers deploy our technology more efficiently. Let me begin with our commercial offering. Last year at this time, we launched Alarm.com for Business and we've steadily expanded the offering since. This past quarter, we introduced a few significant new software-based capabilities. First, we continued to enhance our Access Control solution. We integrated Access Control into our enterprise console dashboard to enable customers with many locations to manage everything in one place. From a single web view, users can add and delete users, manage access points and user permissions and define schedules across multiple locations and security partitions. This capability significantly expands the range of installations our Access Control solution can handle. In addition, we applied our market leading AI engine that we call the Insights Engine to the high volumes of data coming from our Access Control solution. Leveraging machine learning, our solution can intelligently detect and alert the right personnel about irregular or unexpected events, pre-determining and configuring all the different conditions that might warrant receiving an alert can be challenging. Our Insights Engine now does this on behalf of the commercial subscriber.…

[Operator Instructions] Our first question comes from the line of Adam Tindle from Raymond James. Your question please.

Afternoon. I just want to start, Steve Trundle, the moving parts, the competitive landscape in adjacent channels, you probably noticed a sizable acquisition announced this morning in the premium home automation space. I know one of the growth drivers for Alarm.com is adding more service provider partners and that's not a direct comparison, it's a different channel, but just thinking about new dealers choosing a channel, does this get more challenging with the Control4-SnapAV entity and any broad comments on competitive landscape changes?

Sure, Adam. Yes, I did notice the announcement this morning. It -- from our perspective, it's sort of a non-event, in that we're not really seeing competition from either Control4 or SnapAV. I think both are in a bit more of the custom integrator space, doing higher-end systems typically and also doing systems that are less sort of security-first, or security-centric. So, at times, we have request to integrate with various products from both of those providers, but we haven't really heard of service providers sort of standing on the doors of a customer and hearing that the customer is trying to make a choice between us and, as an example, Control4. In fact, some customers probably have both. They're using us for security and video and Control4 for automation and maybe even using SnapAV components for a high-end AV system. So on that front, I would say, it's interesting, but it's not really a material event from our perspective, and I think the rest of the competitive landscape has sort of remained the same over the last -- over the last quarter.

Okay. That's helpful. Maybe just as a follow-up, I wanted to touch on guidance for Q2. The SaaS and license revenue would suggest a lower than seasonal sequential uplift. I think it's typically 4% or 5% when you strip out Icontrol historically, and you're implying more like flattish. You now have the Command platform nationwide for a full quarter. Any incremental benefit from video, analytics and commercial, if you could just maybe speak to why we wouldn't see at least the same seasonality as before. Is there an underlying aspect of challenges in the core that's offsetting, is there some conservative approach to guidance. Just trying to understand what the message implies. Thank you.

Sure. Now, good question. So those things you mentioned are all going relatively well. So those are -- those are thus far looking positive, but I mentioned in my prepared comments that we had a nice win with SoCalGas and then they were very effective in -- actually in the first quarter, adding a lot of subscribers very quickly and that generated a pretty meaningful revenue event for us in the first quarter that -- that is partially responsible for our first quarter beat. But that revenue is seasonal revenue that we would expect to see again, hopefully in Q1 of 2020. It comes around once a year, because it's tied to those points in time when people are actually using their heating systems, and we're not going to see that revenue repeat in the second quarter. So with that sort of a drop, some of those other things that you mentioned as positives are making up some of the gap, but that -- that sort of is a function of the lumpiness in this demand response revenue more than anything.

Thank you. Our next question comes from the line of Nikolay Beliov from Bank of America Merrill Lynch. Your question please.

Thanks for taking my questions. A question for Steve Trundle positive. Steve, how do you track your progress in the commercial space? What are the key underlying metrics you look at on a regular basis to evaluate how you're guys progressing there and if you can give us the update on the percentage of service providers that you've trained to sell your commercial offering? And lastly, how important is this STANLEY relationship? How big -- if you could just give us an idea of how big their market presence is.

Sure. Yeah, several questions there. So I'll do the best I can. I may not have all of the metrics right at my fingertips, but at a high level, we're watching sort of the percentage of customers coming on, who we believe are commercial enterprises. And then what percentage of those are taking one of our commercial plans. And we've seen growth in both of those metrics, meaning the gross commercial acquisition rate is higher, some of those customers come on one of our base residential plans, but a growing percentage of them are coming on one of the commercial plans. So we're watching that. And then on the Access Control side, we're watching the actual number of doors being activated on the network per day, or per week and we obviously -- that can't grow fast enough. The faster that's growing the better. So that's a metric we watch. I'm not going to break out exactly what that number is at this point, but it's going in the right direction. With regard to STANLEY, each of these -- each of our large partners, it takes a while to get them trained up to speed, get them -- separate their pricing and whatnot. But STANLEY is a very sophisticated operator in the commercial space and is known for real focus on operational excellence. And we therefore we're pleased with ourselves in a way that we were selected as the platform for their SMB offering. I think it's validating that a lot of the investments we've been making over the last year, and that I talked about -- when I talked about our 2019 strategy, are beginning to -- are beginning to come to fruition. So I would view at this point as a nice validation of our efforts. And then it will take some time to -- to really be contributing as a revenue source, just like any new relationship does.

Thanks, Steve. And a really quick question for Steve Valenzuela. Steve, can you help us in terms of how to model cash flow for the year? Is EBITDA less some estimate of litigation expenses, less the TCPA payment kind of like a proxy of where cash flow should come in more or less?

Yes. Nikolay, this is a very good question. So if you look at last quarter, we indicated that we had made the $5 million payment for the TCPA settlement in Q1. So that certainly affected the cash flow from operations and the free cash flow. Even though we recorded the expense last year, it doesn't affect your cash flow statement, until you actually making a payment. So if you took out that cash flow amount from Q1, you would see that we were actually up year-over-year in cash flow. And then keep in mind, we have an additional $23 million payment that's going to be made, the remainder, at some point later this year. That will affect the cash flow. But if you adjust for that, let's say, if you take out the $28 million one-time event here for the -- for the settlement, the cash flow should be up slightly year-over-year. Whereas, last year, we did about $49 million in free cash flow, the year before we did $47 million. And so, it's still early in the year, the things that could go affecting the cash flow, but where we sit today, we would expect cash flow to be up slightly year-over-year, taking the legal settlement out of that consideration.

Got it, got it. Thanks so much.

Sure. Thank you.

Thank you. Our next question comes from the line of John DiFucci from Jefferies. Your question please.

Hi, thanks. This is Parthiv on for John. Just a quick follow-up on the STANLEY announcement. You guys talked about the size of the commercial installed base over there. I'm just curious, is there room for any of that existing installed base on the SMB side to port over to Alarm over time, or is this a new bookings opportunity looking ahead?

No, I think over time it will be both. Our hope is that, that we can provide enough value with the platform that a system manager [ph] solution provider like STANLEY would have a vested interest in putting the majority of their customers on the platform. They get more efficiencies when they do that, they're able to use the platform for a lot of business intelligence reporting, customer engagement reporting, customer exception reporting. So we hope that we create incentives that would allow us to compete for upgrades into the existing base. That obviously takes some time, customers become acquainted with the system they already have, that their employees are trained on and you don't just sort of go in overnight and switch them all up. But you look for opportunities to present to the customer additional value you can provide with an improved offering and then you make that upgrade. So I think we'll see some contribution from both parts of that business.

Okay. And then is there any contribution from STANLEY baked into sort of the current revenue guide?

Typically, when we actually provide guidance, we are cautious not to include future programs or new programs, it's still as -- just recently announced, right. This is Steve Venezuela, by the way, so our guidance strategy is not to include new programs that are at the early stages.

Okay, got it. Thank you so much.

Sure. Thank you.

Thank you. Our next question comes from the line of David Gearhart from First Analysis. Your question please. David, you might have your phone on mute.

Hi, good afternoon. Sorry about that, my phone was on mute. Thank you for taking my questions. My first question has to do with one of your large customers MONI or Brinks Security. It was publicized that they've missed a debt payment and there are some things going on there. Just wondering if you've seen any change in your relationship or how you're thinking about working with that client.

No, so we have not seen a change in our -- in our relationship, nor has that changed the way we think about working with that service provider. In fact, I feel we have seen the quality of the customer they're creating from our perspective is steadily improving. They have, in some domains, sort of right-sized, I would say, and they have focused on creating higher quality customers that are more engaged with their system. So we like that and we are treating them and acting in a way where they are just sort of a regular customer, obviously a very important one. But we are not really involved in their restructuring effort and it doesn't really affect the way we work with them.

Okay. And then lastly, could you provide an update on either -- on actually both excuse, ADT and their new platform, if you see an increasing activity as a result of their platform update and their efforts, as well as what you're seeing in the new builder channel in the program that you have there? Thank you.

Sure. Yeah, on that front, what I would say is ADT reported a couple days ago, I believe, their results and they did spend some time speaking about the launch of their new platform. And in summary, I think they are satisfied. It's early days, obviously, but they indicated satisfaction with how it's going and early signs of a lot of positive activity. And my perspective is, if they're satisfied, then we're satisfied. So that's probably about the most I can share, since it's really their system at this point, but I'm happy to see that it's going well and that they're satisfied with it.

Thank you. Our next question comes from the line of Darren Aftahi from ROTH Capital Partners. Your question please.

Hey, guys. Thanks for taking my question. One think I didn't hear in the call, just anything about international, love to get an update there, just percentage of revenue. And then on your other revenue with SoCalGas, is there way you could quantify that? Thanks.

So, Darren. It's the Venezuela. So international, we typically don't break out every quarter, but what we can say is year-over-year we've seen good growth. And in terms of the actual accounts have been accredited, the creation is up over 50% year-over-year. And so we're seeing progress. Last quarter actually Steve Trundle talked about a number of new programs in international. I think what we've mentioned in the past is these programs do take longer to launch, because you're dealing with different standards, different requirements in different countries, but we've seen good strategic momentum internationally, it just takes time to really -- to have those agreements really start generating revenue. But we have seen good growth in terms of the account creation year-over-year.

One thing I would add there is, is the win at STANLEY is -- STANLEY is a brand that's known well in North America, but it's also -- that business is actually larger in rest of world, in the security space than it is in North America. So we treat that as an international win and it's sort of good on two fronts and that it's validating on the commercial side. And then, you wouldn't be able to win that business if you weren't able to scale globally. So it's validating on some of the investments we've made to build out our Rest of World presence as well.

And I think one of your other questions was quantifying the SoCalGas program. So obviously, we can't provide details of our customers' revenue. What I would say is, point you to our 10-Q, where we do break out the Other segment. We've seen good growth within PointCentral, EnergyHub and also our other segment vertical businesses in our Other segment. Actually, this quarter the Other segment, which includes those businesses, account for about 8% of total revenue, a year ago they account for about 6.5% of revenue, and achieved very strong SaaS revenue growth year-over-year. So I think that would probably help you.

Thank you.

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital. Your question please.

Yeah, hi. This is Pawan [ph] on for Mike Latimore. Like, can you please give an update on your video analytics service? Is there any qualitative or quantitative information related to the residential or business market?

Sure, so the updates are, we saw the uptake steadily increasing during the first quarter. We're probably not going to break out the exact percentages of people that are taking video analytics, but the adoption, I would say is going the way that we had hoped it would go and I think that's because the user experience with that offering is very differentiated right now and is far superior to an offering that doesn't use intelligence to be more selective in surgical, in the content that you present to the end user. So, it's going well. In my prepared comments I talked about expanding the lineup of cameras that are able to work with our video analytics engine to include the rest of our commercial cameras. So we got that done in the -- in the first quarter and really until you can support the full lineup of cameras with a software feature like that, you're a bit hamstrung in how quickly you can roll out, but we've gotten that done in the first quarter and things are generally going pretty well with it. I think I also spoke about the Highlights feature, which is only really enabled with video analytics with subscribers. So that's something we've done on the residential side, primarily, where we've really made an effort to give someone a short perform, very quick view of everything important that's happened around their home during the day all in about 20 seconds and we're using the video analytics engine do that. So you're seeing us continue to invest in it, and I think those investments will continue to drive adoption.

Thank you. Our next question comes from the line of Jack Vander Aarde from Maxim Group. Your question please.

Yeah, hey guys. How many homebuilder partners do you guys now have or is that something you can share?

So we've talked about D.R. Horton and Toll Brothers. Those are public. I think there certainly are other programs with our dealers that have local builders. But those are the two public ones we've talked about in the past, Toll Brothers and D.R. Horton, there may be others.

Yes, I think that's what we have spoke -- I would just say this, if we -- if we do a relationship with a large national homebuilder, we will attempt to announce it in some way, shape or form. And if we haven't announced it, you can probably assume we don't -- we're probably not in a big -- we are not really engaged with someone. And then what I would add is, there are thousands of smaller homebuilders in the different local markets, custom builders that may only build five homes a year. And this is a place where our service providers are very strong and that they oftentimes have relationships with those local builders and there are more relationships there than we would even know about, but I would say it's a pretty high number, we just don't even know what the number is.

Okay, that's helpful. And then for Steve V, you mentioned video camera sales were strong and hardware gross margin was down due to product mix. Can you just discuss what specific products had a drag on gross margin and if your guidance -- maintained guidance for the year on EBITDA assumes gross margin will return to the 20% or 22% range?

Yeah, Jack, typically hardware margins have ranged from 18% to 20% more recently. I know it's been -- sometimes they have been higher. The interesting thing is there is a mix even within cameras of different margin. So it really depends on the mix in that quarter. So it really is related to product mix, that really is driving it, even within cameras drives their product mix. I would say probably in Q1, we probably had a little bit more mix of the lower margin cameras than we would probably expect. Again, I would think that -- I would think that modeling 18% to 20% for hardware margins is probably a reasonable way to going forward.

Okay. That's helpful. Thanks, guys.

Sure. Thank you.

Thank you. Our next question comes from the line of Jeff Captain from Stifel. Your question please.

Hey, guys, I was just wondering if you can give more color on what's causing the slowdown in the core business if you pull out the -- that added benefit from SoCal this quarter?

Well, yeah, I'm not sure if we pulled that out, which -- not positive that we would be portraying -- obviously, if we pull out that result, we would -- we would not have the lumpiness in Q1. I'm not sure exactly how things would look at that point, but I think they would look pretty close to the normal growth rate that we have guided for the year, if not a little bit above that.

Yeah, probably above that. Right.

Got it. Thanks a lot.

Okay, thank you.

Thank you. This does conclude the question-and-answer session, as well as today's program. Thank you, ladies and gentlemen for your participation, you may now disconnect. Good day.