Good day and thank you for standing by. Welcome to the Alarm.com Q4 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Zartman, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to Alarm.com's fourth quarter and full year 2023 earnings conference call. Please note that this call is being recorded. Joining us today from Alarm.com are Stephen Trundle, our Chief Executive Officer and Steve Valenzuela, our Chief Financial Officer. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our quarterly report on Form 10-Q and Form 8-K, which will be filed shortly after this call with the SEC, along with the associated press release. This call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP and non-GAAP measures can be found in today's press release on our Investor Relations Web site. I will now turn the call over to Stephen Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report fourth quarter and full year results that exceeded our expectations. Our SaaS and license revenue in the Q4 was $148.3 million up 10.3% over the last year. Our adjusted EBITDA for the quarter was $45.6 million. Despite some uncertainty throughout the year, we delivered solid SaaS revenue growth by sharpening our focus on key initiatives. We also delivered record adjusted EBITDA and cash flow performance. I want to thank our service provider partners and our employees for their contributions to our 2023 performance. I'll focus my prepared remarks today on our long-term strategy. We believe that we have the right opportunities in our sites and the right plans to attack them. Our R&D program is positioned to leverage the growing universe of IoT data and to continue building innovative AI based offerings that will empower our service provider partners and deliver unique value to end customers. We have transitioned from a focus on one primary market where we have been very successful, mainly the North American Residential monitored security market to a more diversified business serving a larger overall TAM. We've expanded into the video market, both commercial and residential and the commercial access control and intrusion market. We developed an international business and cultivated new IoT enabled growth businesses like EnergyHub. These growth initiatives collectively represented 31% of our total SaaS revenue in 2023 and together grew 27% year-over-year. Let me kick through these various elements of our strategy. I'll start with the commercial market. We are attacking the market opportunity with a purpose designed solution that deeply integrates access control, intrusion and video monitoring into a single cohesive platform that the largest commercial integrators can leverage to solve their clients' multisite requirements. We've made…

Thanks, Stephen. I'll begin with a review of our fourth quarter and full year 2023 financial results and then provide guidance for 2024 before opening the call for questions. Fourth quarter SaaS and license revenue of $148.3 million grew 10.3% from the same quarter last year. For the full year of 2023, SaaS and license revenue of $569.2 million grew 9.4% over 2022. Non-GAAP SaaS and license revenue, excluding Vivint license revenue, grew 13% in 2023 year-over-year. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 94% in the fourth quarter. Partner and other revenue grew 5.8% in Q4 2023 to $77.9 million mainly driven by sales of video cameras. Total revenue of $226.2 million for the 4th quarter grew 8.7% from Q4 2022. For the full year of 2023, total revenue grew 4.6% year-over-year to $881.7 million. SaaS and license gross margin for the fourth quarter remained solid at 84.6%, which is slightly down from 85.2% in the year ago quarter, mainly due to mix. Hardware gross margin was 25% for the fourth quarter, up 610 basis points from 18.9% for Q4 2022, due mainly to the improvement in our supply chain and to a lesser extent product mix. Total gross margin was 64.1% for the fourth quarter, up 230 basis points from 61.8% for Q4 2022, mainly due to the improvement in hardware margins. Turning to operating expenses. R&D expenses in the fourth quarter were $61.3 million compared to $57.4 million in the Q4 of 2022, mainly due to an increase in headcount and related compensation expenses as we continue to execute our growth strategies. We ended 2023 with 1118 employees in R&D, up from 1004 employees at the end of 2022. Total headcount increased to 1989 employees for 2023 compared to 1733…

Certainly. [Operator Instructions]. Our first question will be coming from Alicia Barnes. Your line is open. And one moment for our next question. Our next question will come in from Saket Kalia of Barclays Capital. Your line is open.

Okay, great. Hey, guys. Thanks for taking my questions here. Nice result here, Stephen Trundle and Steve Valenzuela. Steve Valenzuela, maybe to start with you, just to kind of hit Vivint upfront, and I know we can't talk too much about it, but as we look at the revised 2024 guide, can you maybe just talk about how much of the increase in SaaS revenue is coming from sort of better underlying fundamentals versus some of the litigation settlements? And along those same lines, maybe how should we kind of think about the lower litigation costs in 2024 versus your prior expectations? Does that make sense?

Yes, Saket. Although you said the SaaS revenue from litigation costs, did you mean the EBITDA or..

Yes, the EBITDA. Yes, like how much lower do the litigation costs go?

Yes. Thank you. So when we released our Q3 results in November, we provided an initial look for 2024. And that was, of course, before the settlement. We've now provided guidance for 2024 for EBITDA that's about $13 million higher than what we gave on the initial look. And that's a combination of the Vivint settlement and also the strength of our business. I would say the Vivint settlement is a larger component of that, but we can't really break it out as Stephen talked about given the confidentiality of that situation. The also important point to make is that the legal matters related to Vivint had gotten to the point at the end of Q4 of last year where we would adjust those out of EBITDA. So there's no benefit to EBITDA in 2024 from that litigation matter being resolved. However, there is a significant cash flow benefit because we do expect lower legal costs. It's always very difficult to predict legal costs. And I would toot a horn a little bit here on the cash flow. This year, we believe cash flow could be about $150 million. Now there is that tax matter related to Section 174 where unless Congress acts and they're supposed to meet again in the next couple of weeks, we would have about $70 million of tax payments in 2024 related to the R&D capitalization which frontloads the taxes. So our net tax -- our net cash flow would be about $80 million -- $85 million in 2024 taking into account the $70 million dollars. So the operating cash flow in 2024 really is going to be about $150 million. So very similar to the cash flow we actually generated in 2023 where we also made that tax payment around $35 million and we generated about $125 million of free cash flow in $23 million. So the business is generating a very good amount of cash. Does that answer your question?

Yes, that does. That's super helpful detail actually. Stephen Trundle, maybe I have a follow-up for you, maybe on to a different topic. I was wondering if you could just talk about some of the early observations that you're seeing from ADT Google and its impact to the business. And just maybe remind us if -- how you're sort of thinking about that impact in 2024 and whether that's changed at all?

Sure. So, so far the observations are we haven't seen impact from the any rollout of the ADT Plus software. In terms of how we're looking at the year, we're building our models off of the publicly available sort of estimates from ADT themselves instead of speculating about any other sort of timeframe. So we're currently using the estimate that, that transition will occur in the first and second quarter of this year and the first half of the year. And therefore, that's how we've modeled the results there and the expectation there in our own guidance.

Got it. If I can just squeeze one last housekeeping question here for you, Steve Valenzuela. Every year, there's a really helpful stat just on the annual subscribers. I think last year at the end of 2022, it was a little over 9 million. Do you have that rough number here for how we ended subscribers at the end of 2023?

Saket, generally, the thing we've looked at our business, it's changed so much given with Noonlight, EBS, with commercial really not being indicative of the number of subscribers given that you have multiple locations. And so that's a metric that we don't feel that's really valuable anymore. So we've not really provided that and we think it's actually misleading. It actually understates the benefit of the commercial growth of our business, which is almost 10% of our SaaS I think it was 9.4% of our SaaS revenue in the fourth quarter. And so it's really not a meaningful stat anymore.

Very helpful. Thanks guys.

And one moment for our next question. Our next question will be coming from Adam Nordson of Raymond James. Your line is open, Adam.

Hey. This is Adam Tindle. I just wanted to maybe start, Stephen Trundle. You mentioned the focus of this call was long term strategy and that you were transitioning your focus to becoming a more diversified business. On that point, if you could maybe share some practical strategies that you're thinking about in terms of that increased focus. And I mentioned that because you're arguably at scale now in these areas and proven. Commercial, for example, might it make sense to employ a more direct sales force? The growth businesses, you've got major reference customers like a Tesla. How do you capitalize on that? And you also have significant cash balance to overlay across this entire increased focus. So if you could just maybe share some practical strategies that you're thinking about as you talk about that high level topic? Thanks.

Yes. Good question, Adam. So practical and distinguishing commercial from our commercial go to market from our residential go to market is worth doing because the relationship that one has with their partners is slightly different in the commercial side than the residential side. On the commercial side, our integrator partners expect us to do more marketing, more lead generation activity. I don't think we'll jump into a direct sales force that's at all competing with our partners. So that's definitely not in our plans. But some practical things we've been doing are doing a lot more sort of outbound calling to potential commercial clients, doing a lot more in the form of lead generation that then flows down to our commercial partners and absorbing some of the costs associated with that, but trying to drive further growth there. And I think we'll continue to do that because, thus far we've seen meaningful results from that.

Okay. And on the cash balance and priority for that?

The second piece was on the I'm sorry, the cash balance?

Yes, the cash balance on the balance sheet and how that might.

Sure. Yes. The balance I mean, the cash we have gives us an opportunity to be optimistic when we see things come along. And our primary -- I guess our primary view is we want to retain that dry powder for the right opportunity if we see something on the corporate development side that makes sense. So that's sort of what we continue to look at. We don't feel like we have to go do any sort of deal with that balance. So we're able to sort of sit back and look at things that come up, see if they meet our criteria. Where we deploy, if we do deploy, I think, really depends on the unique element of each opportunity that comes up. So for now, just going to continue to preserve that capacity as dry powder if the right thing comes along.

Okay. And I know that was a multipart for my first one, sorry. But as a quick follow-up, one of the other things you talked about on this call was that the growth businesses are improving with scale and it sounded like the unit economics and margin profile. If I look at that, you finished 2023 with an EBITDA margin around 17.5% and this initial guidance implies kind of flattish year-over-year. I understand that you tend to be somewhat conservative, but help us maybe better appreciate that comment on benefits of scale because it's not as evident as we look at 2024.

Sure. I guess what I'd say first, at this point in the year, we want to preserve the capacity to unleash more marketing activity probably than what you saw from us in 2023, more brand building activity, particularly in the commercial -- on the commercial side of the business. So when I say they're sort of at scale, that in a way what we mean there is that they're converging each business is different, but some are converging on the point where growth is still there but cash burn is reduced. They're all at different sort of stages when we talk about the other segment. EnergyHub is closer to being at scale, as an example. Noonlight, probably not as close to being at scale as an example. So each one has sort of different characteristics. But on an overall basis, we think that the other segments, some of the businesses there are getting to scale. And in terms of how that flows up to the parent, I think I would just come back to we're going to continue to bring them along and focus on growth. And you'll probably see us this year go in a bit harder on the marketing and sales side than we have last year. If you go back to last year, we were sort of dealing with a surprise in our P&L and we pulled out a lot of levers to try to maintain sort of a certain direction with the ship, if you will. Some of that pressure is off, so we want to go back to focusing on how do we grow the business.

Our next question will be coming from Michael Funk of Bank of America. Michael, your line is open.

A couple, if I could, please. So just on the use of cash question, again, wanted to drill down a bit. Should we think about potential strategic uses overlaying with the priorities that you mentioned earlier, the growth venture businesses, international and some of the other capabilities? Or how should we think about that, I guess, is the question?

Yes. I think that's a good starting point is looking at some of those priorities that I mentioned in my prepared remarks, the commercial piece, the video piece, video analytics, potentially, other growth domains like multifamily or the energy business. So those are all places where we're surveying for opportunity. I would say that the criteria that one applies to opportunities change with the cost of capital. So while we still have a pretty low cost of capital, we evaluate each opportunity against today's cost of capital and whether we think the opportunity to sort of be a good fit with our overall strategy would be good for our investors. So probably the bar is raised a tad this year versus two years ago in terms of what meets our criteria. But we continue to look. I wouldn't say that we won't consider something that comes up in our core business domain, but I'd say probably the places we're surveying the market more broadly are in those growth areas. If you look at some of the tuck ins like last year, the EBS acquisition, it was focused on our international business as an example. The Ventra acquisition was focused on our video analytics strategy. So you can kind of see a pattern there of us building out the diversity of our TAM and of our go to market by strengthening some of the areas that we that are more new to us than our core business.

Sure. And then just quickly on AI, you spoke about in the past, AI as a potential monetization opportunity. Just hoping to get an update on your thinking for AI and the potential for that to drive ARPU and top line?

Yes. The good news is it's sort of already happening at some level. The AI is a very broad category to us. There are two places where it sort of intersects with our business. One is the efficiency and how we handle a lot of the communications to our partners and how we handle support calls, how we put together documents, those type of things. So you can drive some additional efficiency there. The other is more on the rev gen side, where to us AI is what are we doing, how are we using intelligence to get more content from the millions of video cameras that we have deployed in the world. And if you're getting more content or more -- not just content, but more useful content, then you're able to drive higher revenue per channel. Increasingly, by the way, our pricing when we talk is increasingly more of a per channel type of model. So the opportunity is sort of here today and we're leveraging what we see to drive increasingly sophisticated use cases on each video unit that we see installed.

Our next question is coming from Darren Aftahi of ROTH MKM.

Hey, guys. Thanks for taking my questions and nice quarter. Two, if I may. First, on the growth opportunities, you kind of talked about commercial energy and video making up 31%, I think growing 27% year on year. Like what are the underlying assumptions in your 2024 outlook? Does that growth decelerate or has it become a bigger mix shift and kind of retain that growth characteristics? Any color on that would be helpful.

Yes. I think Darren, we're probably looking at that growth continuing in 2024. I mean typically when we do guide we have to be conservative, so probably backing off a little bit on that growth in our guide. But we're seeing good growth there in Commercial and Video, Video Analytics, EnergyHub, as you mentioned, which are in those growth segments. But again, in the guide, we have to be somewhat conservative there. So probably backing off a little bit on that in 2024.

Great. And then, it seems like everyone's raising prices. I'm just curious, when was the last time you guys did a price increase and any kind of thoughts about that going forward? Thank you.

The last time we did a price increase, they're sort of happening all the time, but the last time we announced a price increase was in the Q4 of 2023. Hardware stabilized, I would say, so haven't seen as much there lately. And you see, with the margin profile that Steve reported, probably less pressure on the hardware side with improvements in the supply chain. On the services side though, there's sort of a need to just sort of recognize that an inflationary environment, there has to be some price increase component.

Our next question will come from Cory Carpenter of J.P. Morgan. Cory, your line is open.

Hey, thanks. I have two. Just first, wanted to ask about hardware trends. You called out slowing the commercial segment last quarter. Curious what you've seen more recently, and how that was incorporated into your 2024 outlook? And then just to clarify on the guide, I guess to ask directly, would you have raised your 2024 guidance without the Vivint settlement over any assumptions around ADP?

Thank you. Hey, Corey. This is Steve. So I'll start with the last question. Historically, if you look at sort of the standard practice between our initial look and our Q4 report. Generally, we've been able to gain additional sort of visibility into the business during the last three months of the year and raise the guide some coming into the full year guide. So I would say even absent those two matters you mentioned that likely would have occurred this year. As it relates to the hardware piece, I guess what I'd say there as we continue the Q4 we saw some stability on the hardware side, roughly came in about within what we had guided for a range. It's we're seeing right now sort of a low pretty low point in terms of the amount of hardware that is in the channel relative to what the install rate traditionally is. So we're trying to sort of adjudicate our is the channel just becoming more efficient and moving to much lower inventory profile permanently or we sort of had an interesting point in time where the density of hardware in the channel is unusually low. We're not real sure yet, but till we figure that out we want to be judicious with our hardware guide and we looked at that when we put together the number for the year.

Our next question will be coming from Jack Vander Aarde of Maxim Group.

Okay, great. Thanks. Thanks, Stephen T, Steve V. Great to see strong results, raised outlook. I'll start with a question for Stephen Trundle. Can you speak to your dealer channel partners? And just what's the overall sentiment and kind of morale of the channel overall? And just how are they navigating the current competitive environment? Just any updates there from your channel?

Sure. No, it's a great good question because I already this year have been out to a few dealer events. So I've got a kind of a fresh feel for what the sentiment is. And I would say generally they're very -- you have to break -- I mean, our channel is big. We have lots and lots of service providers. Most recently, I've spent a lot of time with the midsized smaller service providers. They provide a lot of balance in our business and represent the bulk of our service providers. There's a lot of kind of encouraging the morale is very good there, I would say. There's lots of opportunities, particularly as video moves to the cloud, lots of commercial locations that want to upgrade, take advantage of new analytic capabilities, take advantage of new remote monitoring capabilities. So the wealth of things that they are able to sell today that are desired by the customer. I'd say this is just generally been a trend over the last five years, which is what most of those service providers are selling today is actually something that the customer really wants and is desirable, especially with the capabilities that are enabled with video analytics, with the cloud access control piece. So the excitement seem to be there. Now when you get into other parts of the market that are focused more on residential mass market, I would say it's tad more neutral is the sentiment at the moment. Folks are wondering what's going to happen with the economy, what's going to happen with moves, what's going to happen with new home starts, those type of sort of macroeconomic concerns create probably a bit more of a neutral stance there. But overall, I'd say folks are mostly upbeat.

Great. That's helpful. That's helpful color. Thanks, Stephen. And maybe just a question for Steve Valenzuela. I appreciate, understand you're not providing the total subscriber count at the end of the year, but something would just be helpful maybe if you can. Can you speak to anything in terms of international connected properties or international SaaS revenue as a percentage of the overall? I think you said commercial was about 9.4%, something near 10% of the SaaS revenue. Just anything to provide from a subscriber growth or subscriber count or percentage of revenues for international and commercial?

Yes, international is actually 4% of our total revenue. International continues to do well. It grew about the international SaaS revenue in 2023 grew about 25% year over year. And with EBS especially, we're excited about the opportunity going forward with the communicator that's going to be coming on this year. So we think there's quite a few opportunities there internationally. And commercial as you mentioned, commercial occupancy grew quite well in 2023 as well, and it was about 9.4% of the total SaaS.

Got you. So just to clarify, international about 4% of total revenue and up around 25% commercial revenue about 9.5% of total SaaS revenue and growing very strong. Okay. Well, great to hear guys. Thank you. I'll hop back.

International SaaS actually 25% year-over-year, yes. Sorry, quite a few numbers there to mix up. Yes, because we disclosed international revenue in our Ks and Qs.

Got you. I appreciate the color. Thank you.

[Operator Instructions]. And I'm showing no further questions. This concludes today's conference call. [Operator Closing Remarks].