Alarm.com Holdings, Inc. (ALRM) Q2 2024 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Alarm.com Second Quarter 2024 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 today's conference is being recorded. I would now like to hand the conference over to the speaker today, Matthew Zartman, Vice President, Strategic Communications, Investor Relations. Please go ahead.

Thank you Kevin. Good afternoon everyone and welcome to Alarm.com's Second Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. Joining us today are Steve Trundle, our CEO; and Steve Valenzuela, our CFO. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates and 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 our Form 8-K which will be filed shortly with the SEC, along with the associated press release. The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or other information which speak as of their respective dates. In addition several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to the non-GAAP measures can be found in today's press release on our Investor Relations website. I will now turn the call over to Steve Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We’re pleased to report financial results for the second quarter that exceeded our expectations. SaaS and license revenue in the second quarter grew to $155.9 million and adjusted EBITDA was $42.8 million. During the quarter, Alarm.com and our service provider partners continue to drive organic growth in the commercial, international and Energy Hub businesses. We also increased our balance sheet flexibility with a $500 million convertible notes offering. I want to thank our service provider partners and our employees for their contributions to our results. On today's call, I will cover recent developments in our residential and commercial businesses. In the second quarter, we continued to see that churn in the residential account base remained below the historical averages. This is consistent with our expectations and in-line with our experience in prior periods of economic softness. With mortgage rates remaining elevated, people are moving less. Instead, they are investing into their existing home and staying put. We believe that an additional factor contributing to lower residential churn in the last few quarters has been the fact that a higher percentage of systems today include a number of capabilities that are used routinely by the consumer. System engagement and the attachment of advanced devices or capabilities like video and video analytics, smart Alarm.com thermostats and smart locks significantly increase account survival and lifetime value over time. So we are pleased to see that the attachment rate of video services on new residential accounts nudged higher to 53% during the second quarter. This followed several quarters of the rate hovering around 50%. Since launching our video analytics solution in the fourth quarter of 2018, the video attachment to new accounts has increased more than 2.5 times. Several recent new products, including our 750 video doorbell and our new floodlight camera combined with our enhanced remote video monitoring central station integrations, appear to be well received by the residential markets we serve. To better service our partners who are delivering these more advanced systems to the market, we recently introduced a generative AI capability to our service provider support platform. We trained a large language model on our complete database of product information, support, installation and training content. The chat-based interface, we created is accessible to technicians in our mobile tech app. This allows technicians to seamlessly access synthesized information from all our support resources while they are in the field actively engaged in installations or supporting subscribers. Nearly 2,000 of our partners have adopted and used this capability since its release. Now let me shift to an update on our commercial business. We believe that the commercial market remains fragmented and is in the early stages of a significant transition to cloud-based solutions that are more capable across the enterprise, less expensive to maintain and easier to install and use. As this market shift unfolds, we’re leveraging our competitive advantages in SaaS software, reliability and our service-oriented partner business model to capture share. Our commercial offering is a purpose-built, end-to-end solution that unifies intrusion, access control and video capabilities. We are also enabling integrated solutions for fleet management and active shooter response. I'm particularly pleased with the progress we have made with our Access Control solution which we brought to market several years ago. The team has worked closely with our partners to drive a steady cadence of enhancements like mobile credentials, which allow users to access a property using just their smartphone. We also added elevated enterprise management so that larger commercial customers can create and manage access plans that align with their more complex organizational structures. And we launched Cell Connector, so that our Access Control solution can operate without the challenges of deploying connected devices on the customer's IT network. This quarter, we also began to introduce elevator control with our Access Control solution. The steady work by our Access Control team has expanded our product debt and our partners have successfully introduced our solution in more sales cycles. As a result, we surpassed a few nice milestones in the second quarter. Our access control platform now powers over 100,000 doors and 2 million active user credentials. We’ve a diverse base of access control customers across approximately 30 different worldwide markets. They range from small businesses with two to three doors to large-scale enterprise customers with hundreds of doors to manage. One of our multi-location accounts includes nearly 1000 doors. Another commercial account manages over 15,000 employee access credentials through our service. We are pleased that our service provider partners and our platform can serve such a wide market and are excited to continue advancing our solution and driving growth in this area. Before I hand things over to Steve Valenzuela, I want to touch upon the convertible senior notes offering that we closed during the second quarter. We took advantage of what we felt was a strong convertible bond market to put more dry powder into our business, so that we can continue to be opportunistic in our corporate development initiatives. We are pleased with the strong market interest in our bond offering and the terms we secured, including the 2.25% interest rate. As I have indicated in the past, our corporate development strategy is to be deliberate in pursuing acquisitions that are consistent with their strategy and support our partners. The convertible bond transaction included a $75 million stock buyback and a cap call transaction to reduce future dilution. We anticipate continuing buyback activity from time-to-time, consistent with our Board's authorization. In summary, I'm pleased with our quarterly results and the growth we continue to see across the business. I want to thank our service provider partners and our team for their hard work and our investors for their continued trust in our business. With that, I'll hand things over to Steve Valenzuela to review our financials. Steve?

Thanks, Steve. I'll begin with a review of our second quarter 2024 financial results and then provide our updated guidance before opening the call for questions. Second quarter SaaS and license revenue of $155.9 million grew 11% from the same quarter last year. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 94% in the second quarter, at the higher end of our historical range. Hardware and other revenue in the second quarter was $77.9 million, up from $72.9 million in Q1 2024, mainly due to some strengthening in video camera sales. Total revenue of $233.8 million for the second quarter grew 4.4% year-over-year. SaaS and license gross margin for the second quarter was 85.8%, up about 120 basis points year-over-year. Hardware gross margin was 24% for the second quarter, up from 22.4% in the year ago quarter, mainly due to product mix with increased commercial hardware product contribution. Total gross margin was 65.2% for the second quarter, up from 61.4% for Q2 2023 due to increased SaaS and hardware margins and a higher mix of margin rich SaaS and license revenue. Turning to operating expenses. R&D expenses in the second quarter were $65.7 million compared to $60.9 million in the second quarter of 2023. We ended the second quarter with 1,155 employees in R&D, up from 1,053 employees in Q2 2023. Total headcount increased to 2,033 employees for the second quarter compared to 1,909 employees in the year ago quarter. Sales and marketing expenses in the second quarter were $27.8 million or 11.9% of total revenue, up from $23.8 million or 10.6% of revenue in the same quarter last year, mainly due to conference expenses and more marketing program spending. Our G&A expenses in the second quarter were $26.1 million, down from $28.8 million, mainly due to lower legal expenses. In the second quarter, GAAP net income was $33.5 million, up from GAAP net income of $15.8 million for Q2 2023. Non-GAAP adjusted EBITDA in the second quarter was $42.8 million up 17.8% from $36.4 million for Q2 2023. Non-GAAP adjusted net income was $32 million or $0.58 per diluted share in the second quarter compared to $26.6 million or $0.49 per share for the second quarter of 2023. Turning to our balance sheet. We ended the second quarter with $1.1 billion of cash and cash equivalents, up from $697 million at December 31, 2023. During the quarter, we issued $500 million in convertible notes that mature in June 2029. As part of the transaction, we used $75 million to repurchase 1.1 million shares of our common stock at $67.14. We also used $63 million to purchase cap calls to bid up the convertible bond conversion premium from 30% to 100% for an effective conversion price of $134.28. As a reminder, our original $500 million convertible bonds mature in January 2026. Turning to our financial outlook. For the third quarter of 2024, we expect SaaS and license revenue of $157.3 million to $157.5 million. Our third quarter guide includes a $1.25 million reduction in SaaS and license revenue resulting from the CrowdStrike outage that temporarily impacted some of our operations. For the full year of 2024, we’re raising our expectations for SaaS and license revenue to be between $626.8 million to $627.2 million up from our prior guidance of $624.5 million to $625 million. We are projecting total revenue for 2024 of $920.8 million to $931.2 million increase from our prior guidance of $914.5 million to $931 million, which includes estimated hardware and other revenue of $294 million to $304 million. We estimate that adjusted EBITDA for 2024 will be between $165 million to $167 million up from our prior guidance of $164 million to $166 million. Non-GAAP net income for 2024 is projected to be $119.5 million to $120.5 million or $2.06 to $2.07 per diluted share compared to our prior guidance of $118.5 million to $119.5 million or $2.14 to $2.16 per diluted share. As a reminder, our new convertible bond issuance increased the total number of diluted shares outstanding. EPS is based on an estimate of 58.1 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2024 to remain at 21% under current tax rules. We expect full year 2024 stock-based compensation expense of $51 million to $53 million. In summary, we are focused on executing on our business plan and investing in our long-term strategy while continuing to deliver profitable growth. And with that operator please open the call for Q&A.

Thank you. [Operator Instructions] Our first question comes from Adam Tindle with Raymond James. Your line is open.

Okay. Thanks good afternoon. Steve Trundle, I wanted to ask on the topic of Gen AI as you get more insight. You mentioned in your prepared remarks the concept of utilizing it for text, which makes a lot of sense. Just curious, is that something that you are monetizing separately? Or are you bundling that into the app? And then on a broader topic, as you kind of think about Gen AI, where does it go from here in areas that you think you could potentially monetize and how Alarm.com can differentiate? Thanks.

Adam. Good question. Yes, on the implementation that's there to support our technicians, that's bundled into the mobile tech application. And it is really intended to help them sort of while they're on the go, more quickly get answers to. At the moment, more routine types of questions, if someone's on a job site and they've got a super complicated issue, it's a technician. We'll still get on the phone and we often do and hold their hand for one or two hours sometimes to get them through a complex type of commercial installation. But for routine stuff, the large language model really helps them get sort of quick and easy expedited answers, and we've seen pretty good usage there. More generally, in the offering, I think where you'll see us go is tying the capabilities that are becoming available to what we are doing with video and specifically what we are doing with remote video monitoring. So you can imagine that a number of the operator actions, when I'm -- if I were an operator today, and I'm watching camera activity, at some point, I may need to speak to a potential perk or someone who is doing something that may not -- maybe shouldn't be do it or maybe I'm not sure you can imagine that we can leverage a lot of the work we're doing in this world to make that entire process more efficient for the operator in the central station, and that is where we're in -- one of the several areas where we're headed.

Got it. Makes sense. And congrats on the convert, you're now flushed with cash. I think, near $1 billion even after some of the things that you had to do with the convert. So I wonder if you could maybe just in light of that, talk about priorities, and in particular, if we were to potentially even use that in one fell swoop for example, for a larger acquisition. As you kind of think through that potential, what would be the key criteria that you would need to look for? Or do you think it's more likely this would be kind of piecemeal and maybe do more tuck-in type? Thanks.

Well, we wanted to be in a position to do more than just tuck-ins. We have had, I think, a nice track record with some of the smaller -- by today's standards, some of the smaller acquisitions through time, like we did with ObjectVideo, like we did with Energy Hub and open I was a bit larger, but we want to be in a position to even potentially look at things that are still larger than those. So that's what we are doing. We are being optimistic. We're watching the market. We think that now it is a good time to have some cash available. We think we are probably the acquirer of choice in the security industry anyway. And the range of things we may look at are sort of any place in the IoT space, particularly if those IoT applications are consistent with their mission of providing people more safety and convenience in their everyday life. So we're looking at a lot of things. We're not ruling out larger opportunities. We'll continue to do a trickle of tuck-ins as the right opportunities present themselves. And I'd say the primary criteria I mean one that we are careful about is we attempt to look at things the way I as a shareholder would look at things and make sure that whatever we are doing is on a long-term basis, accretive to our shareholders and supportive of the metrics that we want to deliver. So that's a little bit of commentary there. I can't speak to any specific opportunity. But we're active, but opportunistic and deliberate in how we look at things.

Yes. I think investors certainly appreciate that mindset. Thank you.

Thank you.

Our next question comes from Saket Kalia with Barclays. Your line is open.

Okay. Great. Hi guys. Thanks for taking my questions here. Steve Trundle, maybe just to start with you. I really appreciated the commentary just on commercial in your prepared remarks. Can you just maybe go one level deeper into what would a dealer have to rip and replace to bring their platform onto Alarm? And how do you sort of think about that can that you're going after?

Good question, Saket. So the amount of rip and replace is actually declining somewhat. The team we have at OpenEye has for a long time, supported a wide variety of cameras on the video side. Some of that supports enabled via a standard that is known as ONVIF. So we support a pretty wide range of cameras, not just our own. And what that enables is for us to go to a potential commercial customer and get them on platform, get them all the value of our cloud services without ripping out everything they have. Obviously, newer cameras and newer models enable more functionality. And especially on the analytics side, more of the analytics is being done on the edge, on the camera. So more capabilities are possible with newer equipment, but you want to sort of land and then expand, and that's what we're trying to do. We brought that capability back into the full Alarm.com platform, by the way meaning broader camera support. On the access side and I talked a little bit about the access control market. There, we are using fairly -- in most cases, we are leveraging what are fairly common market standard readers, which are the devices that you actually see next to a door that someone scans in or out with. So we can go in. In this case, I mean, of course, our service provider partner can go in and take over a lot of those existing readers and begin to deliver enhanced new services without a ton of rip and replace. We're increasingly trying to avoid having to always kind of especially the commercial customer and these bigger ones, we just can't go in with the rip and replace message and be successful very often. So try to avoid that as much as we can. To your comment about the TAM, I mean, I think -- we think we're sort of early days in our penetration of the TAM. The TAM is generally regarded as every small business or enterprise in North America, if we at least look at the North American TAM, number of sites there, I try to think do we have sizing for roughly 4.5 million, 5 million sites, we think are available, and we're sort of steadily chipping away at that.

Got it. It makes a ton of sense. Steve Valenzuela, maybe for you, and apologies if I missed it in the prepared remarks, but did you sort of give an update just on sort of the mix of the business or of the SaaS business that comes from some of those higher growth areas like commercial, like video and international. That's always just a really useful sort of lens given the mix shift that's happening in that business.

Sure, Saket. Yes, the growth initiatives continue to do very well. We've actually refined it a bit. We've looked at North American residential video and actually pull that out of the growth initiatives because it was actually understating North America. So if you look at the growth initiatives, which we include in commercial, international Energy Hub, those represent about 1/4 of our total SaaS and we are growing about 20% to 25% year-over-year.

Very, helpful. Thanks guys.

One moment for our next question. Our next question comes from Darren Aftahi with ROTH. Your line is open.

Great. Can you hear me?

Yes, hey Darren.

Hi, how are you? Thanks for taking my questions. Just two, if I may. On the Gen AI initiative, I'm curious if that's going to result in cost savings relative to some of the kind of help. You said you'd have to provide longer term? And then on international, I know you guys have made some acquisitions in the past and I'm kind of curious how those acquisitions kind of play into kind of manifesting some new international markets as we maybe go forward into 2025. Thanks.

Darren, sure. The Gen AI in theory, over time should drive some amount of reduction in in-person call volume. As I was mentioned on the prior question, what we are seeing right now are most of the calls that we can handle with AI. Those are fairly routine calls that might have taken us 1 or 2 minutes with a human support person otherwise. We do expect -- and one of the things we actually pride ourselves on is really laying out great support for our service provider partners so that they're confident in their development of new products or in their adoption of new products and technologies. So I don't think we're going to see a massive reduction in our capacity, the capacity we have to maintain to support our partners, but there's probably a bit of a positive tailwind there over time. With regard to international, yes you are referring back out to an acquisition we did 1.5 years or two years ago, which was EBS. And that we had a lot of work underway there for the last -- since the acquisition and we are just getting to the point where that product, which is a much lower cost communicator that will work with a wide variety of international panels is coming to market. So it's going to start showing up in the second half of this year, sort of just starting right now. So it's a good reminder, something we should probably watch and hopefully talk about an update further on towards the end of the year. But we are now beginning to get to market with the integrated version of that technology.

Great. That’s helpful. Thank you.

Our next question comes from [indiscernible] with JPMorgan. Your line is open.

Hi, guys. Thanks for the questions. For the first, can you provide us with some color on the macro front, maybe what you're seeing? I think existing home sales bonds got all-time lows. And then on the second, in your prepared remarks, you noted commercial contribution was greater on the hardware side, which led to the margin improvement. Can you maybe elaborate on whether you are seeing varying behavior from residential versus commercial customers on the hardware side? Thanks.

Yes. Sure. Good questions. On the macro side to us, things looked sort of as expected in the second quarter. As I noted in my prepared remarks, we are seeing higher revenue retention because we think there are fewer moves on the residential side, and certainly, your housing data supports that. So -- but those consumers who are buying in the second quarter anyway, we saw a little bit of a move back towards what we had planned in terms of the size of systems that they are purchasing and the amount of hardware going into each installation. Same thing on the commercial side, actually. If we go back in time, following our Q1 report, we indicated we had seen a little bit of softness on the commercial side and the SMB side. In the second quarter, we saw basically those installations right at plan. So a little bit of a recovery on the hardware side, a little bit more access control, more cameras going into the average install. So macros look to us on an overall basis to improve a tad on both the residential and the commercial side in the second quarter.

That’s helpful. Thanks.

Our next question comes from Stephen Sheldon with William Blair. Your line is open.

Hi, thanks for taking my questions. And just one for me. I just want -- if you guys think about Alarm.com's commercial capabilities, how should investors really think about the rank order of opportunities there that could really move the needle over the next two years to three years as you think about monetization, which applications, I guess, framed another way -- which applications are you the most optimistic about?

Hi, Stephen, I’d rank them video first and foremost including analytics, upside on the SaaS line with improvements constantly on the analytics level and then with remote video monitoring capabilities. So I'd rank that First, I would then rank in terms of our growth, access control as the second piece of commercial that is growing nicely, a little further down would be intrusion and then active shooting detection and fleet monitoring and all things that have promised. But I probably think the bigger drivers are really what we are doing with video and access control. And then over time, we may introduce additional products into that category. But the big two right now and the big one is really video. And then after that, a lot of the other pieces sort of support the video installation.

Very helpful. Thank you.

Good. Thank you Stephen.

And I'm not showing any further questions at this time. So this does conclude today's conference and presentation. You may now disconnect, and have a wonderful day.

Thank you.

Thank you.