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spk01: Good day, and welcome to the Alarm.com Q3 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then 1 on your touchtone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. I would now like to turn the call over to David Trone, Vice President, Investor Relations.
spk05: Thank you. Good afternoon, everyone, and welcome to Alarm.com's third quarter 2021 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... projected financial performance for the fourth quarter 2021 and full year 2021 and 2022, the impact of emerging market dynamics and trends on our business and on anticipated market demand for our offerings, including new product offerings, the impact of the COVID pandemic on our global supply chain and the global economy, our business strategies, plans and objectives for future operations and integration of recent acquisitions, continued enhancements to our platform and offerings, opportunities for growth in our current markets and our plans to expand into new 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, began, believe, continue, could, estimate, expect, forecast, may, plan, project, trend, will, and other similar words are intended to identify such forward-looking statements. These statements are subject to risks and uncertainties, including those contained in the risk factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 5, 2021, and its subsequent reports that we file with the Securities and Exchange Commission from time to time, including our quarterly report on Form 10-Q for the quarter ended September 30, 2021, that we intend to file with the Securities and Exchange Commission shortly after this call. That could cause actual results to differ materially from those contained in the forward-looking statements. Please note that the 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 the use of these non-GAAP financial measures provides an additional tool for investors to use in understanding the company's performance and trends, but notes 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. Reconciliation 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 to 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 also be available on our website. With these formalities out of the way, I'd now like to turn the call over to Steve Trundle. You may begin.
spk07: Steve Trundle, Thank you, David. Good afternoon and welcome to everyone. We are pleased to report another quarter of strong results. Our SAS and license revenue in the third quarter was $118.1 million, up 17.9 percent over the same period last year. Our adjusted EBITDA in the third quarter was $37.6 million. I want to thank our service provider partners and the Alarm.com team for their continued strong performance. I'll start by updating you on several new products that we recently introduced and discuss how they support our long-term goals. During the third quarter, we introduced a new outdoor camera that we call the 724 and a new capability powered by our video analytics engine that we call Perimeter Guards. The new 724 camera offers premium image quality and field of view. It also includes the addition of an onboard microphone and a powerful speaker and LED light. We married these new hardware capabilities with our advanced video analytics software to enable a new set of customer experiences. PerimeterGuard identifies people anywhere around the perimeter of a property and triggers the 724 camera to respond with both audible alerts and a flashing red LED light. This capability immediately puts any potential intruder on notice that they are being actively watched. Subscribers can easily configure the conditions that trigger perimeter guard. For example, it can be instructed to respond based on a person's direction of travel or only when they loiter in a specific location for a specific period. It can also be set to respond based on various parameters and rules. For example, it can be configured to trigger both while the system is armed and the subscriber is home for the night, or when they are out during the day. The uptake and engagement with Premier Guard among existing subscribers is running above our expectations. Tens of thousands of perimeter guard rules were customized and activated within the first few weeks of its introduction. Our goal is to continue to develop our video offering to address high-value use cases that will drive higher video attachment rates in the residential segment. Shifting to the commercial market, we launched a new lineup of commercial-grade video cameras as well as a package of video analytics software capabilities that we call business activity analytics. The Pro Series commercial grade camera lineup is designed for the mid-market commercial segment. These customers tend to have more nuanced and diverse video surveillance requirements than small businesses. The Pro Series cameras were designed for our service providers to flexibly address these customer needs. For example, the Pro Series line includes a range of form factors with four megapixel image sensors and varifocal lenses that greatly expand the forensic image quality of recorded video. These capabilities allow technicians to utilize more location options for camera placements while providing the coverage, area, and image quality their security installations require. The Pro Series line enables our sophisticated new video analytics service for commercial customers. Business Activity Analytics identifies and tracks the movements of people and captures business performance and operational data. It enables occupancy tracking, people counting, queue monitoring, detection of crowd gathering, and occupancy heat mapping. Each analytics capability can be customized with specific virtual tripwires, multi-directional counting configuration rules, and ground zone demarcations that can monitor activity in specified areas. We designed business activity analytics to keep managers and business owners aware of issues in their business. For example, a manager can customize alerts so that they can know in real time if the customer wait time in a checkout line exceeds the predetermined limit or if occupancy restrictions are exceeded. Lastly, business activity analytics provides robust, enterprise business intelligence reporting. Commercial subscribers can analyze activity trends, monitor and measure foot traffic and customer flows, allowing them to optimize operations and staffing levels. Our goal with these enhancements to our commercial video software is to enable our service providers to introduce alarm.com's video solutions to a larger segment of their commercial customers. As we build our inventory of Pro Series products, our partners will be able to service more of their mid-market commercial customers with our fully integrated security and video solutions. This benefits both our partners and their customers. We will continue to invest in our video platform to expand our market opportunity and build new revenue for our service providers. We also provide a broad suite of tools and solutions for service providers through our partner services platform. These cutting-edge enterprise-grade capabilities unlock the full breadth of opportunities and value enabled by IoT technology. Partner services enables our service providers to leverage data and insights from connected property solutions to optimize business operations, lower their cost to serve, and build customer lifetime value, and dramatically enhance and differentiate the professional monitoring services they provide. We work closely with our partners to identify and develop innovative new solutions for our partner services platform. We recently launched a package of enterprise software updates that we call Jetstream. The focus of Jetstream is to drive efficiency and reduce cost by enabling our software capabilities to further support are service providers' internal operations. Jetstream includes appointments, which is a feature that seamlessly pushes information about customer support appointments from a service provider's CRM system to the alarm.com customer-facing mobile app and web interface. This capability automates and unifies customer communications. It can also reduce missed service appointments when traditional email confirmations are inaccurately filtered as potential spam or junk mail. Jetstream also includes our Service Dashboard. This new tool is designed for service managers with day-to-day responsibilities overseeing technicians and customer support operations. Service Dashboard provides a unified interface for monitoring key operational metrics and customer experience indicators generated by Alarm.com. It displays scores for technician performance, system reliability, and customer engagement, and highlights critical trouble conditions across the account base. The service dashboard also supports service managers in implementing operational efficiency goals through our full range of service provider solutions, including the award-winning on-site wrap-up capability and our system check tool. We believe that our partner services software platform adds significant mutual value to our relationship with service providers and contributes to our competitive advantage in the market. Lastly, I want to update you on a new agreement that we reached with Brinks Home that extends our partnership for another three years. In addition to enabling our ongoing partnership, the agreement will support a significant opportunity that Brinks Home is managing to upgrade AT&T Digital Life customers to Brinks Home services in 2022. The agreement also ties in our deep integration of IoT devices with new market verticals and opportunities that Brinks Home is pursuing. For example, Brinks Home can both reduce carbon emissions and generate additional revenue each time one of their customers enrolls an energy management device in a demand response program that is managed by Energy Hub. We are excited to continue our long-term partnership with the Brinks Home team and we're pleased to have completed this renewal in the third quarter. In summary, I'm pleased with our third quarter results and with our execution against our plans. 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. And with that, let me turn things over to Steve Valenzuela to review our financial results and provide guidance. Steve?
spk04: Steve Valenzuela Thanks, Steve. I'll begin with a review of our third quarter 2021 financial results and then provide our updated guidance before opening the call for questions. SAS and license revenue in the third quarter grew 17.9 percent from the same quarter last year to $118.1 million. We saw solid growth in new subscribers and continued increase in video attachment rates based on the strength of our video and video analytics offering. Connect software license revenue in the third quarter was approximately $7.9 million, down as expected from $9.5 million in the year-ago quarter. Our SaaS and license revenue visibility remains high, with a revenue renewal rate of 96% in the third quarter, which is above our historical range of 92 to 94%. It's encouraging to see our renewal rate continue to increase. However, some of the increase could be the result of fewer people moving homes at the start of the pandemic, and we continue to anticipate that this measure could revert to our long-term historical range. Hardware and other revenue in the third quarter was $74.3 million, up 26.5% over Q3 2020. Strong hardware sales were driven by increased adoption of our video cameras in the residential segment and improvement in our North American commercial business with OpenEye and Alarm.com for Business continuing to show good momentum coming out of the pandemic. Total revenue, 192.3 million for the third quarter, grew 21.1% year-over-year. Staff and license gross margin for the third quarter was 85.2%, up slightly by 40 basis points quarter-over-quarter. Hardware gross margin was 15.2% for the third quarter, down from 20.5% in Q2 2021 due to higher prices and increased shipping costs. The global supply chain continues to present challenges, which require us to expedite shipments and incur higher air freight costs. Total gross margin in the third quarter was 58.2 percent, down from 61.5 percent in the year-ago quarter, mainly due to the lower hardware gross margins and mix. I'll now turn to operating expenses. R&D expenses in the third quarter were 44.1 million, compared to 36.9 million for the third quarter of 2020, as we continue to add R&D capacity to help us address the large opportunities we see in our markets, both in our residential and commercial businesses. We ended the third quarter with 819 employees in R&D, up from 750 employees in the same quarter last year. Total headcount increased to 1,482 employees in the third quarter, compared to 1,361 employees a year ago. Sales and marketing expenses in the third quarter were $22.6 million or 11.7% of total revenue compared to 18.4 million or 11.6% of revenue in the same quarter last year. During the third quarter, we attended and exhibited at the annual ISC West Security Conference held in Las Vegas, which was canceled last year due to the pandemic and moved to July for this year. Our G&A expenses in the third quarter were 18.7 million up from $17.4 million in the same quarter last year. G&A expense in the third quarter includes non-ordinary course litigation expense of $1.6 million compared to $2.4 million for Q3 2020. Non-ordinary course litigation expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance. Moving on to our profitability, non-GAAP adjusted EBITDA in the third quarter was $37.6 million, up from $34.5 million in the third quarter of 2020. In the third quarter, GAAP net income was $13.5 million. In the year-ago quarter, GAAP net income was $36.1 million, which included a gain of $24.7 million resulting from an investment we had in the company that was acquired by an unrelated third party. We reflected the gain in our GAAP P&L as other income However, we excluded this from our operating income and our non-GAAP financial results as it was not related to our operating performance. Non-GAAP adjusted net income increased to $27.4 million, or $0.53 per diluted share in the third quarter, compared to $24.8 million, or $0.49 per share for the third quarter of 2020. Turning to our balance sheet. We ended the third quarter with $700.3 million of cash and cash equivalents. We have a strong balance sheet, which provides a significant flexibility going forward. In the third quarter, we generated approximately $37.9 million in cash flow from operations compared to $18.6 million for the third quarter of 2020. Our free cash flow for the third quarter was $36.3 million compared to $15.1 million for the same quarter last year. On a year-to-date basis, through the first nine months of 2021, we generated $74.3 million of free cash flow, up from $56 million for the same period in 2020. In the third quarter, our capital equipment purchases were about $1.6 million, down from $3.6 million in the third quarter of 2020, mainly due to less facility build-up costs. Turning to our financial outlook, For the fourth quarter of 2021, we expect SAS and license revenue of $118.1 to $118.3 million. For the full year of 2021, we believe SAS and license revenue will be between $456.7 to $456.9 million, up from our prior guidance of $452.3 to $452.8 million. We are now projecting total revenue for 2021 of $721.7 to $731.9 million, increased from our prior guidance of $707.3 to $717.8 million, which includes estimated hardware and other revenue of $265 to $275 million. We expect continued challenges and higher shipping costs with the global supply chain. which we have factored into our guidance based on the information we have available today. We estimate that non-GAAP adjusted EBITDA for 2021 will be between $138 to $140 million, up from our prior guidance of $133 to $134.5 million. Non-GAAP net income for 2021 is projected to be $97.3 to $98 million or $1.87 to $1.88 per diluted share, up from our prior guidance of 93 to 93.7 million, or $1.77 to $1.79 per diluted share. We project our non-GAAP tax rate for 2021 to remain at 21 percent under current tax rules. EPS is based on an estimate of 52.1 million weighted average diluted shares outstanding. We expect full year 2021 stock-based compensation expense of 38 to 40 million. Finally, while we are in the initial planning stages, I will provide some early thoughts in 2022 with the caveat that there could be further disruption from the COVID pandemic and the global supply chain challenges among other unforeseen events, which could impact us and our service providers in the new year. With that said, We currently believe our SAS and license revenue for 2022 will be between $503 to $504 million. Total revenue for 2022 could range between $780 to $800 million. We currently project our non-GAAP adjusted EBITDA for 2022 to be between $148 to $150 million. We will provide our initial guidance for 2022 when we report our fourth quarter 2021 results early next year. In summary, we are pleased with how our service providers and our Learn.com teams continue to perform during these challenging times. We are focused on executing on our business strategy and investing in our growth opportunities while continuing to deliver profitable growth. And with that, operator, please open the call for Q&A.
spk01: As a reminder, to ask a question, please press star then 1. If your question has been answered and you'd like to move yourself in the queue, press the panel key. Our first question comes from Adam Tindall with Raymond James. Your line is open.
spk03: Hi, this is Alex. I'm for Adam. Thanks for taking our question. So I understand the model centers around software, but hardware enables software. And I was just curious how you think your supply looks relative to demand as we get closer to the end of the year here.
spk07: Well, this is Steve Cundall speaking. Our team has pulled out as many stops as we can to keep our supply chain as healthy as it can be. So I think as we look through the end of this year, we're not sounding any alarms at this point. We feel pretty good about where we are for the most part. Could there be one or two SKUs in one particular category where we're suffering a you know, suffering a backlog? Yeah, there are. But overall right now, you know, looking throughout the rest of 2021, we feel good. And then we're working hard so that hopefully by the next time we update you, we feel that way about 2022 as well. But most of the work right now is going into the 2022 supply chain.
spk03: Perfect. Thanks. And then Just how should we think about Energy Hub, given macro development? So you'd imagine that demand would be increasing materially for that offering. What can you do to accelerate that business to become even more meaningful and more of a driver going forward?
spk07: Yeah, that's a great question. And you're correct. Yeah, the macro trends are favorable to Energy Hub. You know, the business has continued to grow nicely, and the sort of – year-over-year mid-30 percent range, maybe a tad higher than that. And, you know, we've lined up – we've got kind of a marquee list of partners, so lined up 16 of the top 50 utilities already in the U.S. and are getting to a wider number of homes in terms of where we execute distributed energy resource management programs. In terms of going further, it's, I think, primarily going to be driven by our ability to lengthen the lead that we have in terms of product capability by investing more in R&D to expand the range and the capabilities of the product in a number of different types of solutions and the range of solutions that we can provide. As you probably remember, they started with demand response primarily on thermostats. We've been working to drive that out to really sort of be an overall edge resource management platform, managing batteries, solar inverters, pool pumps, anything that's consuming energy, and then advancing the algorithms that we use to allow the utility to see exactly where they are at any given point in time. terms of managing the grid. We also will work and will continue to work to increase the number of actual consumers who enroll their devices in an energy health program. So there's some marketing there usually done in tandem with our partner. But I would say overall it's a business that's confirming nice growth and When they do that, that gives us confidence that we should increase investment in the platform that they take out to their partners. So that's our primary objective at the moment.
spk03: Fantastic.
spk07: Thank you so much.
spk01: Our next question comes from with JP Morgan. Your line is open.
spk09: Hi. This is for Sterling. Can you give colors on like how, if Europe is opening up and how the business on international front is?
spk07: Sure. Was the first part, was it just international or were you asking about something else before international?
spk04: I think it was international. Just international.
spk07: Okay. Gotcha. International sort of, I would say, still in a steady state at the moment, meaning we sort of entered COVID at a certain point production level international and we've continued to execute at that level of production for most of this year we've been sort of holding our breath waiting for some of the clouds to part in rest of world markets so that we can go back to accelerating now you know that said the way things work if you're installing hypothetically 15,000 properties a month in a market and you continue to do that forever, you keep growing. So international is growing as a percentage of revenues and in terms of its contribution to alarm.com. But we see an opportunity to sort of have it grow or we expect it to actually grow at a faster clip than we've seen thus far in 2021. And we're hoping to see that some kind of a positive inflection there. So not be talking about steady state, but instead sort of accelerated pace of deployment sometime in the middle part of next year, probably.
spk04: International in the quarter was a little bit over 4% of our revenue, and a year ago it was around 3%. So it is growing, as Steve said, but being held back by COVID.
spk09: And then just a quick follow-up on that. How does Europe compare on that front? How is the business on the Europe front? Is Europe opening up on this?
spk04: We have, obviously, we have a number of service providers in Europe, and we have some in Asia, South America. I would say Europe is representative of international. I mean, we probably have a very strong presence relative to the international base in Europe, but we also have South America, we have Australia, New Zealand. Europe has been certainly a growth engine for us, but again, that's also been held back given the issues you see in London, in England, I should say, and then also on the continental Europe. I would say it's representative of what Steve talked about for international and total.
spk01: Yep.
spk09: Thanks, Ed.
spk04: Yeah, thank you.
spk01: Our next question comes from Brian Wettenberg with Imperial Capital. Your line is open.
spk08: Yes, thank you very much. First, it's margin. They were down, you know, every year and sequentially. Can we expect stabilization from the quarter to fourth quarter and then into 2022?
spk04: Brian, your line broke up a bit at the very beginning. We missed the beginning part of your question. Would you mind repeating that?
spk08: Yes. I need to pay my cell phone. I apologize. Hardware gross margins, they were down both year over year and sequentially. Can we talk a little bit about what you expect – sequentially going forward?
spk07: I think your dog has some of the same views I do right now. He's not happy about those hardware gross margins, right? But, yes, we'll try to improve there. We have been dealing, I think I had a call a moment ago about the supply chain or a question, and supply chain activities, our first goal is to make sure we're maintaining a stable supply supply of product to our service providers. And any disruption there impacts our long-term SAS revenue growth. So when we have a choice to make in terms of whether to incur some additional costs to expedite things, we typically will choose to incur those costs and execute different types of expediting activity, whether that be securing long-term parts at inflated rates or whether it means air freighting product in. All of that activity has compounded to drive down hardware margins the second half of this year, especially in the last quarter. But I think we'll kind of see an ongoing, what you saw in the third quarter is what you likely will see in the fourth quarter. And then we'll revisit some of our strategies around hardware margins as we come into the new year. And if we see a need to correct core sum, we'll do so.
spk08: Okay. I apologize about working from home. So the next question I have is the deal with Brinks. Can you talk a little bit about that? What is that add incrementally from what you had before with Brinks, the relationship? Can you talk a little bit about that?
spk07: Yeah, sure.
spk06: Okay.
spk07: Yeah, so it was a great new endorsement of our long-term relationship. First, Brinks had done a nice job to secure a big win for them in partnership with AT&T to provide an upgrade path to the AT&T Digital Life subscribers. sort of represented a business that's coming to an end for AT&T, but Brinks is right there to actually take those existing subs and move them to a Brinks home offering, of course, powered by Alarm.com. So we were excited to be able to participate in that and to help to identify the product and the capabilities that those subscribers will receive, and this renewal captures that opportunity. It also created a path for Brinks to continue to drive. They're very focused on customer sat overall and actually really driving in, I would say, more of the smart home and video capabilities into the subscriber base than maybe what has been the case historically. And the reason for that, of course, is that the trends and the positive results they're seeing both in terms of upfront upfront willingness by the consumer to pay for a system, but also in terms of attrition dynamics on systems when a consumer is invested in a bigger system. So we worked with them for some time to identify different ways we could collaborate to help them in their programs over the next few years, drive in sort of deeper adoption of the full range of smart home capabilities, and all of that's captured in this new three-year agreement.
spk08: Great. Thank you very much.
spk01: Our next question comes from David Robinson with William Blair. Your line is open.
spk02: Hi, guys. Thanks for taking my question. The one question I had was on the commercial business. I know you said you saw some improvement in Alarm.com for business and OpenEye. I was wondering what was kind of driving that improvement that you saw and kind of what your expectations are for that segment as we close out the year.
spk07: Sure. I'd say a couple drivers. First, for the most part, business is open again. So I think we saw a pause in the commercial market in the first and second quarters of this year. I began to sort of see in the third quarter, saw sort of businesses coming back to the table, new businesses opening, a willingness by the commercial customer to invest in security in their facilities again. So I think there were some macro trends working in our favor. POs loosened up, that sort of thing. The other driver, though, I would say is that business activity analytics, which I spoke about some, is a pretty meaningful feature upgrade and capability upgrade to what a midsize commercial customer has been able to access in the past, especially if you say that you need to have a video offering that's completely integrated with the intrusion offering and with the access control offering. Well, what we're doing on the analytics side now with the inputs coming from Anywhere from five to 20 video cameras to do things like identifying people that are too close to each other, monitoring queues and lines, those type of capabilities open eyes and get people a little bit more excited about pulling the trigger and making a purchase. If you're only providing security, that's great. If you're providing security and you're also driving business value, like metrics that you can use to make a decision to improve your operation and your revenue streams or your customer set, it's a little more exciting. So I think we've seen early signs that the commercial sales forces for our partners and integrators are having some luck with that message of being able to use the analytics capability for not just security. Of course, security is better, but also for driving a lot of improvement or more intel on some of the customer satisfaction and customer service metrics.
spk02: Awesome. And then in regards to the improvement, I guess has it been pretty broad based across the customer size? Obviously, you're focusing on kind of the mid-market, but just trying to get a sense of the different size of customers on the commercial side as well.
spk07: Yeah, good question. We're kind of, I mean, the improvement has been across the spectrum, but what I would say is it's a bit more sort of early days for us, if you will, in the mid and larger size commercial customer accounts. So in that pool, we're growing off a smaller base. In the small business segment, you know, we've got a nice base already. And we've been strong there for some time. But if you look at some of the things we've done to build out the platform with OpenEye and with SDS, shooter detection systems, we're attaching to an increasingly larger commercial customer now.
spk02: Got it. Thanks for taking my questions.
spk06: Sure.
spk01: Our next question comes from Darren at the with Roth capital partners, your line is open.
spk06: Hey, guys, thanks to my questions. Nice results. To if I may, I think it's been about nine months since you guys launched Flex IO. I'm just kind of curious traction in the market. And then for Stevie, can you give the other SAS revenue in the quarter? Thanks.
spk04: Sure, I'll start with the other SAS. I know that's your favorite question. So it was $8.9 million in the quarter, and it was up 22% year-over-year, and really driven mainly by energy. Of course, that includes Point Central Building 36 with a smart water valve plus meter, which has been doing well. But yeah, so $8.9 million for SAS revenue for Q3.
spk07: Yeah, and coming back to FLEX. We've put FLEX in the market. A number of dealers have begun to introduce that into their, you know, first getting it onto their price sheet, getting their salespeople trained on when to sell it, what types of use cases deserve a FLEX sell. In fairness, this has been a very busy year for residential. I don't think any of us expected 2021 to be as strong on the residential side as we've seen. At some level, a lot of the sales folks have been more focused, I would say, on selling our video analytics and sort of meeting demand that's for the product that they already know. And we're working to get them familiar with the capability that Flex offers so that we can continue to accelerate that. But we do have, I don't know, a number of service providers now that are putting that into their offering as an option And we, of course, want to drive that option, the use of that option, higher and higher because it is all sort of green-filled ARPU for us and something we're working on. Great. Thank you.
spk00: Thank you.
spk01: This does conclude the conference. You may now disconnect. Everyone, have a great day.
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