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spk04: Good day and thank you for standing by. Welcome to the Alarm.com first quarter 2022 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 the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Zartman, Vice President of Investor Relations. Please go ahead.
spk03: Thank you. Good afternoon, everyone, and welcome to Alarm.com's first quarter 2022 earnings conference call. I want to remind you that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO, and Steve Valenzuela, our CFO. Before we begin, a quick reminder. Management's discussion during today's call will include forward-looking statements, which include, among others, projected financial performance, the impact of emerging market dynamics, trends, and anticipated market demand, and the impact of the COVID pandemic and challenging global supply chain dynamics, our business strategies, plans and objectives, and integration of recent acquisitions, continued enhancements to our platform and offerings, opportunities for growth and expansion in our current and new markets. These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. These statements are subject to risks and uncertainties, including those contained in today's earnings press release and in the risk factors section of our most recent annual report on Form 10-K filed with the SEC on February 24, 2022, and in subsequent reports that we file with the SEC from time to time, including our quarterly report on Form 10-Q for the quarter ended March 31, 2022, that we intend to file with the SEC 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 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. 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 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. Let's now turn the call over to Steve Trundle. You may begin.
spk06: Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report solid Q1 results to begin the year. Our SATs and license revenue in the first quarter was $123.2 million, up 14.8% over last year. Our adjusted EBITDA in the first quarter was $29.9 million. In the first quarter, demand remained steady for Alarm.com products and services, and we saw stronger sales than expected. But we also absorbed increased component and freight costs that pressured our hardware gross margins. As a result, we are currently phasing in a second price increase of the year on select products. We expect hardware margins to strengthen from Q1 levels as the year progresses, but not to reach our historical levels during 2022. On today's call, I want to update you on several new commercial product initiatives that are good examples of the ongoing collaboration between our OpenEye and Alarm.com R&D teams. I will also share some takeaways from my time at ISC West, the largest security industry trade show of the year, which was held in late March. Starting with our new commercial products, we recently introduced the Pro Series Commercial Stream Video Recorder, or SVR. It's designed for small and medium sized commercial installations with support for up to 16 cameras on a single recording device. The SDR is accessible from anywhere through an intelligent interface that includes a timeline view of all video feeds in the property. The timeline displays an overlay of activity detected by video analytics, security and access control systems, and other sensor-based events. This functionality streamlines forensic video searches and provides a unified interface for subscribers to monitor their property and view important activity. Importantly, the Pro Series SVR was developed via collaboration between the OpenEye and Alarm.com product teams. The effort has allowed us to introduce to mid-tier commercial customers a set of enterprise-grade video management capabilities that are typically available only to the large-scale customers that OpenEye serves. OpenEye also had a productive quarter. During IFC West, they demonstrated a new analytics solution that was recently introduced into their SaaS offering. OpenEye worked with Alarm.com's video analytics team to advance our AI architecture and deploy a new neural network that is optimized for the high-demand environments of OpenEye's enterprise commercial customers. This new video analytics engine can simultaneously analyze the large volumes of data generated by hundreds of cameras. It is also relatively open and supports retrofitting of existing third-party camera deployments into OpenEye's enterprise video ecosystem. One functional benefit of this new architecture is highly accurate activity detection that reduces false motion events that can be caused by background movement and other image noise. More precise detection of important activity will allow subscribers to create more actionable alerts and quickly find recorded video associated with an incident. Another benefit is the opportunity for customers to reduce video storage needs and related costs. Today, most enterprise commercial customers receive too many nuisance false alerts that waste valuable video recording space. OpenEye can now dynamically trigger alerts and camera recordings only when important activity, including the presence of a human or vehicle, is detected. During testing of this new capability, OpenEye saw a reduction in false positive alert reporting that led to a 20% to 40% improvement in video storage efficiency. When we acquired OpenEye in the fourth quarter of 2019, I discussed the opportunity we saw to leverage technology and domain expertise across alarm.com and OpenEye. Developing and deploying advanced video analytics capabilities in the OpenEye channel was a key part of this vision and an important step in our strategy to build a strong and durable recurring revenue business model at OpenEye. The OpenEye team is doing great work and has become a strong contributor to our business. Let me next turn to ISC West, where alarm.com recently had a great presence. We highlighted our residential security and video products, especially new partner-facing capabilities that drive operational efficiency and increase subscriber satisfaction. We also showcased our expanding set of commercial services. During the conference, we engaged with a broad cross-section of our service providers in direct meetings, training sessions, and hosted events. These activities always create a valuable opportunity to take the pulse of our channel and to hear direct market feedback. Our service provider partners continue to see a positive demand environment for professionally installed security services. Consumers increasingly view security systems as the platform for an intelligent, multi-device smart home. Alarm.com and our service providers are driving this trend and leading the industry, particularly in deploying video solutions. In 2021, our service provider partners attached video to nearly half of all new security and smart home accounts. Industry-wide, Parks Associates recently estimated that about 30% of residential security systems installed in 2021 included video. Overall, my sense was that our partners see a positive year developing. Most of their concerns were focused on supply-related issues, inflationary pressures, and labor constraints rather than market challenges, competitors, or product gaps. To conclude, I'm pleased with our Q1 results and the progress we made to expand our platform during the quarter. 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.
spk07: Steve? Thanks, Steve. I will begin with a review of our first quarter 2022 financial results and then provide our updated guidance before opening the call for questions. SAS and license revenue in the first quarter grew 14.8 percent from the same quarter last year to $123.2 million. This includes Connect software license revenue, of approximately 7.1 million for the first quarter, down as expected from 8.7 million in the year-ago quarter. Our staff and license revenue visibility remains high, with a revenue renewal rate of 94 percent in the first quarter, which is at the high end of our historical range of 92 to 94 percent. Hard-run other revenue in the first quarter was 82.2 million, up 26.3 percent over Q1 2021. We continue to see strong sales of our video cameras, driven by increased adoption of our industry-leading video solutions and video analytics capabilities for both our residential and commercial subscribers. Total revenue of $205.4 million for the first quarter grew 19.1 percent year-over-year. SAS and license growth margin for the first quarter was 86.3 percent, up approximately 20 basis points quarter-by-quarter mainly due to product mix. Hardware growth margin was 11 percent for the first quarter, which was flat quarter-by-quarter and down from 22.3 percent during the same quarter last year. Hardware growth margins were lower than expected due to additional cost increases for components and higher shipping costs. We continued to ship more products by air freight to meet demand, and shipping costs increased due in part to increasing fuel prices. As a result of these additional costs, we announced our second price increase this year on some of our hardware products. The pricing changes will mostly take effect later in the second quarter. Barring any additional economic impacts or supply chain disruptions, we expect hardware growth margins to improve from Q1 levels each quarter this year. Total growth margin was 56.1 percent for the first quarter, down from 57.8 percent last quarter mainly due to a higher mix of hardware revenue in the quarter. Turning to operating expenses, R&D expenses in the first quarter were $51.5 million compared to $42.5 million for the first quarter of 2021. We ended the first quarter with 892 employees in R&D, up from 797 employees in the same quarter last year. Total headcount increased to 1,565 employees in the first quarter compared to 1,414 employees a year ago. Sales and marketing expenses in the first quarter were $23.2 million or 11.3% of total revenue compared to $19 million or 11% of revenue in the same quarter last year. Our G&A expenses in the first quarter were $24 million up from $22.9 million in the same quarter last year. G&A expense in the first quarter includes non-ordinary course litigation expense of $1.1 million compared to $5.3 million for Q1 2021. Non-ordinary course litigation expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance. Non-GAAP adjusted EBITDA in the first quarter was $29.9 million down from $35.6 million in Q1 2021, mainly due to the lower hardware margins. In the first quarter, GAAP net income was $9.1 million, compared to GAAP net income of $14.8 million for Q1 2021. Non-GAAP adjusted net income was $21.3 million, or $0.39 per diluted share in the first quarter, compared to $25.8 million, or $0.50 per share for the first quarter of 2021. Turning to our balance sheet, we ended the first quarter with $671.8 million of cash and cash equivalents. During the first quarter, we used $23.3 million of our cash to repurchase 354,123 shares of our stock. Turning to our financial outlook, for the second quarter of 2022, we expect SAS and license revenue of $126.2 to $126.4 million. For the full year of 2022, we expect SAS and license revenue to be between $512.7 to $513.3 million, up from our prior guidance of $508 to $509 million. We are projecting total revenue for 2022 of $822.7 to $853.3 million, increased from our prior guidance of $808 to $819 million, which includes estimated hard-earned other revenue of 310 to 340 million. We are maintaining our guidance for non-GAAP adjusted EBITDA for 2022 at 149 to 150 million, given the very challenging global supply chain dynamics and the unusual geopolitical concerns, among other factors. We expect adjusted EBITDA on Q2 to represent approximately 22 percent of our annual guide. Non-GAAP adjusted net income for 2022 is projected to be 104.3 to 105 million, consistent with our prior guidance. Our EPS is estimated to be $1.87 to $1.88 per diluted share, compared to our prior guidance of $1.86 to $1.88 per share. We currently project our non-GAAP tax rate for 2022 to remain at 21% under current tax rules, EPS is based on an estimate of 55.8 million weighted average diluted shares outstanding. We expect full-year 2022 stock-based compensation expense of 50 to 52 million. In summary, we are pleased how well our service providers and internal teams continue to perform during these challenging times. We are focused on executing 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.
spk04: Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Adam Tindall with Raymond James. Your line is open.
spk09: Okay, thanks. Good afternoon. I want to start with Steve Trundle, just kind of an observation that a lot of consumer subscription companies are seeing major challenges right now, whether it's Netflix, et cetera, yet your subscription metrics are still solid mid-teens growth. I know you're B2B, but end consumer is just the ultimate customer. I'm wondering why you think this is. Is there some sort of lag effect because you're B2B2C? or are you not expecting impact in any metrics that you can give us to kind of support your view on why this business seems to be a lot more durable than some of those other consumer subscription models out there?
spk06: Hey, Adam. Yeah, good question. I think a lot of it is the market we serve and that security and safety are sort of fundamental components consumer needs. We're not selling an entertainment service and we're not competing with a variety of other sources of new entertainment, whether it be TikTok or otherwise. So I think in our case, fortunately, we're going after a market that is sort of fundamental to the consumer and they don't want to part with safety and security. And our service providers have a long, long history of of knowing how to address the needs of each locality. So perhaps the B2B2C thing gives us a little bit of a shield, but I think it's probably more basic than that, which is the market is generally growing. We're delivering the technology that renders what we believe to be the best smart home and security experience, and the consumer need is not going away. Even during recessionary periods, we normally see that security holds up very well, people are moving less, and there's usually a heightened concern about property protection. So I think it's probably a trend that's not going away. I think we'll hold up fine.
spk09: Got it. That makes sense. Just a follow-up for Steve V. On EBITDA margin, obviously a really challenging environment, but you're executing well in Q1, just under, I think, 15% this quarter. But if I looked at the full year guidance, I think it's closer to 18%, so sort of this lift as the year progresses. I'm wondering if you could maybe unpack some of the key factors that you're considering in that assumption to kind of climb up EBITDA margin and the timing for those margins to normalize. Thank you.
spk07: Yeah, Adam, good point. Certainly the hardware margins, we expect to improve with the price increases. So Q1 hardware margin, 11%. We expect Q2 to probably be around 13%, and then Q3 closer to 17%, 18%. So that's certainly a big factor. Also keep in mind seasonality-wise, typically Q4 is our seasonally strongest quarter, especially with Energy Hub contributing that incremental amount of revenue. So those are really the main factors I would point to for the improvement in EBITDA margins.
spk09: Okay. And just to really quickly clarify, since we're just in such an uncertain supply environment, hardware for Q2, I mean, we typically see summer months, you get a sequential uptick, but I'm just not sure if we've got kind of a different type of a year and would hate to be missing something on how to think about hardware revenue for Q2. Okay.
spk06: I think, Adam, this is Steve T. speaking. I think, yeah, it's a little bit of an odd year, so we can't absolutely be certain that we're going to see that sequential uptick in Q2. We also, as Steve B. mentioned, as prepared remarks, we put forth or put through a second cost increase on the or price increase on the hardware. So while we don't expect that to dampen demand much. It hasn't really played out yet. It comes into effect May 1st. So I wouldn't go crazy with the second quarter hardware. I think I'd anticipate sort of a flat quarter over quarter hardware number.
spk09: Very helpful. Thank you. Thanks.
spk04: Thank you. Our next question comes from Michael Funk with Bank of America. Your line is open.
spk10: Yeah, thank you all for taking the questions today. I really, really appreciate it. So, you know, first on the commercial side, I know in the past you've given some quantitative commentary about the quarterly additions. I think last quarter, I should say, you were kind of running around 25,000 a quarter, if I remember correctly. So, I hope you can just update us there if you're seeing any kind of acceleration. Then I'll follow up after if I could.
spk06: Hey, Michael. This is Steve. Just to make sure I've got it right, you're referencing on the 25K per quarter, you're referencing which part of the business?
spk10: I believe it was commercial you said last quarter was 25K, if I remember correctly.
spk06: Yeah, so commercial momentum continues to be good. It's becoming an increasingly larger and larger component of our business. of our SAS revenue. I believe last quarter I indicated that the commercial account base was over 400,000 active subscriptions. That number has continued to grow and is growing at a percentage level that's faster than our overall SAS growth. I spent a fair amount of time in my prepared remarks talking also about the OpenEye business and the recent integrations we've done there to drive deeper video analytic opportunities into the enterprise space. And I think in the first quarter, as an example, I believe our OpenEye team alone activated over 50,000 new connection points, which basically means new cameras In the commercial space so business is going well, and I think will You know bar in any sort of major recession.
spk10: I think we'll continue to see good solid commercial momentum And then one more if I could so at a higher level you commented on the second price increase on the equipment side earlier You know that's understood obviously passing on some of your own increase in pricing, but how are you thinking about increasing your subscription and Pricing and we're seeing pretty broad dates price increases walked up and be in store today God was increasing prices and everything. I just got shrugged my shoulders like we're all seeing it People kind of conditioned to that at this point We just expect it not that you're trying to you know, push that to your customer, but everyone else is doing it how have you thought about the ability to increase pricing on the subscription side and in the current market environment that might help to offset some of the other pricing pressure, sorry, cost pressure that you're seeing?
spk06: Yeah, that's a great question and one we spend time on. Historically, we have really wanted to be stable on the pricing of the subscription services that we offer through our service providers. Everyone's planning their business around a certain amount of cost on each subscription, and our service providers are oftentimes funding account creation costs using debt, making assumptions about certain levels of margin on each account. So a stable environment requires that you not be too quick, I would say, to drive up the subscription costs. That said, The reflections you just sort of made in terms of what we're all experiencing day-to-day create a dynamic where at some point you simply have to be ready to increase the cost of the subscription, and our service providers will have to also increase the cost of a subscription. So we're not saying that we absolutely will never increase subscription costs, I think, at some point. you know, that becomes a necessary part of our business model if we don't see some tampering down of kind of the current inflationary pressures. But we're not going to be quick on it is what I would say. We'll probably be the last to move in that direction.
spk10: I would just note AT&T increased price and wireless has been a deflationary cyclone for the last 20 years. Nobody would have expected wireless price increases. Just a data point that the company that should have been last just raised their prices on their customers.
spk06: Even hardware, we expected a couple years ago, I think our view was hardware costs would always be driving those costs down. It's just not happening right now. So, yeah, the world is a little different right now. I think I like the old way better, but we'll react to the world we live in.
spk10: I really appreciate the time. I'll yield the floor back to the next participant.
spk07: Thanks, Michael.
spk04: Thank you. Our next question comes from Matt Saw with William Blair. Your line is open.
spk01: Hey, guys. Thanks for the questions. I wanted to follow up on the discussion around higher prices and inflation. I think in terms of a new customer, probably the bigger impact from a pricing perspective would be the increased hardware prices and also most likely labor costs for the installers. which I assume would be getting passed back to the homeowner to some extent. But, you know, your demand environment has remained robust, so it doesn't really seem like that price increases around the sort of initial install and setup are impacting demand. Maybe if you could just sort of comment on that and how, you know, price-sensitive consumers have been historically to changes in the initial install.
spk06: Yeah, I would say we haven't seen a drop in demand thus far. I think that, and we don't really anticipate a drop in demand. I think that, you know, still on a relative basis, the cost of what our service provider is offering in terms of security and smart home experiences is significant. It's not the most expensive thing in the budget for most folks. I mean, we're talking $50 a month type of service plan for safety and security. It might be $60 depending on the amount of video services. It might be $40 if there's not a ton of services. But in any case, it's a fundamental need people have for safety and security. And I don't think we're the biggest target when people are sort of looking to potentially reduce expense. On new account creations, I think what's happening there some is the technology is just continuously getting better. So the value we provide is offsetting some of the increase in cost. And a big driver of that is the video analytics services that are now pretty rich and pretty developed on a residential grade So I do think we've packed quite a bit more value in. And then on the actual financing side, we've seen a movement over the last two, three years that's still underway towards a dynamic whereby a lot of the cost that's being incurred to originate a new customer is being financed through some type of consumer financing mechanism where the consumer's credit itself is being used to finance the creation cost instead of the service provider's balance sheet. So that also takes some of the pressure off. And you're seeing this in other consumer markets with companies like Affirm and otherwise. But when you can spread out the incremental cost over a five-year period, it eases the burden on both the service provider and the consumer. I think that's helping.
spk01: Got it. And just one more on the commercial video analytics. functionality that you have released. You've had some out there for a while, obviously making improvements. What are your expectations in terms of attach of video analytics to commercial customers relative to residential? I assume the percentage of commercial customers with video would be higher. So, you know, would you also then expect the analytics to be higher as well?
spk06: Well, you know, I would say absolutely yes, except that On the residential side, we have seen very, very high attach of analytics. At this point, 75% of the customers who are activated with analytic-capable cameras are being activated with analytics on the residential side, so that's a pretty high attach rate, which is great. That means we're rendering the most sort of value and the most functionality we can to the consumer. I would expect on the commercial side, through time, as the... the offering becomes well adopted by the service providers, that we'll see at least that level and perhaps a bit higher, but it's not as if, but we're starting with sort of a 75 number, so there's not that much higher we can go on attaching analytics in the commercial side. Does that make sense?
spk01: Yeah, it does. So you can't go past 100, so got it. Right, right, right.
spk04: Thank you. Our next question comes from Brian Ruttenberg with Imperial Capital. Your line is open.
spk02: Yes, thank you very much. First of all, I want to go to a macro question. A lot of the nuts and bolts have already been asked about margins and things, but recessionary environments. Let's just play that out. Let's hope that doesn't happen. But you guys have been doing this 22 years. Can you talk a little bit about your business and what you anticipate happening if there is a downturn? And then what your plans are for your cash, if that changes at all, if there's a downturn in the economy?
spk06: Right. Yeah, I can spend a moment on that. I think, you know, obviously depends on the severity of the downturn, but Our expectation would be that revenue retention would probably increase some. We know that when people are not moving, that we generally see less, our dealers see less attrition. So that tends to be a positive. We also know from prior experience that during a recessionary period that people are more concerned, particularly if there are layoffs, they're more concerned about the safety and security of their property. They begin to wonder about folks wandering through the neighborhoods during the middle of the day and that sort of thing. So there is probably even a heightened desire for safety and security that, again, I think supports customer retention. Those are the positives. On new sales, some of those same positives will drive new sales activity. At the same time, you see a slowdown typically in new home construction. You have probably fewer new homes being initiated, so that creates a bit of a headwind right now. About 10% of home sales in the U.S. are coming from the builder trade or new homes, so you might have a little bit less there. So a little bit of a headwind perhaps on new account origination, offset some by greater retention. In terms of... what it means in terms of the way we think about our cash position. I think that in a recessionary period, that's often the point in time when your cash takes on more value. You can find more opportunities to deploy your cash efficiently and with reasonable expectations for return. In some ways, if we saw a recessionary period, I think you would see us maybe be a little bit more active on the corp dev front, thinking about how to leverage our cash position most effectively.
spk02: Great. Thank you very much.
spk06: Sure.
spk04: We have a question from Darren Aftahai with Roth Capital. Your line is open.
spk08: Hi, thank you. Uh, this is Austin on for Darren. Uh, thanks for taking my questions. Um, just have two, if I may, uh, the first one I think has been asked, I'll try to rephrase it a little bit differently. Um, but with, again, on the theme of inflation and rising interest rates, I'm just curious what kind of changes you have seen, or, you know, would anticipate to see on the residential side with regard to, uh, the new, uh, home builder program, as well as second home buyers.
spk06: Good question. Yeah, on the residential side, new home buyers, I mean, I think we watched the national data there to get a feeling for what's happening with new home purchases. My recollection, so this, you know, my memory's not perfect, but I seem to remember that we've seen sort of a 10%, 11% drop in new home sales over the prior quarter. So, you know, a little bit of a tapering there. At the same time, we're not like super heavily penetrated in the, you know, while we have the majority of the builders in partnership someplace, we haven't completely penetrated all of the builder opportunities that we see. And therefore, we've got some room for expansion in terms of greater attachment to the number of new homes being constructed. So, I would hope that you know, even as new homes decline potentially, first you've got to remember that's not, you know, at most it's sort of 10% of home sales. But as new home construction declines, you know, we can hopefully further penetrate that TAM some. And I think that's what we would, you know, be attempting to do. We might see that, you know, more homes are kind of coming in at a slightly different rate. price point and maybe some compression on what folks are willing to buy with higher interest rates. But generally speaking, I don't think we see any sort of avalanche coming, even if new home sales decline further. With regard to second home sales, that's a data point I actually don't have. I'm not sure what's been going on with second home sales in the general market right now. What I would say is, from our perspective, there's a favorable trend towards, at least what we're seeing, is towards increasing rental of second homes. And when you have people going to places and renting a home, that's good for our Point Central business in that we're driving the technology there that allows a property manager to quickly turn a rental from one guest to the next. So if that continues, if that trend continues, if people continue to sort of favor vacations that are in the United States over a ton of international travel, or if we've just seen sort of the emergence of a new habit, you know, you want to go to the beach or the lake instead of necessarily New York City, then that's a good trend for us. So far that appears to be trending in the right direction.
spk08: Great. I appreciate that. And then last one for me. Just curious how your Flex IO initiative is going.
spk06: Sure. A little color on that. So Flex is underway. We've got some dealers that are beginning to deploy that in various situations. Probably the most common use right now would be for gates that are remote from the home, whether that be driveway gates or swimming pool gates. We're not at the point where Flex is by itself driving any sort of material change in our numbers. It's still fairly early days. Still working out a few feature requests that some of the service providers have had. So it's moving, but it's not a dial mover at the moment.
spk08: Got it. All right, well, I appreciate it, and congrats again. Thank you.
spk04: Thank you. Our next question comes from Jack Vanderaarde with Maxim Group. Your line is open.
spk11: Great. Hi, Steve T., Steve V. I appreciate the update. Thanks for taking my questions. I'll just start with a question in case you haven't gotten enough on pricing prices. Just for clarity, did you say you already rolled out that second round of price increases in the hardware products, or are these in the works?
spk06: Yeah, Jack, so we rolled out a – we really didn't want to have to do a second one, but we did a first one that really went into full effect in late February, early March. And then on the heels of that, we announced a second increase that goes into effect beginning May 1st, so it's already been – announced and deployed and will sort of begin to show up in the second half of this quarter.
spk11: Got it. Okay. And then a separate topic, just on the premium services front, it's always fun to kind of see your guys' patents, you know, get an idea of what might be coming down the line. So, you know, I've seen stuff with drones today. The drone patents filed, I think, over the last two years. I imagine those would be big ARPU drivers. But just, you know, are we close to something big, something big like an ARPU driver that's kind of unique and innovative like that? You have the connected car as well that came out recently. But, you know, anything like a drone or anything kind of fun you can talk about?
spk06: Fun things to talk about. Other than inflation and price increases. Yeah, that would be nice, wouldn't it? Yeah. Yeah, so the connected car offering is gaining traction, and we're seeing some use on the residential side. We're seeing a lot of demand, really, from our service providers for it on the S&B and sort of the commercial space. So we're adding some capabilities to better support that arena. That is incremental to the typical installation. So if we can see that continue to pick up some, then at some point it begins to push ARPU for us. On the R&D side, yeah, we don't go into great detail about sort of where we are with various projects. You've seen some patenting activity around the drone initiative, and we continue to work that program. We don't have an exact timeframe for when you would see results in market, but we're not backing away from what we want to do there. And at some point, that solution would be a meaningful enhancement, I believe, to what we're able to offer in both the residential and commercial video experience domain. And it would become, at that point, an arm of the driver. But it's a little bit early for us to... And we don't... At some point, you have to do sort of R&D for the purposes of R&D, and then you discover how you're going to monetize it once the product is sort of close to being ready for market. So we don't have a firm sort of – I'll say this. We don't have anything in our current year forecast for that new initiative, but we're still excited about the progress being made. Okay.
spk11: Okay, great. And then just one more on the international business. Can you maybe just provide an update on that overall TAM opportunity and where you're at today? It's clearly still a relatively untapped opportunity. You still have this massive, untapped, long-term growth driver. Is anything changing in your plan, your view?
spk06: No, nothing has changed. It's, you know, on a relative basis, I think at the end of last year, we talked about overall a number of customers around 8.4 million. And I said international at the time, we were getting close to, you know, half a million international subscribers. During the quarter, we blew through that milestone, which is great. So, you know, it's a real business when you're talking about over half a million subscribers. installations outside of the U.S. and Canada, and we're crossing new milestones almost every quarter. So we still believe over time that the rest of the world is a fairly large place and that we would at some point see the number of subscribers globally be a third to a half of what we have domestically. So the question is just sort of when does that curve really begin to pick up? And what I will say is the cost to sort of entry, the cost to really playing globally or material to support the different environments and the different types of hardware and components that you need for each market. So we're sort of continuing to work through all of those issues and continue to drive product out that will service large swaths of the globe. But we still have enthusiasm about the TAM and and the progress that we're making. I don't think we've changed on that at all.
spk11: Okay, great. Well, I appreciate the time. I'll hop back in the queue.
spk06: Okay, thank you.
spk04: Thank you. We have a question from Mike Lattimore with Northland Capital. Your line is open.
spk05: Hi, this is Aditya on behalf of Mike Lattimore. Could you tell me how much did your largest customer contribute as a percentage of revenue
spk07: So our largest customer is ADT, and they're a little bit over 15% of our revenue. And there's no other customer that's greater than 10% of our revenue.
spk05: All right. All right. And could you give some color on the gross margins? How should we think about the gross margins in 2Q and for the rest of the year?
spk07: Yes. So obviously Q1 was 11% for hardware gross margin, 86% for SaaS. SAS has been very stable, as you've probably seen. It's been 86, 86.2, so 20 or 30 basis points. But in terms of the hardware margins, that's where the price increases, of course, are taking effect. And so we see probably in Q2 around a 13% gross margin for hardware, Q3 probably going up to, let's say, 15% to 16%, and then Q4 probably closer to 18%. hardware margins. And that's, of course, dependent upon what we know today and no other changes occurring. And so we have to caveat that. But that's our current expectations.
spk05: All right. All right. Fine. Thank you. Sure. Thank you.
spk04: Thank you. And that's all the time we have for questions. This concludes today's conference call. Thank you for participating. You may now disconnect, everyone.
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