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Operator
Good day, and thank you for standing by. Welcome to the alarm.com second quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew. Please go ahead.
Matthew
Good afternoon, everyone, and welcome to Alarm.com's second quarter 2022 earnings conference call. Please know that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, our 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, the impact of the COVID-19 pandemic, challenging global supply chain dynamics, and adverse macroeconomic conditions. 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 5, 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 June 30, 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 to understand the company's performance and trends. However, 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 replay will be available on our website. Let's now turn the call over to Steve Trundle. You may begin.
Steve Trundle
Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report solid second quarter results. Our SAS and license revenue in the second quarter was $129.5 million, up 14.4% over last year. Our adjusted EBITDA in the second quarter was $37.1 million. I want to thank our service provider partners and the alarm.com team for their contributions to our results and for their ongoing performance. Our continued SaaS growth and profitability during the quarter was driven by strong new account creation by our service providers in both our residential smart home and our business markets. Their outstanding performance on subscriber additions suggest that demand for installations remains healthy. As we look to the back half of the year and consider the current economic uncertainty, We continue to feel well positioned to execute on our annual plan across our diversified revenue streams. This includes our market leadership in North American residential security, our growing momentum in commercial markets, our expanding presence in many global markets, and the continued progress of our long-term growth businesses. On today's call, I will highlight several product updates we released during the second quarter Then I'll hand things over to Steve Valenzuela to review our financial results and our outlook for the remainder of the year. Starting with our smart home solutions, we recently introduced a new capability called smart arming for our residential subscribers. This enables intelligent, automatic system arming and disarming that adjust in real time based on activity in the home. Subscribers select periods when they want their system to monitor activity in the property and then either automatically arm or disarm the system. For example, you might want to automatically arm your system each night between 10 PM and midnight, depending on when you head to bed. During that time, the system begins to monitor motion sensors and other designated sensor activity in the home. After an extended period of inactivity, the system then arms itself for the night. The system can automatically disarm in the morning when it detects designated internal motion, indicating that people are up and about. We believe that SmartArming is unique in the market. It's a capability that we have long offered our commercial business subscribers, which we have now enhanced to suit the needs of our residential users. It's a convenient and intelligent way to control the state of the security system, and we believe that it will further drive daily engagement with the central station monitoring aspect of the smart home system. Smart arming is also another element of our strategy to differentiate professional monitoring services that our service provider partners typically include with alarm.com powered systems. We will continue to invest in developing market leading capabilities that can enhance the life safety services that millions of homeowners depend on each day to protect their families and property. Shifting to our commercial services, I want to give you an update on our software offering for small and medium-sized businesses, which we refer to as SMBs. We address this space through our alarm.com for business platform. This includes integrated services for smart security, video monitoring, video analytics, and access control. During the quarter, we introduced mobile credentials for our cloud-based access control solution. This allows subscribers to use smartphones to access locked doors in a property instead of key cards or fobs. An administrator can virtually provision and manage access credentials directly to a smartphone through our administrative interface, including managing the days and times when a user is allowed to access the property. We believe that mobile credentials can further streamline access management for administrators, reduce costs associated with access cards, and improve the experience for credential holders. We estimate the SMB opportunity that we are targeting with features like mobile credentials to consist of about 5.5 million business properties in the US and Canada. The segment is heavily penetrated with legacy technology. We believe that our integrated services and unified interface deliver unique functionality that will incentivize many of these businesses to upgrade over time. SMB properties typically offer a higher SaaS ARPU opportunity than we see in the residential market. For example, an SMB property with a security system, an eight-channel video system, and an access control solution would drive about six times the ARPU of a typical residential account. In summary, I'm pleased with our second quarter results and with the execution of our plans through the first half of 2022. Looking ahead, I want to make sure our investors understand that we plan to continue to invest in the key growth areas of our business in the back half of 2022 and in 2023, even in a macroeconomic environment that may be less certain. We are entering a seasonally strong recruiting and new employee onboarding period. I'm anxious to get our growing team fully deployed on the growth opportunities we are pursuing in commercial, international, active shooter episode control, and energy management. Finally, 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?
Matt
Thanks, Steve. I will begin with a review of our second quarter 2022 financial results and then provide our updated guidance before opening the call for questions. SAS and license revenue in the second quarter grew 14.4% from the same quarter last year to $129.5 million. This includes Connect software license revenue of approximately $6.9 million for the second quarter down as expected from $8.3 million in the year-ago quarter. Our SAS and license revenue visibility remains high, with a revenue renewal rate of 94% in the second quarter. Part of another revenue in the second quarter was $83.4 million, up 10.2% over Q2 2021. Video camera sales continue to be the main contributor to growth in hardware revenue as residential and commercial subscribers increased adoption of our industry-leading video solutions and analytic capabilities. Total revenue of $212.8 million for the second quarter grew 12.7% year-over-year. Staff and license growth margin for the second quarter was 85.6%, up about 80 basis points over the same quarter last year due to modest scale benefits. Hardware gross margin was 17.7 percent for the second quarter, an improvement from 11 percent last quarter, but down from 20.5 percent during the same quarter last year. Hardware gross margins improved as expected following our price increases earlier this year. However, they are still below our historical levels of 20 to 22 percent as the global supply chain continues to be challenging. We expect hardware gross margins for the second half of this year to be in the range of 18 to 19 percent. Total gross margin was 59 percent for the second quarter, which is flat year over year and up from 56.1 percent in Q1 2022 due to the improved hardware margins. Turning to operating expenses, R&D expenses in the second quarter were 54.2 million compared to $43.5 million for the second quarter of 2021, mainly due to employee-related expenses. We ended the second quarter with 919 employees in R&D, up from 792 employees in the same quarter last year. Total headcount increased to 1,606 employees in the second quarter, compared to 1,421 employees a year ago. Sales and marketing expenses in the second quarter were 22.9 million or 10.8% of total revenue compared to 20.5 million or 10.9% of revenue in the same quarter last year. The increase in sales and marketing costs were mainly due to an increase in headcount and higher travel costs as we have more employees traveling as COVID protocols were relaxed. Our G&A expenses in the second quarter were 29.3 million up from $23.3 million in the same quarter last year, mainly due to increased legal fees, employee-related costs, travel costs, and rent as we expanded our facilities to accommodate our growth. G&A expense in the second quarter includes non-ordinary course litigation expense of $5.3 million compared to $3.7 million for Q2 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 second quarter was $37.1 million, down slightly from $38 million in Q2 2021. In the second quarter, GAAP net income was $10.8 million compared to GAAP net income of $14.7 million for Q2 2021. Non-GAAP adjusted net income was $26.9 million or $0.49 per diluted share in the second quarter compared to $27.7 million or $0.54 per diluted share for the second quarter of 2021. We ended the second quarter with $643.4 million of cash and cash equivalents. During the second quarter, we used $28.2 million to repurchase 480,531 shares of our stock at an average price per share of $58.62. Year to date, we have repurchased 834,654 shares or approximately 1.7% of our outstanding stock. Turning to our financial outlook for the third quarter of 2022, We expect SAS and license revenue of 130.9 to 131.1 million. For the full year of 2022, we expect SAS and license revenue to be between 518.5 to 519 million, up from our prior guidance of 512.7 to 513.3 million. We are projecting total revenue for 2022 of $828.5 to $859 million increased from our prior guidance of $822.7 to $853.3 million, which includes estimated hard-run other revenue of $310 to $340 million. We are maintaining our guidance for non-GAAP-adjusted EBITDA for 2022 at $149 to $150 million. Non-GAAP adjusted net income for 2022 is projected to be 104.3 to 105 million, consistent with our prior guidance. Our non-GAAP EPS is estimated to be $1.89 to $1.91 per diluted 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 55.1 million weighted average diluted shares outstanding. We expect full-year 2022 stock-based compensation expense of 50 to 52 million. In summary, we believe the solid growth of our SaaS revenue and strong retention metrics shows the durability of our model. Our channel remains strong as our service providers continue to provide excellent support to their customers. We are focused on continuing to invest in market-leading smart property solutions while delivering profitable growth. And with that, operator, please open the call for Q&A.
Operator
Thank you. As a reminder, to ask a question, you will need to press one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Saket Khalil with Barclays. Your line is open.
Saket Khalil
Okay, great. Hey, good afternoon, guys. Thanks for taking my questions here. Hey, maybe for you, Steve Trundle, helpful commentary just on the health of the end market. I was wondering if you could just go one level deeper and just talk about how the health of the residential housing market in the U.S. potentially impacts your business. Sure. I mean, clearly you've been through multiple real estate cycles before. Can you just remind us what you've seen and what metrics maybe you would pay attention to in this type of backdrop?
Steve Trundle
Sure. Yeah, we're kind of in a fortunate position where, you know, whenever there has been historically a slowdown in contracts, moving activity or in new home sales, typically there has been an uptake in sort of sales to existing properties where there was no move. And the reason for that is it's just as likely that a new buyer of a smart home system is buying because of an increased concern about crime in their neighborhood or more and more today even an increased desire for sort of the smart home capabilities that we offer. that's just as likely as it is that they're buying because they moved. So while there is a bit of a tapering, I think, in the residential real estate market right now, for us, new builds are roughly 4% or so of our new installations a year. So it's not, while we have great relationships, I believe, with 18 of the 20 largest builders and we're trying to grow those relationships, we're not super exposed to new build activity and we'd expect probably, were there any type of sort of interest rate driven slowdown and moves that we would offset that with an increased level of sales to folks who are buying for other reasons.
Saket Khalil
Got it. That's very helpful. Maybe for my follow-up for you, Steve Valduella, great to see the EBITDA beat on the quarter. You know, looking at the full-year guide of that 149 to 150, you know, what were some of just the puts and takes that you considered when maintaining the guide for the year, despite the nice beat on Q2?
Matt
Sure, yes, Zach. First of all, we have a lot of predictability in the SAS revenue, right, and high gross margin. 85 to 86% and a high renewal rate as well. So a lot of predictability there. With the hardware and the supply chain challenges to continue, we have to be cautious there. The good news is we did see the gross margin on hardware go up to almost 18% in Q2. And we are predicting about 18 to 19% gross margin for Q3 and Q4. As you know, hardware is not as predictable, so we have to be cautious there. We have a challenging macro environment we have to be aware of as well. And so we're actually very pleased to be able to maintain our guide for a very high level of adjusted EBITDA in the quarter. So we feel very good about our guide. Very helpful. Thanks, guys. Thank you. Thanks, Sergeant.
Operator
Thank you. Our next question comes from the line of Catherine Huntley with Raymond James. Your line is now open.
Catherine Huntley
Hey, thank you so much for taking our questions. It looks like the U.S. Senate just passed a bill that helps fund climate change with the intention of reducing greenhouse gas emissions. Do you think that this is a potential catalyst for Energy Hub, especially since inter-quarter you helped launch the EV grid management solution, which almost helps push for those greenhouse gas emission reductions?
Steve Trundle
Yeah, absolutely. We think that that will contribute to the momentum that energy hub has right now. Obviously, if we can be more thoughtful at the times that we choose to exercise the grid to charge an EV vehicle and use energy that is sort of optimally clean, then that will, you know, that will reduce carbon emissions. It would be an overnight catalyst. I don't believe it would sort of overnight be a catalyst, but it certainly gives utilities a lot more air cover as well as with regulators and others to more aggressively pursue the types of programs that Energy Hub enables. So we were a little disappointed with the 1% excise tax on future buybacks, but we were with the contribution that the bill potentially has to our energy home business. So good question.
Catherine Huntley
Awesome. Thank you so much for that color. And then in your prepared remarks, when you talk about the supply chain, is that incremental tightening or are these things that we've already all heard about the environment still being challenged? Just wondering if there's any incremental sequential uptick in the tightening that you're seeing.
Steve Trundle
I don't think so. I don't think we've seen it get sort of worse in the last two, three months. It's probably getting slightly better on an overall basis, but we're not back anywhere close to sort of where we were two years ago in terms of predictability of the supply chain. There's still a lot of heroic acts that are required to maintain availability of product across all of the different SKUs that we offer and all the different geographies that we offer. So it's still a tough environment, but it hasn't gotten tougher in the last two or three months. And I guess I would say we're hopeful. We don't have strong indications that this is going to occur, but we're hopeful that it will improve some in terms of how tight it is in the back half of the year.
Catherine Huntley
That's great to hear. Thank you so much.
Operator
Thank you. Our next question comes from Michael Funk with Bank of America. Your line is now open.
Michael Funk
Yeah, thank you very much for the questions, guys, and nice results. Just thinking about opportunity for improved revenue growth, so where is the upside? Just wondering if you could highlight a few areas where you think that there is you know, greater potential either for, you know, penetration, you know, driving price increases, or, you know, even through, you know, product enhancements. So, where is the greatest opportunity, in your opinion, to improve revenue growth?
Steve Trundle
I would say, this is Steve Tunnell speaking. We're putting a lot of focus in those areas that we think have the greatest opportunity to drive growth. My last question was about energy hubs, so we're excited about that as one. I talked in my prepared remarks a bit about commercial and the meaning to us when a customer actually takes the full stack of technology that we offer to an SMB customer. I talked about the you know, meaningful potential R2 lift there and the size of that market at 5.5 million locations. So, you know, we have our eye on that and we think that's a domain where with additional investment in the product and in sales activity and in marketing activity, we can drive even more growth than we already see there. We're not at all sort of bullish on the residential market. I'm sorry, bearish. We like the residential market. We're continuing to make investments there as we did with SmartArming this past quarter and think that we'll continue to see growth there. The challenge we have is we're pretty heavily penetrated on the North American residential side. So we'll still grow, but we're growing internationally. But I would say if I were to sort of look at them all right now, our focus on what we're doing in commercial And what we're doing with video are probably two of the main drivers, I would say, for incremental growth in the future.
Michael Funk
Got it. And I guess to put some of the question, what's the biggest risk right now, given the macro forecast? Is it more on the NDR side, net dollar retention? Or what is the biggest risk? And then what are you monitoring externally to gauge that risk?
Steve Trundle
Yeah, it's a good question. You know, fortunately for us, at the moment, most companies would probably answer that question, and they would say international. Like, it's always a tough thing to predict what sort of event globally is going to change the international markets. I don't think that's the right answer for us just yet, because international for us is still at sort of 4% or 5% of revenues. So we don't have a ton of exposure there. It's more of a growth opportunity than a real risk. I would say the primary thing that we keep our eye on each day is, are we doing a good job in helping our service providers build their business and execute on their deliverables to the customer? And, you know, are we providing good value to the service providers? And are we making sure that things – you know, a big risk would be if things, for example, didn't work the way a customer expected them to work. That's probably the thing that occupies us. It's not an external event, but more of an internally controllable activity, and it occupies more of our attention than anything, which is, are we doing a good job with our service provider partners, and are we maintaining those very valued relationships?
Michael Funk
I appreciate the question. Thank you very much.
Operator
Thank you. That question comes from . Your line is now open.
Brian
Great. So I've got two different lines of questions. Real quick on the financial line, can you talk about the weighting of adjusted EBITDA in third quarter versus fourth quarter? The reason for this question is the last two years you've been more heavily weighted in terms of adjusted EBITDA in the third quarter versus the fourth quarter. Just wanted to see if that trend was going to continue.
Matt
Yeah, Brian, good question. So, this is Steve Valenzuela, by the way. So, we expect it to be relatively similar Q3 and Q4, but flat spread evenly over Q3 and Q4.
Brian
Okay. So, it should be even in third quarter and fourth quarter. Now, a whole different line of question is about the door port acquisition. that you did in May. Can you talk a little bit about how you're positioned there? I know Butterfly MX is a dominant player in there. I know SmartRent and Latch are trying to get into that market, that intercom market. Can you talk about how you're positioned now and your runway for growth in that area?
Steve Trundle
Sure.
Brian
Yeah.
Steve Trundle
You know, Doorport was a relatively small acquisition I would characterize as an ACWA hire that we rolled into our Point Central business, which is in the other segment. And Point Central is focused on both the vacation rental market and the multifamily market. And obviously, the intercom solution is an important component of the you know, of the multifamily market. And I'd say what we're doing there is sort of twofold. One is a, you know, working to, several fold actually. First is getting the service providers set up with the sales engine to continue to, you know, gain traction in the multifamily space. Now the multifamily space has gotten really crowded in the last two years. And there's a lot of, you know, there's always a point where you look at it and you say, is the business model there one that I want to pursue? And if we look at some of the other companies you referenced, and in our opinion, if we really sort of double-clicked on the business model, there are places where it's better for us to just say no. It's not necessarily a business we want at that level with that cost structure and with that expected revenue stream. So I would say we're being a little more selective in how we go to market and what types of business we take, and then specifically on the intercom solution, you know, we're bringing to market an internally generated sort of door port solution, but also we're open to partnerships and have partnerships with other intercom solutions that may already be installed and may be working well for a given building.
Saket Khalil
Great. Thank you very much. Sure.
Operator
Thank you. As a reminder, to ask a question at this time, please press star 1-1. Our next question comes from the line of Dylan Heslin with the Roth Capital. Your line is open.
Dylan Heslin
Hey, good afternoon. Thanks for taking my questions. First, if I could hit on the competitive space a little bit, specifically against the DIY, sort of following up on the housing market. I mean, have you seen thing in terms of competition that you're either taking share or getting more capture and has that come at a potential higher subscriber acquisition cost?
Steve Trundle
Hey, you know, we've always said that for the most part that the DIY customer is a different customer than the one that is calling one of our service providers. Not universally the case, but usually the case. And therefore, it's usually more likely that one of our insubscribers is comparing a couple of different service provider options than it is that they're going to be sort of comparing doing it themselves versus getting a full security solution. That's not to say that some of the DIY offerings aren't great. We even have some pretty successful solutions service providers that sell our offering through a DIY format. But I would say in the second quarter, you know, overall, no, we didn't really feel any pain, say, surprised by the subscriber additions that our service providers were able to deliver. And, you know, we were able to exceed expectations on the SAS line and didn't really experience any new Competitive pain, we may be taking share. I don't really know, but I suspect it's just that the market we serve is more apt to buy than, you know, a couple years ago.
Dylan Heslin
Thank you. And as a follow-up, could you talk at all about sort of the mix in installs, 2Q versus 1Q between residential and commercial?
Matt
Yeah, commercial revenue was about 7% of staff, which is up a little bit year-over-year and quarter-over-quarter. So typically, we break out the amount of commercial staff revenue that we achieved in a quarter. I would say commercial is growing at about 25% year-over-year, so we're seeing good growth there. And specifically in OpenEye, we're seeing very good growth in OpenEye. And we're very proud of the achievement of being able to have more of the revenue actually coming as a SAS revenue. Whereas a year ago, their SAS revenue was a half a million, and this quarter their SAS revenue was 1.5 million. So we're seeing very good progress and good growth in commercial. Thank you. Thank you.
Operator
Thank you. And I'm currently showing no further questions at this time. this does conclude today's conference call thank you for participating you may now disconnect
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