Alarm.com Holdings, Inc.

Standing by and welcome to the Alarm.com third 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 1-1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Matthew Zertman, Vice President, Investor Relations. Please go ahead, sir.

Good afternoon, everyone, and welcome to Alarm.com's third 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 and key assumptions related thereto, including with respect to the Vivint dispute, potential legal spend, and cost rationalization strategies. The impact of emerging market dynamics, trends, and anticipated market demand. The impact of the COVID pandemic, challenging global supply chain dynamics, and adverse macroeconomic conditions. Our business strategies, plans, and objectives, and integration of recent acquisitions and anticipated growth prospects of our Noonlight acquisition, 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 August 9th, 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 September 30th, 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. 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.

Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report another quarter of solid results. Our SAS and license revenue in the third quarter was $133.1 million up 12.8% over the same period last year. Our adjusted EBITDA in the third quarter was $40.8 million. I want to thank our service provider partners and the Alarm.com team for their continued strong performance. In my comments today, I'll update you on several new platform capabilities that expand our addressable market and talk a bit about our recent NoonLight acquisition. I'll also spend some time addressing the matter related to our patent license agreement with Vivint and close with some of the thinking that has gone into our initial look numbers for 2023. This quarter, we expanded the market for our alarm.com for business video solution with the introduction of third-party camera support. We estimate that our commercial video solution will now work with about 80% to 90% of third-party cameras that have been installed in mid-sized and large commercial settings since 2018. Supporting third-party cameras will make it easier for businesses to adopt our integrated solution without the cost of replacing all the existing installed video cameras. We can also leverage a wider diversity of commercial camera form factors and capabilities to expand the fit for our video solution. For example, We can now address the needs of businesses with specific requirements for pinhole, fisheye, thermal, and other camera types. To deploy this new capability, the Alarm.com video team leveraged technology created and widely deployed by our OpenEye team for enterprise commercial customers. It's a good portrayal of the ongoing synergies that our 2019 acquisition is producing. We also expanded the applications of our video solution with the introduction of escalated events. This software capability enables our partners monitoring stations to receive and respond to events generated by Alarm.com's suite of video analytics software. For example, when Alarm.com detects a person in a customer's backyard or in the parking lot of a business after hours, we can alert a monitoring station. A monitoring agent can then access video clips, and live video feeds from cameras enrolled in the service by the subscriber. The agent can evaluate the situation quickly and dispatch first responders as needed. Escalated events adds a new layer of proactive security protection for property owners. It also creates new opportunities and applications for professional monitoring services that our partners provide. Escalated Events expands our suite of software-based alarm signaling and emergency response capabilities. We believe we can create new markets for our partners to deliver professional monitoring services while also enhancing the value of services offered to the typical customer today. Our recent acquisition of NoonLight also gives us further scale in developing these opportunities in the emergency response space. NoonLight launched in 2013 as a personal safety mobile application and has organically attracted over 3.5 million users. During that time, the company's technology has evolved into a connected safety platform that enables context-aware event management and emergency response services. A range of market-leading brands and IoT device vendors integrate NoonLight services into their offerings. We saw a number of appealing things about NoonLight that led to our acquisition. First, NoonLight allows alarm.com to participate more broadly in the IoT market. NoonLight's fast-growing SaaS offering enables IoT device vendors to incorporate emergency response capabilities into their solutions. Many of these vendors provide devices as standalone products that have not traditionally been monitored by the security channel. Second, we see opportunities to leverage technology across the NoonLight and alarm.com platforms and create new markets for our service provider partners. For example, NoonLight's API simplifies the incorporation of emergency response services into nearly any IoT device. Integrating emergency response capabilities with existing products such as FlexIO, Connected Car, and shooter detection systems would meaningfully expand their use cases and value proposition. Lastly, Noonlight's founders and leadership team share many aspects of our management and technology philosophies. They are committed to a growth strategy driven by expanding their platform through R&D. Noonlight will continue to operate independently. The team will focus on exceeding the expectations of their current and prospective customers and expanding their services platform. Shifting gears, I want to address the VIVIT matter and how it relates to our initial look for 2023. As you know, VIVIT recently notified us that it will stop paying Alarm.com the royalty fees associated with the patent license agreement that we reached with VIVIT in 2013. We have filed for arbitration under our agreement. We expect the arbitration process which is confidential and not open to the public like traditional litigation, to take about 12 to 16 months. We intend to continue aggressively defending the investments we have made in our technology over the course of 20 years, including our global patent portfolio of over 600 issued patents and additional patents pending. As we previously disclosed regarding the Vivint Matter, Alarm.com believes that quarterly SAS and license revenue and total revenue will be impacted by approximately $6 million per quarter, beginning with the fourth quarter of 2022 and through 2023. The patent license revenue from Vivint was projected to grow somewhat more slowly than the rest of alarm.com's SAS revenue. In the first half of 2022, alarm.com's SAS and license revenue Excluding Vivint grew 14.7% year over year. As our longer term investors know, we typically conclude our third quarter call by providing an early initial look for how we think the business will perform in the following fiscal year. The emergence of the Vivint matter in the last few weeks has made that objective more challenging. Nonetheless, we are going to again provide our current thinking for the year ahead. Steve Valenzuela will speak further about our 2023 estimates in a few minutes, but I wanted to provide some commentary as well. For this year's initial look estimates, we have budgeted conservatively and assumed no license revenue from Vivint in 2023. We have also budgeted for potential significant additional legal expenses related to Vivint in the range of $16 million to $20 million in 2023. At this early stage, we do not know exactly what our legal costs will be in 2023. However, we do not want to find our legal options constrained by our budget or our financial outlook. We want to be positioned to deploy a full legal budget without surprising our investors next year. The combination of these potential expenses with the loss of patent and license revenues meaningfully impacts our 2023 adjusted EBITDA estimates. Unfortunately, these legal costs are not core to the business's operation, and at some point in the future when the matter is concluded, they will subside. Since receiving Vivint's notification, I've been asked several times, what adjustments are you going to make in the rest of the business? I've answered by saying that I liked our growth strategy before I heard from Vivint, and I still like our strategy today. This news doesn't change our core strategy in any way. In the last few years, we have successfully expanded the Alone.com platform and diversified our revenue streams. We've also increased our level of investment into R&D such that we are building for the future while also maintaining profitability. As a result, we have created strong businesses in commercial intrusion and access, residential and commercial video, and energy management. We have established toeholds in the HVAC channel, the multifamily housing segment, the active shooter detection vertical, and most recently with our acquisition of Noonlight, the non-traditional monitoring space. We've built an international business that now serves over 50 countries globally and installs over 200,000 systems annually. We've done all this while also continuing to treat our service provider partners as a top priority. Each of these businesses leveraged our competencies in IoT, AI, user-oriented design, and multi-tenant high-availability cloud SaaS. We have great teams in place in these areas too, and they are developing technology that does good things for people, keeping them safer, literally saving lives, making people more efficient, and reducing the energy footprints of individual properties and across entire communities. We believe that in each of these areas, we can build multi-hundred million dollar businesses. So I feel good about where we are headed and the strategy we plan to continue to pursue. We'll do some modest cost rationalization to enable us to produce ample cash even as we address litigation matters, but I don't see us changing our core strategies. In summary, I remain confident with our trajectory. I'm pleased with our third quarter results and with the execution of our plans throughout the year. I especially 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?