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spk20: Good day, and thank you for standing by. Welcome to the Alarm.com Q4 2023 earnings 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, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Matt Zartman, Vice President of Investor Relations. Please go ahead.
spk11: Good afternoon, everyone, and welcome to Alarm.com's fourth quarter and full year 2023 earnings conference call. Please note that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, our CEO, and Steve Valenzuela, our CFO. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our annual report on Form 10-K and our Form 8-K both of which will be filed shortly after this call with the SEC along with the associated press release. The call is subject to these risk factors and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or information which speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to the non-GAAP measures can be found in today's press release on our investor relations website. I'll now turn the call over to Steve Trundle. Steve?
spk03: Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report fourth quarter and four-year results that exceeded our expectations. Our SAS and license revenue in the fourth quarter was $148.3 million, up 10.3% over the last year. Our adjusted EBITDA for the quarter was $45.6 million. Despite some uncertainty throughout the year, we delivered solid, fast revenue growth by sharpening our focus on key initiatives. We also delivered record adjusted EBITDA and cash flow performance. I want to thank our service provider partners and our employees for their contributions to our 2023 performance. I'll focus my prepared remarks today on our long-term strategy. We believe that we have the right opportunities in our sights and the right plans to attack them. Our R&D program is positioned to leverage the growing universe of IoT data and to continue building innovative AI-based offerings that will empower our service provider partners and deliver unique value to end customers. We have transitioned from a focus on one primary market where we have been very successful, mainly the North American residential monitored security market, to a more diversified business serving a larger overall TAM. We've expanded into the video market, both commercial and residential, and the commercial access control and intrusion market. We developed an international business and cultivated new IoT-enabled growth businesses like Energy Hub. These growth initiatives collectively represented 31% of our total SAS revenue in 2023 and together grew 27% year over year. Let me kick through these various elements of our strategy. I'll start with the commercial market. We're attacking the market opportunity with a purpose-designed solution that deeply integrates access control, intrusion, and video monitoring into a single cohesive platform that the largest commercial integrators can leverage to solve their clients' multi-site requirements. We've made good progress in our R&D pipeline here. During 2023, we launched third-party camera support to enable our video solutions to operate with existing camera installations and originate additional SAS revenue. We also launched a new access control product called Cell Connector. It leverages our work with LTE cellular networks to connect the access door controller directly to the alarm.com platform rather than depending on an end customer's internal networks. OpenEye, our cloud-based video solution for large-scale commercial customers, launched new solutions during the year through its open ecosystem architecture. For example, Sales Connect is a new point-of-sale solution that integrates transaction data from the leading suppliers of point-of-sale systems. OpenEye triggers real-time alerts for point-of-sale exceptions, such as voids, refunds, and overrides, and retrieves the corresponding video of the transaction. OpenEye also integrated environmental sensors to launch a new solution that detects smoke from cigarettes and vapes, monitors temperature, humidity, and air quality, and detects sound anomalies. Both solutions are sold as an additional SAS module and significantly strengthen OpenEye's position in the retail, grocery, and quick serve restaurant verticals, as well as secondary schools. Shifting to our video business, we're deploying increasingly capable video analytics solutions. Importantly, we leverage our R&D investment in video and video analytics across our residential, commercial, and international businesses. Our goal is to take advantage of a significant shift in video-based monitoring technology that is underway. Traditional video systems operate only on premise and use legacy technology. These systems are being replaced, particularly in business properties. Our video solutions employ intelligent AI processors at the edge, coupled with flexible cloud-based software and storage, and additional layers of more refined cloud-resident video analytics capabilities. The market is competitive, but we believe we are in a strong position to capture share as the shift away from traditional systems continues to unfold. One area where you will see us extending our video capabilities further in 2024, is in the realm of proactive deterrence. In 2023, we launched a capability called Perimeter Guard. Perimeter Guard can already identify a person during times when the potential for trouble is greatest or when the subscriber is away, and then trigger a series of responses. Video cameras enabled with Perimeter Guard can emit audible warnings and strobe light responses. An escalated video event can also be sent directly to the monitoring station through our alarm response software. This enables monitoring station operators to view video feeds and talk down through the camera's onboard mic or via an external microphone so they can try to defuse a potential threat before escalating a step further by initiating a police response. Shifting to our international business, We are driving growth by supporting our international partners to fully operationalize alarm.com and deploy our solutions in the diverse range of commercial and residential markets they address worldwide. Last year's acquisition of EBS, a European-based business that designs and manufactures universal communicators, will significantly expand our support for our international partners. Universal communicators can work with a wide range of legacy control panels. Service providers can cost-effectively upgrade existing customers to alarm.com. EBS has been in business for 30 years, and its products support control panels that have been widely deployed in international markets. The final element of our growth strategy is the continued development of our growth venture businesses. These SAS-based businesses consist of Energy Hub, Building 36, Point Central, and Shooter Detection Systems. Each is developing innovative IoT-enabled applications that can further expand our TAM. As you know, these businesses are at various stages of development, with Energy Hub being the most mature. We expect these growth businesses to continue to increasingly contribute to our overall performance next year and become more efficient with scale. Next, I want to comment briefly on our EBITDA margin strategy. EBITDA is a choice that we make in our strategic planning cycles. One can choose between investing in the future health of the business or harvesting profits to produce cash today. I believe that producing meaningful, positive EBITDA while also making reasonable long-term investments inspires good operational discipline and allows the company to selectively evaluate both organic and inorganic opportunities. Our commitment to ongoing R&D investment into future opportunities is a cornerstone of our synergistic relationship with our 11,000-plus service provider partners who handle the bulk of the sales and marketing activities on our behalf. I have previously indicated that we have a long-term target range of adjusted EBITDA margin of 18%, assuming a similar mix of SaaS and hardware revenues and a similar go-to-market approach as we have today. Our target range remains unchanged, and as Steve Valenzuela will discuss shortly, our four-year adjusted EBITDA guidance for 2024 implies an adjusted EBITDA margin of 17.5%. Lastly, before I hand things over to Steve Valenzuela, I also want to briefly discuss the settlement of the VIVINT matter. In December, we announced that we entered into a long-term intellectual property license agreement under which Alarm.com will license to Viva our intellectual property portfolio. The revenues associated with the new license agreement are reflected in our guidance for 2024. We simultaneously settled all outstanding litigation matters between the companies. We are not able to share the details of this confidential settlement, and it will therefore be hard for us to answer detailed questions on this particular matter. But I can say that I believe that the outcome is a good one for alarm.com and its investors. To conclude, I'm pleased with our performance in 2023, and I'm excited about the year ahead in 2024. And with that, let me turn things over to Steve Valenzuela. Steve?
spk13: Thanks, Steve. I'll begin with a review of our fourth quarter and full year 2023 financial results and then provide guidance for 2024 before opening the call for questions. Fourth quarter SAS and license revenue of $148.3 million grew 10.3% from the same quarter last year. For the full year of 2023, SAS and license revenue of $569.2 million grew 9.4% over 2022. Non-GAAP SAS and license revenue, excluding Vivint license revenue, grew 13% in 2023 year over year. Our SAS and license revenue visibility remains high, with a revenue renewal rate of 94% in the fourth quarter. Part of another revenue grew 5.8% in Q4 2023, to $77.9 million, mainly driven by sales of video cameras. Total revenue of $226.2 million for the fourth quarter grew 8.7% from Q4 2022. For the full year of 2023, total revenue grew 4.6% year-over-year to $881.7 million. SAS and license growth margin for the fourth quarter remained solid at 84.6%, which is slightly down from 85.2% in the year-ago quarter, mainly due to mix. Hardware growth margin was 25% for the fourth quarter, up 610 basis points from 18.9% for Q4 2022, due mainly to the improvement in our supply chain and to a lesser extent, product mix. Total gross margin was 64.1% for the fourth quarter, up 230 basis points from 61.8% for Q4 2022, mainly due to the improvement in hardware margins. Turning to operating expenses, R&D expenses in the fourth quarter were $61.3 million compared to $57.4 million in the fourth quarter of 2022, mainly due to an increase in headcount and related compensation expenses as we continue to execute our growth strategies. We ended 2023 with 1,118 employees in R&D, up from 1,004 employees at the end of 2022. Total headcount increased to 1,989 employees for 2023 compared to 1,733 employees at the end of 2022. Sales and marketing expenses in the fourth quarter were $25.9 million, or 11.5 percent of total revenue, compared to $23.6 million, or 11.3 percent of revenue in the same quarter last year. Our G&A expenses in the fourth quarter were $24.2 million, compared to $25.4 million in the year-ago quarter down slightly due to lower legal costs. G&A expense in the fourth quarter includes non-ordinary court litigation expense of $1.1 million, down from $1.9 million for Q4 2022. Non-ordinary court litigation expenses are part of our adjusted measures and are excluded from the measurement of our non-GAAP financial performance. Non-GAAP adjusted EBITDA in the fourth quarter was $45.6 million compared to $39 million in Q4 2022. For all of 2023, adjusted EBITDA was $154 million, an increase of 4.8% from adjusted EBITDA of $146.8 million for 2022. In the fourth quarter, GAAP net income was $31.3 million compared to GAAP net income of $18.1 million for Q4 2022. Non-GAAP adjusted net income was $33.9 million, or $0.62 per diluted share in the fourth quarter, compared to $28.7 million, or $0.53 per share in the fourth quarter of 2022. GAAP net income for the full year of 2023 was $81 million, compared to GAAP net income of $56.3 million for 2022. Non-GAAP adjusted net income for 2023 was $113.2 million or $2.07 per diluted share compared to non-GAAP net income of $106.9 million or $1.95 per share for 2022. Turning to our balance sheet, We ended the fourth quarter with $697 million of cash and cash equivalents up from 622.2 million at December 31st, 2022. For all of 2023, we used $27.3 million to repurchase approximately 488,000 shares of our common stock. Through the 12 months ended December 31st, 2023, we generated $136 million of cash flow from operations up from $56.9 million for 2022. Our free cash flow for 2023 was $128.4 million compared to $28.3 million for 2022. These results were driven by a combination of an improvement in our working capital due to an easing of supply chain dynamics and increase in profit margins. Before turning to our financial outlook, I want to provide some additional context about the IP license agreement and settlement with Vivid. For Q4 2023, the agreement had no impact on our SAS and license revenue or on our non-GAAP financial results. Looking ahead to 2024, our guidance includes the expected contributions from the new agreement. With that said, I will now turn to our financial outlook. For the first quarter of 2024, we expect SAS and license revenue of $148.6 to $148.8 million. For the full year of 2024, we expect SAS and license revenue to be between $622.5 to $623.5 million. We are projecting total revenue for 2024 of $912.5 to $933.5 million, which includes estimated hardware and other revenue of $290 to $310 million. We estimate that adjusted EBITDA for 2024 will be between $160 to $164 million. We expect adjusted EBITDA in the first quarter of 2024 to represent approximately 22 to 23 percent of our annual guidance. Non-GAAP net income for 2024 is projected to be $116 to $118.1 million, or $2.10 to $2.14 per diluted share. EPS is based on an estimate of 55.2 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2024 to remain at 21 percent under current tax rules. I do want to point out, however, that some of our tax payments will be front-loaded for the new Section 174 requirement to capitalize R&D costs if Congress does not act to reverse this change in the tax code. We expect full-year 2024 stock-based compensation expense of $51 to $53 million. In summary, we are pleased with how well our service provider partners and internal teams have performed over the past year. We are focused on executing on our business plan and investing in our long-term strategy while continuing to deliver profitable growth. And with that, operator, please open the call for Q&A.
spk20: Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And one moment for our first question. Our first question will be coming from Alicia Barnes. Your line is open.
spk19: And one moment for our next question. Our next question will come in from Sackett Kalia of Barclays, and your line is open.
spk15: Okay, great. Hey, guys, thanks for taking my questions here. Nice result here, Steve Trundle and Steve Valenzuela. Thank you. Hey, Steve Valenzuela, maybe, yeah, absolutely. Steve Valenzuela, maybe to start with you, just to kind of hit Vivint up front, and I know we can't talk too much about it, but as we look at the revised 24 guide, Can you maybe just talk about how much of the increase in SAS revenue is coming from sort of better underlying fundamentals versus some of the litigation settlements? And along those same lines, maybe how should we kind of think about the lower litigation costs in 24 versus your prior expectations? Does that make sense?
spk13: Yes, Zach. Although you said the SAS revenue from litigation costs,
spk06: Did you mean the EBITDA or?
spk15: Yeah, the EBITDA. Yeah, like how much lower did the litigation cost go? Yeah, no, it's a very good point.
spk13: Yes, thank you. So when we released our Q3 results in November, we provided an initial look for 2004. And that was, of course, before the settlement. We've now provided guidance for 2024 for EBITDA that's about $13 million higher than what we gave on the initial look. And that's a combination of the Vivint settlement and also the strength of our business. I would say the Vivint settlement is the larger component of that, but we can't really break it out, as Steve talked about, given the confidentiality of that situation. The also important point to make is that the legal matters related to Vivint had gotten to the point at the end of the fourth quarter of last year where we would adjust those out of EBITDA. So there's no benefit to EBITDA in 2024 from that litigation matter being resolved. However, there is a significant cash flow benefit because we do expect lower legal costs. It's always very difficult to predict legal costs. And I would toot a horn a little bit here on the cash flow. This year, we believe cash flow could be about $150 million. Now, there is that there is that tax matter related to Section 174, where unless Congress acts and they're supposed to meet again in the next couple weeks, we would have about 70 million of tax payments in 24 related to the R&D capitalization, which front loads the taxes. So our net cash flow would be about 80 million, 85 million in 24, taking into account the 70 million. So the operating cash flow in 24 really is going to be about $150 million. So very similar to the cash flow we actually generated in 23 where we also made that tax payment around $35 million and we generated about $125 million of free cash flow in 23. So the business is generating a very good amount of cash. Does that answer your question?
spk15: Yeah, that does. That's super helpful detail actually. Steve Trundle, maybe from a follow-up for you, maybe on to a different topic, I was wondering if you could just talk about some of the early observations that you're seeing from ADT Google and its impact to the business. And just maybe remind us how you're sort of thinking about that impact in 24 and whether that's changed at all.
spk03: Sure. So, so far, the observations are we haven't seen impact from any roll out of the ADP Plus software. In terms of how we're looking at the year, we're building our models off of the publicly available estimates from ADP themselves, instead of speculating about any other time frame. So we're currently using the estimate that that transition will occur in the first and second quarter of this year, in the first half of the year. And therefore, that's how we've modeled the results there and the expectation there in our own guidance.
spk15: Got it. If I can just squeeze one last housekeeping question here for you, Steve Valenzuela. You know, every year there's a really helpful stat just on the annual subscribers. I think last year at the end of 22 was a little over 9 million. Do you have that rough number here for how we ended subscribers at the end of 2023? Generally,
spk13: The thing we've looked at at our business, it's changed so much given with NoonLive, with EBS, with commercial really not being indicative of the number of subscribers given that you have multiple locations. And so that's a metric that we don't feel that's really valuable anymore, so we've not really provided that. We think it's actually misleading. It actually understates the benefit of the commercial growth of our business, which is, you know, almost 10% of our SAS, I think it was 9.4% of our SAS revenue in the fourth quarter. And so it's really not a meaningful stat anymore.
spk14: Very helpful. Thanks, guys.
spk20: Thanks. And one moment for our next question. Our next question will be coming from Adam Norrison of Raymond James. Your line is open, Adam.
spk05: Hey, this is Adam Tyndall. I just wanted to maybe start, Steve Trundle, you mentioned the focus of this call was long-term strategy and that you were transitioning your focus to becoming a more diversified business. On that point, if you could maybe share some practical strategies that you're thinking about in terms of that increased focus. And I mention that because you're arguably at scale now in these areas and proven. Commercial, for example, might make sense to employ a more direct sales force. The growth businesses, you've got major reference customers like a Tesla. How do you capitalize on that? And you also have significant cash balance to overlay across this entire increased focus. So you could just maybe share some practical strategies that you're thinking about as you talk about that high-level topic. Thanks.
spk03: Yeah, good question, Adam. So practical and distinguishing commercial go-to-market from our residential go-to-market is... is worth doing because the relationship that one has with their partners is slightly different in the commercial side than the residential side. On the commercial side, our integrator partners expect us to do more marketing, more lead generation activity. I don't think we'll jump into a direct sales force that's at all competing with our with our partners, so that's definitely not in our plans. But some practical things we've been doing are doing a lot more sort of outbound calling to potential commercial clients, doing a lot more in the form of lead generation that then flows down to our commercial partners, and absorbing some of the costs associated with that, but trying to drive further growth there. And I think we'll continue to do that because thus far we've seen meaningful results from that.
spk05: Okay, and on the cash balance and priorities for that?
spk03: Oh, the second piece was on the... I'm sorry, the cash balance?
spk05: Yeah, the cash balance on the balance sheet and how that might... Oh, sure, sure, sure.
spk03: Yeah. I mean, the cash we have gives us an opportunity to be optimistic when we see things come along, and our primary... I guess our primary view is we want to retain that dry powder for the right opportunity if we see something on the corporate development side that makes sense. So that's sort of what we continue to look at. We don't feel like we have to go do any sort of deal with that balance, so we're able to sort of sit back and look at things that come up, see if they meet our criteria. Where we deploy, if we do deploy, I think really depends on the unique element of each opportunity that comes up. So for now, I'm just going to continue to preserve that capacity as a dry powder if the right thing comes along.
spk05: Okay. And I know that was a multi-parter for my first one. Sorry. But as a quick follow-up, one of the other things you talked about on this call was that the growth businesses are improving with scale. It sounded like the unit economics and margin profile. If I look at that, you finished 2023 with an EBITDA margin around 17.5, and this initial guidance implies kind of flattish year over year. I understand that you tend to be somewhat conservative, but help us maybe better appreciate that comment on benefits of scale because it's not as evident as we look at 2024. Sure.
spk03: I guess what I'd say first at this point in the year, we want to preserve the capacity to unleash more marketing activity, probably than what you saw from us in 2023. More brand building activity, particularly in the commercial, on the commercial side of the business. So when I say they're sort of at scale, that in a way, what we mean there is that they're converging, you know, and each business is different, but some are converging on the point where growth is still there, but cash burn is reduced. They're all at different sort of stages when we talk about the other segment. Energy Hub is closer to being at scale as an example. Noonlight probably not as close to being at scale as an example. So each one has sort of different characteristics, but on an overall basis, we think that the other segments, some of the businesses there are getting to scale. And in terms of how that flows up to the parent, I think I would just come back to we're going to continue to bring them along and focus on growth. And you'll probably see us this year go in a bit harder on the marketing and sales side than we have last year. If you go back to last year, we were sort of dealing with a surprise in our P&L, and we pulled on a lot of levers to try to maintain sort of a certain direction with the ship, if you will. Some of that pressure is off, so we want to go back to focusing on how do we grow the business.
spk17: Thank you.
spk03: Yep.
spk20: And one moment for our next question. And our next question will be coming from Michael Funk of Bank of America. Michael, your line is open.
spk10: Great. Thank you for taking the questions tonight. A couple if I could, please. Just on the use of cash question, again, I wanted to drill down a bit. Should we think about potential strategic uses overlaying with the priorities that you mentioned earlier, the growth venture businesses, international, and some of the other capabilities, or how should we think about that, I guess, is the question.
spk03: Yeah, I think that's a good starting point is looking at some of those priorities that I mentioned in my prepared remarks, the commercial piece, the video piece, video analytics, potentially other growth domains like multifamily or the energy business. So those are all places where we're surveying for opportunity. I would say that, you know, the criteria that one applies to opportunities change with the cost of capital. while we still have a pretty low cost of capital, we evaluate each opportunity against today's cost of capital and whether we think the opportunity to sort of be a good fit with our overall strategy would be good for our investors. So probably the bar is raised a tad this year versus two years ago in terms of what meets our criteria. But we continue to look. I wouldn't say that we want consider something that comes up in our core business domain, but I'd say probably the places we're surveying the market more broadly are in those growth areas. If you look at some of the tuck-ins like last year, the EBS acquisition was focused on our international business as an example. The venture acquisition was focused on our video analytics strategy. So you can kind of see a pattern there of us building out the diversity of our TAM and of our go-to-market by strengthening some of the areas that are more new to us than our core business.
spk10: Sure. And then just quickly on AI, you spoke about in the past that AI is a potential monetization opportunity. Just hoping to get an update on your thinking for AI and the potential for that to drive ARPU and top line.
spk03: Yeah, the good news is it's sort of already happening at some level. AI is a very broad category to us. There are two places where it sort of intersects with our business. One is the efficiency and how we handle a lot of the communications to our partners and how we handle support calls, how we put together documents, those type of things. So you can drive some additional efficiency there. The other is more on the RevGen side, where to us AI is what are we doing, how are we using intelligence to get more content from the millions of video cameras that we have deployed in the world. And if you're getting more content, not just content, but more useful content, then you're able to derive higher revenue per channel Increasingly, by the way, our pricing when we talk is increasingly more of a per-channel type of model. So the opportunity is sort of here today, and we're leveraging what we see to drive increasingly sophisticated use cases on each video unit that we see installed. Great. Thank you for the time and the color.
spk20: Sure. And one moment for our next question. Our next question is coming from Darren Toffee of Roth MKM. Your line's open.
spk04: Hey, guys. Thank you. My question's in the next quarter. Two, if I may. First, on the growth opportunities, you kind of talked about commercial energy and video making up 31%, I think growing 27% year-on-year. Like, what are the underlying assumptions in your 2024 outlook? Does that growth decelerate, or has it become a bigger mix shift and kind of retain that growth characteristic? Any color on that would be helpful.
spk13: Yeah, I think, Darren, we're probably looking at that growth continuing in 2024. I mean, typically when we do guide, we have to be conservative, so probably backing off a little bit on that growth in our guide. But we're seeing good growth there in commercial and video, video analytics, energy hub, as you mentioned, which are in those growth segments. But again, in the guide, we have to be somewhat conservative there, so probably backing off a little bit on that in 2024.
spk04: Great. And then it seems like everyone's raising prices. I'm just curious, when was the last time you guys did a price increase and any kind of thoughts about that going forward?
spk03: Thank you. The last time we did a price increase, they're sort of happening all the time. But the last time we announced a price increase was in the fourth quarter of 2023. Hardware's stabilized, I would say, so haven't seen as much there lately. And you see with the margin profile that Steve reported, probably less pressure on the hardware side with improvements in the supply chain. On the services side, though, there's sort of a need to just sort of recognize that in an inflationary environment, there has to be some price increase component.
spk20: Okay.
spk19: And one moment for our next question. Our next question will come from Corey Carpenter of JPMorgan.
spk20: Corey, your line's open.
spk22: Hey, thanks. I have two. Just first wanted to ask about hardware trends. You called out slowing the commercial segment last quarter. Curious what you've seen more recently and how that was incorporated into your your 24 outlook. And then just to clarify on the guide, I guess to ask directly, would you have raised your 24 guidance without the Vivint settlement or any assumptions around ADT? Thank you.
spk03: Hey, Corey. This is Steve. So I'll start with the last question. Historically, if you look at sort of the standard practice between our initial look and our Q4 report, Generally, we've been able to gain additional sort of visibility into the business during the last three months of the year and raise the guide, some coming into the four-year guide. So I would say even absent those two matters you mentioned, that likely would have occurred this year. As it relates to the hardware piece, I guess what I'd say there is we continue, you know, the fourth quarter we saw some stability on the hardware side. Roughly came in about within what we had guided for a range. It's, we're seeing right now sort of a low, pretty low point in terms of the amount of hardware that is in the channel relative to what the install rate traditionally is. So we're trying to sort of adjudicate, is the channel just becoming more efficient and moving to a much lower inventory profile permanently? Or are we sort of at an interesting point in time where the density of hardware in the channel is just unusually low? We're not real sure yet. But until we figure that out, we want to be judicious with our hardware guide. And we looked at that when we put together the number of the year.
spk21: Okay, great, thank you. Thanks.
spk19: One moment for our next question.
spk20: Our next question will be coming from Jack Sander-Arndt of Maxim Group. Your line is open.
spk09: Okay, great. Thanks, Steve T., Steve V. Great to see strong results, raised outlook. I'll start with a question for Steve Trundle. Can you speak to your dealer channel partners and just, you know, what's the overall sentiment and kind of morale of the channel overall and just how are they navigating the current competitive environment? Just any updates there from your channel.
spk03: Sure. No, it's a great, good question. Cause I already this year have been out to a few dealer events. So I've got a kind of a fresh feel for what the sentiment is and, And I would say generally they're very, you have to break, I mean, our channel is big. We have lots and lots of service providers. Most recently I've spent a lot of time with the mid-sized, smaller service providers. They provide a lot of ballast in our business and represent the bulk of our service providers. There's a lot of kind of encouraging, the morale is very good there, I would say. There's lots of opportunities, particularly as video moves to the cloud, lots of commercial locations that want to upgrade, take advantage of new analytic capabilities, take advantage of new remote monitoring capabilities. So the wealth of things that they're able to sell today that are desired by the customer. I'd say this has just generally been a trend over the last five years, which is what most of those service providers are selling today is actually something that the customer really wants and is desirable, especially with the capabilities that are enabled with video analytics, with the cloud access control piece. So the excitement seemed to be there. Now, when you get into other parts of the market that are focused more on residential mass market, I would say it's a tad more neutral is the sentiment at the moment. Wondering what's going to happen with the economy, what's going to happen with moves, what's going to happen with new home starts, those type of sort of macroeconomic concerns create probably a bit more of a neutral stance there. But overall, I'd say folks are mostly upbeat.
spk07: Great. That's helpful. That's helpful, Collier. Thanks, Steve.
spk09: And maybe just a question for Steve Valenzuela. I appreciate, understand you're not providing the total subscriber count at the end of the year, but, you know, something that would just be helpful maybe if you can. Can you speak to anything in terms of international connected properties or international SaaS revenue as a percentage of the overall? I think you said commercial was about, you know, 9.4%, something near 10% of the SaaS revenue. Just anything you could provide from a, subscriber growth or subscriber count or percentage of revenues for international and commercial?
spk13: Yeah, international is actually 4% of our total revenue. International continues to do well. It grew about, the international staff's revenue in 23 grew about 25% year over year. And so we're, you know, there's, With EBS especially, we're excited about the opportunity going forward with the communicator that's going to be coming on this year, so we think there's quite a few opportunities there internationally. And commercial, as you mentioned, commercial actually grew quite well in 23 as well, and it was about 9.4% of the total sales.
spk09: Got you. So just to clarify, international about 4% of total revenue and up around 25% commercial revenue, about 9.5% of total SaaS revenue, and growing very sharp.
spk18: Okay. Well, great to hear, guys.
spk09: Thank you.
spk18: I'll hop back in with you.
spk13: International SaaS is 25% year over year. Yeah. Sorry, quite a few numbers there to mix up. Yeah, because we disclose international revenue in our Ks and Qs.
spk08: Got you. I appreciate the color. Thank you. Sure.
spk20: As a reminder, if you would like to ask a question, please press star 11 on your telephone and wait for your name to be announced. Again, please press star 11 for any additional questions.
spk19: And I'm showing no further questions.
spk20: This concludes today's conference call. Thank you for participating. You may now disconnect.
spk21: Thank you. Music. Music. you Bye. Thank you.
spk20: Good day, and thank you for standing by. Welcome to the Alarm.com Q4 2023 earnings 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, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Matt Zartman, Vice President of Investor Relations. Please go ahead.
spk11: Good afternoon, everyone, and welcome to Alarm.com's fourth quarter and full year 2023 earnings conference call. Please note that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, our CEO, and Steve Valenzuela, our CFO. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our annual report on Form 10-K and our Form 8-K both of which will be filed shortly after this call with the SEC along with the associated press release. The call is subject to these risk factors and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or information which speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to the non-GAAP measures can be found in today's press release on our investor relations website. I'll now turn the call over to Steve Trundle. Steve?
spk03: Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report fourth quarter and four-year results that exceeded our expectations. Our SAS and license revenue in the fourth quarter was $148.3 million, up 10.3% over the last year. Our adjusted EBITDA for the quarter was $45.6 million. Despite some uncertainty throughout the year, we delivered solid, fast revenue growth by sharpening our focus on key initiatives. We also delivered record adjusted EBITDA and cash flow performance. I want to thank our service provider partners and our employees for their contributions to our 2023 performance. I'll focus my prepared remarks today on our long-term strategy. We believe that we have the right opportunities in our sights and the right plans to attack them. Our R&D program is positioned to leverage the growing universe of IoT data and to continue building innovative AI-based offerings that will empower our service provider partners and deliver unique value to end customers. We have transitioned from a focus on one primary market where we have been very successful, mainly the North American residential monitored security market, to a more diversified business serving a larger overall TAM. We've expanded into the video market, both commercial and residential, and the commercial access control and intrusion market. We developed an international business and cultivated new IoT-enabled growth businesses like Energy Hub. These growth initiatives collectively represented 31% of our total SAS revenue in 2023 and together grew 27% year over year. Let me kick through these various elements of our strategy. I'll start with the commercial market. We are attacking the market opportunity with a purpose-designed solution that deeply integrates access control, intrusion, and video monitoring into a single cohesive platform that the largest commercial integrators can leverage to solve their clients' multi-site requirements. We've made good progress in our R&D pipeline here. During 2023, we launched third-party camera support to enable our video solutions to operate with existing camera installations and originate additional SAS revenue. We also launched a new access control product called Cell Connector. It leverages our work with LTE cellular networks to connect the access door controller directly to the alarm.com platform rather than depending on an end customer's internal networks. OpenEye, our cloud-based video solution for large-scale commercial customers, launched new solutions during the year through its open ecosystem architecture. For example, Sales Connect is a new point-of-sale solution that integrates transaction data from the leading suppliers of point-of-sale systems. OpenEye triggers real-time alerts for point-of-sale exceptions, such as voids, refunds, and overrides, and retrieves the corresponding video of the transaction. OpenEye also integrated environmental sensors to launch a new solution that detects smoke from cigarettes and vapes, monitors temperature, humidity, and air quality, and detects sound anomalies. Both solutions are sold as an additional SAS module and significantly strengthen OpenEye's position in the retail, grocery, and quick serve restaurant verticals, as well as secondary schools. Shifting to our video business, we're deploying increasingly capable video analytics solutions. Importantly, we leverage our R&D investment in video and video analytics across our residential, commercial, and international businesses. Our goal is to take advantage of a significant shift in video-based monitoring technology that is underway. Traditional video systems operate only on premise and use legacy technology. These systems are being replaced, particularly in business properties. Our video solutions employ intelligent AI processors at the edge, coupled with flexible cloud-based software and storage, and additional layers of more refined cloud-resident video analytics capabilities. The market is competitive, but we believe we are in a strong position to capture share as the shift away from traditional systems continues to unfold. One area where you will see us extending our video capabilities further in 2024, is in the realm of proactive deterrence. In 2023, we launched a capability called Perimeter Guard. Perimeter Guard can already identify a person during times when the potential for trouble is greatest or when the subscriber is away, and then trigger a series of responses. Video cameras enabled with Perimeter Guard can emit audible warnings and strobe light responses. An escalated video event can also be sent directly to the monitoring station through our alarm response software. This enables monitoring station operators to view video feeds and talk down through the camera's onboard mic or via an external microphone so they can try to defuse a potential threat before escalating a step further by initiating a police response. Shifting to our international business, We are driving growth by supporting our international partners to fully operationalize alarm.com and deploy our solutions in the diverse range of commercial and residential markets they address worldwide. Last year's acquisition of EBS, a European-based business that designs and manufactures universal communicators, will significantly expand our support for our international partners. Universal communicators can work with a wide range of legacy control panels. Service providers can cost-effectively upgrade existing customers to alarm.com. EBS has been in business for 30 years, and its products support control panels that have been widely deployed in international markets. The final element of our growth strategy is the continued development of our growth venture businesses. These SAS-based businesses consist of Energy Hub, Building 36, Point Central, and Shooter Detection Systems. Each is developing innovative IoT-enabled applications that can further expand our TAM. As you know, these businesses are at various stages of development, with Energy Hub being the most mature. We expect these growth businesses to continue to increasingly contribute to our overall performance next year and become more efficient with scale. Next, I want to comment briefly on our EBITDA margin strategy. EBITDA is a choice that we make in our strategic planning cycles. One can choose between investing in the future health of the business or harvesting profits to produce cash today. I believe that producing meaningful, positive EBITDA while also making reasonable long-term investments inspires good operational discipline and allows the company to selectively evaluate both organic and inorganic opportunities. Our commitment to ongoing R&D investment into future opportunities is a cornerstone of our synergistic relationship with our 11,000-plus service provider partners who handle the bulk of the sales and marketing activities on our behalf. I have previously indicated that we have a long-term target range of adjusted EBITDA margin of 18%, assuming a similar mix of SaaS and hardware revenues and a similar go-to-market approach as we have today. Our target range remains unchanged, and as Steve Valenzuela will discuss shortly, our four-year adjusted EBITDA guidance for 2024 implies an adjusted EBITDA margin of 17.5%. Lastly, before I hand things over to Steve Valenzuela, I also want to briefly discuss the settlement of the VIVINT matter. In December, we announced that we entered into a long-term Intellectual Property License Agreement under which Alarm.com will license to Vivint our Intellectual Property Portfolio. The revenues associated with the new license agreement are reflected in our guidance for 2024. We simultaneously settled all outstanding litigation matters between the companies. We are not able to share the details of this confidential settlement, and it will therefore be hard for us to answer detailed questions on this particular matter. But I can say that I believe that the outcome is a good one for alarm.com and its investors. To conclude, I'm pleased with our performance in 2023, and I'm excited about the year ahead in 2024. And with that, let me turn things over to Steve Valenzuela. Steve?
spk13: Thanks, Steve. I'll begin with a review of our fourth quarter and full year 2023 financial results and then provide guidance for 2024 before opening the call for questions. Fourth quarter SAS and license revenue of $148.3 million grew 10.3 percent from the same quarter last year. For the full year of 2023, SAS and license revenue of $569.2 million grew 9.4% over 2022. Non-GAAP SAS and license revenue, excluding Vivint license revenue, grew 13% in 2023 year over year. Our SAS and license revenue visibility remains high, with a revenue renewal rate of 94% in the fourth quarter. Part of another revenue grew 5.8% in Q4 2023, to $77.9 million, mainly driven by sales of video cameras. Total revenue of $226.2 million for the fourth quarter grew 8.7% from Q4 2022. For the full year of 2023, total revenue grew 4.6% year-over-year to $881.7 million. DAS and license growth margin for the fourth quarter remained solid at 84.6%, which is slightly down from 85.2% in the year-ago quarter, mainly due to mix. Hardware growth margin was 25% for the fourth quarter, up 610 basis points from 18.9% for Q4 2022, due mainly to the improvement in our supply chain and to a lesser extent, product mix. Total gross margin was 64.1% for the fourth quarter, up 230 basis points from 61.8% for Q4 2022, mainly due to the improvement in hardware margins. Turning to operating expenses, R&D expenses in the fourth quarter were $61.3 million compared to $57.4 million in the fourth quarter of 2022, mainly due to an increase in headcount and related compensation expenses as we continue to execute our growth strategies. We ended 2023 with 1,118 employees in R&D, up from 1,004 employees at the end of 2022. Total headcount increased to 1,989 employees for 2023 compared to 1,733 employees at the end of 2022. Sales and marketing expenses in the fourth quarter were 25.9 million, or 11.5 percent of total revenue, compared to 23.6 million, or 11.3 percent of revenue, in the same quarter last year. Our G&A expenses in the fourth quarter were 24.2 million, compared to 25.4 million in the year-ago quarter down slightly due to lower legal costs. G&A expense in the fourth quarter includes non-ordinary court litigation expense of $1.1 million down from $1.9 million for Q4 2022. Non-ordinary court litigation expenses are part of our adjusted measures and are excluded from the measurement of our non-GAAP financial performance. Non-GAAP adjusted EBITDA in the fourth quarter was $45.6 million compared to $39 million in Q4 2022. For all of 2023, adjusted EBITDA was $154 million, an increase of 4.8% from adjusted EBITDA of $146.8 million for 2022. In the fourth quarter, GAAP net income was $31.3 million compared to GAAP net income of $18.1 million for Q4 2022. Non-GAAP adjusted net income was $33.9 million or $0.62 per diluted share in the fourth quarter compared to $28.7 million or $0.53 per share in the fourth quarter of 2022. GAAP net income for the full year of 2023 was $81 million compared to GAAP net income of $56.3 million for 2022. Non-GAAP adjusted net income for 2023 was $113.2 million or $2.07 per diluted share compared to non-GAAP net income of $106.9 million or $1.95 per share for 2022. Turning to our balance sheet, We ended the fourth quarter with $697 million of cash and cash equivalents up from 622.2 million at December 31st, 2022. For all of 2023, we used $27.3 million to repurchase approximately 488,000 shares of our common stock. Through the 12 months ended December 31st, 2023, we generated $136 million of cash flow from operations up from $56.9 million for 2022. Our free cash flow for 2023 was $128.4 million compared to $28.3 million for 2022. These results were driven by a combination of an improvement in our working capital due to an easing of supply chain dynamics and increase in profit margins. Before turning to our financial outlook, I want to provide some additional context about the IP license agreement and settlement with Vivid. For Q4 2023, the agreement had no impact on our SAS and license revenue or on our non-GAAP financial results. Looking ahead to 2024, our guidance includes the expected contributions from the new agreement. With that said, I will now turn to our financial outlook. For the first quarter of 2024, we expect SAS and license revenue of $148.6 to $148.8 million. For the full year of 2024, we expect SAS and license revenue to be between $622.5 to $623.5 million. We are projecting total revenue for 2024 of $912.5 to $933.5 million, which includes estimated hardware and other revenue of $290 to $310 million. We estimate that adjusted EBITDA for 2024 will be between $160 to $164 million. We expect adjusted EBITDA in the first quarter of 2024 to represent approximately 22 to 23 percent of our annual guidance. Non-GAAP net income for 2024 is projected to be $116 to $118.1 million, or $2.10 to $2.14 per diluted share. EPS is based on an estimate of 55.2 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2024 to remain at 21% under current tax rules. I do want to point out, however, that some of our tax payments will be front-loaded for the new Section 174 requirement to capitalize R&D costs if Congress does not act to reverse this change in the tax code. We expect full-year 2024 stock-based compensation expense of $51 to $53 million. In summary, we are pleased with how well our service provider partners and internal teams have performed over the past year. We are focused on executing on our business plan and investing in our long-term strategy while continuing to deliver profitable growth. And with that, operator, please open the call for Q&A.
spk20: Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And one moment for our first question. Our first question will be coming from Alicia Barnes. Your line is open.
spk19: And one moment for our next question. Our next question will come in from Sackett Kalia of Barclays, and your line is open.
spk15: Okay, great. Hey, guys, thanks for taking my questions here. Nice result here, Steve Trundle and Steve Valenzuela. Thank you. Hey, Steve Valenzuela, maybe, yeah, absolutely. Steve Valenzuela, maybe to start with you, just to kind of hit Vivint up front, and I know we can't talk too much about it, but as we look at the revised 24 guide, Can you maybe just talk about how much of the increase in SAS revenue is coming from sort of better underlying fundamentals versus some of the litigation settlements? And along those same lines, maybe how should we kind of think about the lower litigation costs in 24 versus your prior expectations? Does that make sense?
spk13: Yes, Zach. Although you said the SAS revenue from litigation costs?
spk06: Did you mean the EBITDA or?
spk15: Yeah, the EBITDA. Yeah, like how much lower did the litigation cost go? Yeah, no, it's a very good point.
spk13: Yes, thank you. So when we released our Q3 results in November, we provided an initial look for 2004. And that was, of course, before the settlement. We've now provided guidance for 2024 for EBITDA that's about $13 million higher than what we gave on the initial look. And that's a combination of the Vivint settlement and also the strength of our business. I would say the Vivint settlement is the larger component of that, but we can't really break it out, as Steve talked about, given the confidentiality of that situation. The also important point to make is that the legal matters related to Vivint had gotten to the point at the end of the fourth quarter of last year where we would adjust those out of EBITDA. So there's no benefit to EBITDA in 2024 from that litigation matter being resolved. However, there is a significant cash flow benefit because we do expect lower legal costs. It's always very difficult to predict legal costs. And I would toot a horn a little bit here on the cash flow. This year, we believe cash flow could be about $150 million. Now, there is that there is that tax matter related to Section 174, where unless Congress acts and they're supposed to meet again in the next couple weeks, we would have about 70 million of tax payments in 24 related to the R&D capitalization, which front loads the taxes. So our net cash flow would be about 80 million, 85 million in 24, taking into account the 70 million. So the operating cash flow in 24 really is going to be about $150 million. So very similar to the cash flow we actually generated in 23, where we also made that tax payment around $35 million, and we generated about $125 million of free cash flow in 23. So the business is generating a very good amount of cash. Does that answer your question?
spk15: Yeah, that does. That's super helpful detail, actually. Steve Trundle, maybe from a follow-up for you, maybe on to a different topic, I was wondering if you'd just talk about some of the early observations that you're seeing from ADT Google and its impact to the business. And just maybe remind us how you're sort of thinking about that impact in 24 and whether that's changed at all.
spk03: Sure. So, so far, the observations are we haven't seen impact from the – rolled out of the ADP Plus software. In terms of how we're looking at the year, we're building our models off of the publicly available estimates from ADP themselves, instead of speculating about any other time frame. So we're currently using the estimate that that transition will occur in the first and second quarter of this year, in the first half of the year. And therefore, that's how we've modeled the results there and the expectation there in our own guidance.
spk15: Got it. If I can just squeeze one last housekeeping question here for you, Steve Valenzuela. You know, every year there's a really helpful stat just on the annual subscribers. I think last year at the end of 22 was a little over 9 million. Do you have that rough number here for how we ended subscribers at the end of 2023? The SACA generally...
spk13: The thing we've looked at at our business, it's changed so much given with NoonLive, with EBS, with commercial really not being indicative of the number of subscribers given that you have multiple locations. And so that's a metric that we don't feel that's really valuable anymore, so we've not really provided that. We think it's actually misleading. It actually understates the benefit of the commercial growth of our business, which is, you know, almost 10% of our SAS, I think it was 9.4% of our SAS revenue in the fourth quarter. And so it's really not a meaningful stat anymore.
spk14: Very helpful. Thanks, guys.
spk13: Thanks.
spk20: And one moment for our next question. Our next question will be coming from Adam Norrison of Raymond James. Your line is open, Adam.
spk05: Hey, this is Adam Tyndall. I just wanted to maybe start, Steve Trundle, you mentioned the focus of this call was long-term strategy and that you were transitioning your focus to becoming a more diversified business. On that point, if you could maybe share some practical strategies that you're thinking about in terms of that increased focus. And I mention that because you're arguably at scale now in these areas and proven. Commercial, for example, might make sense to employ a more direct sales force. The growth businesses, you've got major reference customers like a Tesla. How do you capitalize on that? And you also have significant cash balance to overlay across this entire increased focus. So you could just maybe share some practical strategies that you're thinking about as you talk about that high-level topic. Thanks.
spk03: Yeah, good question, Adam. So practical and distinguishing commercial from our commercial go-to-market from our residential go-to-market is... is worth doing because the relationship that one has with their partners is slightly different in the commercial side than the residential side. On the commercial side, our integrator partners expect us to do more marketing, more lead generation activity. I don't think we'll jump into a direct sales force that's at all competing with our with our partners, so that's definitely not in our plans. But some practical things we've been doing are doing a lot more sort of outbound calling to potential commercial clients, doing a lot more in the form of lead generation that then flows down to our commercial partners, and absorbing some of the costs associated with that, but trying to drive further growth there. And I think we'll continue to do that because thus far we've seen meaningful results from that.
spk05: Okay, and on the cash balance and priorities for that?
spk03: The second piece was on the, I'm sorry, the cash balance?
spk05: Yeah, the cash balance on the balance sheet and how that might... Oh, sure, sure, sure.
spk03: Yeah. I mean, the cash we have gives us an opportunity to be optimistic when we see things come along, and our primary... I guess our primary view is we want to retain that dry powder for the right opportunity if we see something on the corporate development side that makes sense. So that's sort of what we continue to look at. We don't feel like we have to go do any sort of deal with that balance, so we're able to sort of sit back and look at things that come up, see if they meet our criteria. Where we deploy, if we do deploy, I think really depends on the unique element of each opportunity that comes up. So for now, just going to continue to preserve that capacity as a dry powder if the right thing comes along.
spk05: Okay. And I know that was a multi-parter for my first one. Sorry. But as a quick follow-up, one of the other things you talked about on this call was that the growth businesses are improving with scale. And it sounded like the unit economics and margin profile. If I look at that, you finished 2023 with an EBITDA margin around 17.5, and this initial guidance implies kind of flattish year over year. I understand that you tend to be somewhat conservative, but help us maybe better appreciate that comment on benefits of scale because it's not as evident as we look at 2024. Sure.
spk03: I guess what I'd say first at this point in the year, we want to preserve the capacity to unleash more marketing activity, probably than what you saw from us in 2023. More brand building activity, particularly on the commercial side of the business. So when I say they're sort of at scale, in a way, what we mean there is that they're converging. Each business is different, but some are converging on the point where growth is still there, but cash burn is reduced. They're all at different sort of stages when we talk about the other segment. Energy Hub is closer to being at scale as an example. Noon Light probably not as close to being at scale as an example. So each one has sort of different characteristics, but on an overall basis we think that the other segments, some of the businesses there are getting to scale. And in terms of how that flows up to the parent, I think I would just come back to we're going to continue to bring them along and focus on growth. And you'll probably see us this year go in a bit harder on the marketing and sales side than we have last year. If you go back to last year, we were sort of dealing with a surprise in our P&L, and we pulled out a lot of levers to try to maintain sort of a certain direction with the ship, if you will. Some of that pressure is off, so we want to go back to focusing on how do we grow the business.
spk17: Thank you.
spk03: Yep.
spk20: And one moment for our next question. And our next question will be coming from Michael Funk of Bank of America. Michael, your line is open.
spk10: Great. Thank you for taking the questions tonight. A couple if I could, please. Just on the use of cash question, again, I wanted to drill down a bit. Should we think about potential strategic uses overlaying with the priorities that you mentioned earlier, the growth venture businesses, international, and some of the other capabilities, or how should we think about that, I guess, is the question.
spk03: Yeah, I think that's a good starting point is looking at some of those priorities that I mentioned in my prepared remarks, the commercial piece, video piece, video analytics, potentially other growth domains like multifamily or the energy business. So those are all places where we're surveying for opportunity. I would say that, you know, the criteria that one applies to opportunities change with the cost of capital. While we still have a pretty low cost of capital, we evaluate each opportunity against today's cost of capital and whether we think the opportunity would be a good fit with our overall strategy and be good for our investors. So probably the bar is raised a tad this year versus two years ago in terms of what meets our criteria. But we continue to look. I wouldn't say that we won't. consider something that comes up in our core business domain, but I'd say probably the places we're surveying the market more broadly are in those growth areas. If you look at some of the tuck-ins like last year, the EBS acquisition was focused on our international business as an example. The venture acquisition was focused on our video analytics strategy. So you can kind of see a pattern there of us building out the diversity of our TAM and of our go-to-market by strengthening some of the areas that are more new to us than our core business.
spk10: Sure. And then just quickly on AI, as Steve spoke about in the past, AI is a potential monetization opportunity. Just hoping to get an update on your thinking for AI and the potential for that to drive ARPU and top line.
spk03: Yeah, the good news is it's sort of already happening at some level. AI is a very broad category to us. There are two places where it sort of intersects with our business. One is the efficiency and how we handle a lot of the communications to our partners and how we handle support calls, how we put together documents, those type of things. So you can drive some additional efficiency there. The other is more on the RevGen side, where to us AI is what are we doing, how are we using intelligence to get more content from the millions of video cameras that we have deployed in the world. And if you're getting more content, not just content, but more useful content, then you're able to derive higher revenue per channel Increasingly, by the way, our pricing when we talk is increasingly more of a per-channel type of model. So the opportunity is sort of here today, and we're leveraging what we see to drive increasingly sophisticated use cases on each video unit that we see installed.
spk10: Great. Thank you for the time and the color.
spk20: Sure. And one moment for our next question. Our next question is coming from Darren Toffee of Roth MKM. Your line's open.
spk04: Hey, guys. Thank you. My question's in the next quarter. Two, if I may. First, on the growth opportunities, you kind of talked about commercial energy and video making up 31%. I think we're on 27% year-on-year. Like, what are the underlying assumptions in your 2024 outlook? Does that growth decelerate, or has it become a bigger mix shift and kind of retain that growth characteristic? Any color on that would be helpful.
spk13: Yeah, I think, Darren, we're probably looking at that growth continuing in 2024. I mean, typically when we do guide, we have to be conservative, so probably backing off a little bit on that growth in our guide. But we're seeing good growth there in commercial and video, video analytics, energy hub, as you mentioned, which are in those growth segments. But again, in the guide, we have to be somewhat conservative there, so probably backing off a little bit on that in 2024.
spk04: Great. And then it seems like everyone's raising prices. I'm just curious, when was the last time you guys did a price increase and any kind of thoughts about that going forward?
spk03: Thank you. The last time we did a price increase, they're sort of happening all the time. But the last time we announced a price increase was in the fourth quarter of 2023. Hardware's stabilized, I would say, so haven't seen as much there lately. And you see with the margin profile that Steve reported, probably less pressure on the hardware side with improvements in the supply chain. On the services side, though, there's sort of a need to just sort of recognize that in an inflationary environment, there has to be some price increase component.
spk20: Okay.
spk19: And one moment for our next question. Our next question will come from Corey Carpenter of JPMorgan.
spk20: Corey, your line's open.
spk22: Hey, thanks. I have two. Just first wanted to ask about hardware trends. You called out slowing the commercial segment last quarter. Curious what you've seen more recently and how that was incorporated into your your 24 outlook. And then just to clarify on the guide, I guess to ask directly, would you have raised your 24 guidance without the Vivint Settlement or any assumptions around ADT?
spk21: Thank you.
spk03: Hey, Corey. This is Steve. So I'll start with the last question. Historically, if you look at sort of the standard practice between our initial look and our Q4 report, Generally, we've been able to gain additional sort of visibility into the business during the last three months of the year and raise the guide, some coming into the four-year guide. So I would say even absent those two matters you mentioned, that likely would have occurred this year. As it relates to the hardware piece, I guess what I'd say there is we continue, you know, the fourth quarter we saw some stability on the hardware side, roughly came in about within what we had guided for a range. It's, we're seeing right now sort of a low, a pretty low point in terms of the amount of hardware that is in the channel relative to what the install rate traditionally is. So we're trying to sort of adjudicate, is the channel just becoming more efficient and moving to a much lower inventory profile permanently? Or are we sort of at an interesting point in time where the density of hardware in the channel is just unusually low? We're not real sure yet. But until we figure that out, we want to be judicious with our hardware guide. And we looked at that when we put together the number of the year.
spk21: Okay, great, thank you. Thanks.
spk19: One moment for our next question.
spk20: Our next question will be coming from Jack Sander R. of Maxim Group. Your line's open.
spk09: Okay, great. Thanks, Steve T., Steve V. Great to see strong results, raised outlook. I'll start with a question for Steve Trundle. Can you speak to your dealer channel partners and just, you know, what's the overall sentiment and kind of morale of the channel overall and just how are they navigating the current competitive environment? Just any updates there from your channel?
spk03: Sure. No, it's a good question because I already this year have been out to a few dealer events, so I've got kind of a fresh feel for what the sentiment is. And I would say generally they're very, you know, you have to break, I mean, our channel is big. We have lots and lots of service providers. Most recently I've spent a lot of time with the midsize, smaller service providers. They provide a lot of ballast in our business and represent the bulk of our service providers. There's a lot of kind of encouraging, the morale is very good there, I would say. There's lots of opportunities, particularly as video moves to the cloud, lots of commercial locations that want to upgrade, take advantage of new analytic capabilities, take advantage of new remote monitoring capabilities. So the wealth of things that they're able to sell today that are desired by the customer, I'd say this has just generally been a trend over the last five years, which is what most of those service providers are selling today is actually something that the customer really wants and is desirable, especially with the capabilities that are enabled with video analytics, with the cloud access control piece. So the excitement seemed to be there. Now, when you get into other parts of the market that are focused more on residential mass market, I would say it's a tad more neutral is the sentiment at the moment. Wondering what's going to happen with the economy, what's going to happen with moves, what's going to happen with new home starts, those type of sort of macroeconomic concerns create probably a bit more of a neutral stance there. But overall, I'd say folks are mostly upbeat.
spk07: Great. That's helpful. That's helpful, Collier. Thanks, Steve.
spk09: And maybe just a question for Steve Valenzuela. I appreciate, understand you're not providing the total subscriber count at the end of the year, but, you know, something that would just be helpful maybe if you can. Can you speak to anything in terms of international connected properties or international SaaS revenue as a percentage of the overall? I think you said commercial was about, you know, 9.4%, something near 10% of the SaaS revenue. Just anything you could provide from a subscriber growth or subscriber count or percentage of revenues for international and commercial?
spk13: Yeah, international is actually 4% of our total revenue. International continues to do well. It grew about, the international SAS revenue in 23 grew about 25% year over year. And so we're, you know, there's, With EBS especially, we're excited about the opportunity going forward with the communicator that's going to be coming on this year. So we think there's quite a few opportunities there internationally. And commercial, as you mentioned, commercial actually grew quite well in 23 as well, and it was about 9.4% of the total sales.
spk09: Got you. So just to clarify, international about 4% of total revenue and up around 25% commercial revenue. about 9.5% of total SaaS revenue and growing very sharp.
spk18: Okay. Well, great to hear, guys.
spk09: Thank you.
spk13: I'll hop back in with you. International SaaS is 25% year-over-year, yeah. Sorry, quite a few numbers there to mix up. Yeah, because we disclose international revenue in our Ks and Qs.
spk08: Gotcha. I appreciate the color. Thank you. Sure.
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spk19: And I'm showing no further questions.
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spk21: Thank you.
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