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spk09: Thank you for standing by. Welcome to the Alarm.com third quarter 2024 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would like to hand the conference over to your speaker today, Matthew Zartman, Vice President of Investor Relations. Please go ahead.
spk00: Thanks, Kevin. Good afternoon, everyone, and welcome to Alarm.com's third quarter 2024 earnings conference call. Please note the call is being recorded. Joining us today 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 on our quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly 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 other information which speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of GAAP to non-GAAP measures can be found in today's press release on our investor relations website. I'll turn the call over to Steve Trundle. Steve?
spk08: Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report financial results for the third quarter that exceeded our expectations. SAS and license revenue in the third quarter grew to $159.3 million, and adjusted EBITDA was $50 million. Our performance in the quarter resulted from continued momentum across our growth initiatives. Sales of our video and access control products outperformed and contributed to hardware revenue that was above our expectations. We also saw our revenue retention rate increase to 95%, which is above our historical range. We believe two things are driving the revenue retention metric. First, our service providers have been increasingly putting in fully featured and more robust systems that provide value to the consumer or business owner every day. And second, the slower U.S. housing market has reduced subscriber moves, which can be a leading cause of account churn. I want to thank our service provider partners and our employees for their contributions to our results. On today's call, I want to update you on a few new capabilities we introduced to our commercial and residential video offerings before handing it over to Steve Valenzuela to cover our financials in more detail. In October, we hosted our annual customer conference, which we call Partner Summit, here in Washington, D.C. The event again attracted a sold-out audience that represented a nice cross-section of our service provider partner community. We were able to feature several recently released products in our presentations during the summit. One of the products we demonstrated is a consumer-facing capability we call AI deterrence, or AID. It can identify and engage a potential trespasser on a property and deter them from causing further problems. AID is integrated into our remote video monitoring solution and is essentially an AI bot that replaces some of the workload that a live operator monitoring the video camera would otherwise need to perform. It can discern clothing and location and deliver verbal warnings that are dynamically adapted to the intruder and the scene. Our goal with AID is to make our remote video monitoring solution as cost effective as possible for our service providers. By augmenting human intervention and focusing humans on only the most critical events, we believe our partners can adopt our solution more aggressively and introduce it to a larger segment of the commercial and residential markets. Our advancements in applying AI to video streams in both residential and commercial settings benefit from our scale. In August alone, our AI-enabled video cameras identified and sent 1.2 billion events for further classification and verification by our cloud. Of these 1.2 billion events of interest, 700 million were verified by the cloud AI engine, triggering additional rules which can include archival or push notifications to alert subscribers of important activity. In September, our OpenEye business also launched a new line of cloud cameras designed for flexible, streamlined enterprise video surveillance installations. The new cameras are entirely self-contained with onboard storage and AI processing. They connect directly to the cloud and are provided as a subscription-based solution that leverages the full suite of management, analytics, alerting, and reporting tools offered by the OpenEye platform. Cloud cameras provide a cost-effective way for our partners to land and expand in new commercial accounts. We're pleased with OpenEye's continued momentum and growth. OpenEye is on the cusp of surpassing 1 million active channels or video cameras on its software platform. We expect continued strong contributions to alarm.com's growth as OpenEye leads the transformation of the enterprise security video management market from standalone on-premise devices to cloud-enabled AI-powered video solutions. As most of you know, we typically conclude our third quarter with Steve Valenzuela providing an initial look at the following fiscal year. It's early, and we will continue to refine our plans and forecasts before providing our more calibrated and official 2025 guidance on our fourth quarter call early next year. But I want to give a little context for how we're looking at 2025 at this point. As we think about 2025 revenue, a meaningful variable is the rate at which ADT rolls out the ADT Google software. This forecasting dependency makes visibility into 2025 a bit more opaque than in prior years. Our first look numbers assume that ADT's corporate residential account production will fully transition to the ADT Google software and impact SAS revenue growth for the entirety of 2025. Fortunately, we have built a diverse organic growth engine that will allow us to continue growing our business despite this long-anticipated headwind. We expect our Energy Hub business, our OpenEye business, our international business, and our alarm.com commercial business, including our access control solution, to contribute to our consolidated growth rate at roughly the same levels in 2025 as in 2024. Meanwhile, We have moved EBITDA margins up some in the second half of 2024, and we expect current levels to hold as we move through 2025. In summary, I'm pleased with our Q3 results and the continued growth we see across the business. 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 financials. Steve?
spk01: Thanks, Steve. I'll begin with a review of our third quarter 2024 financial results, then provide our guidance for Q4 and full year 2024, and conclude with our initial thoughts on 2025 before opening the call for questions. Third quarter SAS and license revenue of $159.3 million grew 9.8 percent from the same quarter last year. Our SAS and license revenue visibility remains high, with a revenue renewal rate of 95 percent in the third quarter, above our historical trend and higher than our long-term target range of 92 to 94 percent. Part of another revenue in the third quarter was $81.2 million of 5.7 percent from Q3 2023, mainly due to increased sales of access control devices and video cameras. Total revenue of $240.5 million for the third quarter grew 8.4% year-over-year. SASL license gross margin for the third quarter was 85.5%, up slightly from 84.9% in the year-ago quarter. Hardware gross margin was 24.1% for the third quarter, up from 22.6% in Q3 2023, mainly due to favorable product mix. Total gross margin was 64.8% for the third quarter, up from 63.3% in the prior year quarter. Turning to operating expenses, R&D expenses in the third quarter were $62.2 million compared to $61 million in Q3 2023. We ended the third quarter with 1,164 employees in R&D, up from 1,116 employees in Q3 2023. Total headcount increased to 2,055 employees for the third quarter, compared to 1,986 employees in the year-ago quarter. Sales and marketing expenses in third quarter were $27 million, or 11.2% of total revenue, compared to $23.9 million, or 10.8% of revenue, in the same quarter last year, mainly due to a modest increase in marketing program investment. Our G&A expenses in the third quarter were $25.7 million, down from $31.5 million in the year-ago quarter, mainly due to lower legal-related costs. G&A expense in the third quarter includes negligible non-ordinary court litigation expense compared to $5.9 million in the year-ago quarter. Non-ordinary court litigation expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance. In the third quarter, GAAP net income was $36.7 million, up 88% from GAAP net income of $19.5 million in the year-ago quarter. Non-GAAP-adjusted EBITDA in the third quarter was $50 million, up 20.6% from $41.4 million in Q3 2023. Non-GAAP-adjusted net income increased to $35.2 million or $0.62 per diluted share in the third quarter, up from $30.6 million, or $0.56 per share for the third quarter of 2023. Turning to our balance sheet, we ended the third quarter with $1.17 billion of cash and cash equivalents, up from $697 million on December 31, 2023, with much of the increase due to the convertible offering we closed in May this year, and to a lesser extent, our positive cash flow. Our non-GAAP free cash flow for the three and nine months into September 2024 of $74.5 million and $142.3 million, respectively, increased from $60.9 million and $90.7 million for the same periods in 2023, mainly due to higher profitability levels and improvements in working capital with declines in inventory and a reduction in accounts receivable days sales outstanding to 45 days. Turning to our financial outlook, for the fourth quarter of 2024, we expect SAS and license revenue of $163.2 to $163.4 million. For the full year of 2024, we are raising our expectations for SAS and license revenue to $628.7 to $628.9 million, up from our prior guidance of $626.8 to $627.2 million. We are now projecting total revenue for 2024 of $933.7 to $935.9 million, up from our prior guidance of $920.8 to $931.2 million, which includes estimated hard-earned other revenue of $305 to $307 million. We are raising our estimate for non-GAAP adjusted EBITDA for 2024 to $174 to $176 million, up from our prior guidance of $165 to $167 million. Adjusted non-GAAP net income for 2024 is projected to be $125.5 to $126.5 million, or $2.25 to $2.27 per Duluth share Up from our prior guidance of $119.5 to $120.5 million, or $2.06 to $2.07 per diluted share. EPS is based on an estimate of 57.9 million weighted average diluted shares outstanding. We currently reject our non-GAAP tax rate for 2024 to remain at 21% under current tax rules. We expect full-year 2020 for stock-based compensation expense of $42 to $43 million. Finally, I will provide some early thoughts in 2025, noting that these are preliminary. We currently estimate our SAS and license revenue for 2025 to be between $668 to $671 million. Total revenue for 2025 could range between $975 to $980 million. As Steve noted, we are modeling the ADT RAMSEP to ADT Google rollout. We currently project our non-GAAP adjusted EBITDA for 2025 to be in the range of $188 to $192 million. We will provide our annual guidance for 2025 when we report our fourth quarter 2024 financial results early next year. In summary, 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.
spk09: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered, you will remove yourself from the queue. Please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Adam Tindall with Raymond James. Your line is open.
spk02: Okay, thanks. Good afternoon. Bear with me. I'm just crunching the numbers as fast as I can here, Steve. But I wanted to ask on the SAS guidance for fiscal 25. Understand there's a lot of variables here, and congrats on a strong Q3 that you're coming off of. If I'm doing the math right here, I think you're going to finish this year at about 10.5% SAS growth for 2024. And the initial look for 2025, I think it's closer to 6.5%. If you could maybe just walk through some of the building blocks on the delta between those two, I think ADT in particular, I think a lot of us had thought about somewhere in the neighborhood of 1.5% to 2% headwind related to that. But I wonder if now that you have a little bit more visibility, you've got some clarity on that. So just some of the bridges from the strong finish in 2024 in the initial 2025 outlook would be helpful.
spk08: Hey, Adam. This is Steve Trundle speaking. Yeah, keep in mind, we're not yet calling it guidance. We're going to do our full guidance after the fourth quarter. But in the initial look numbers, you're doing the math correct. And there's really a couple things there to point out. First is, as we've said in the past, we're anticipating about a 200 basis point headwind to growth on the ADT Google transition. So expect that to really start next year. And that's what we've modeled. The second one is that, if you remember, this year we got a meaningful bump when we closed out some litigation. We had essentially no license revenue coming from IP licenses in 2023. And then we closed out litigation. We had a pretty meaningful bump off of that resolution. this year, that IP license revenue is sort of straight-lined into the early 2030s. So we're not getting a bump there again this year. And that by itself is sort of another 200 basis points in the math. So if you add those two up, it sort of reconciles with the 10.5% that we're showing right now.
spk02: That's helpful. And maybe just a follow-up. You mentioned, I think, EBITDA margins you expect current levels to hold. One quick clarification and also a question on that. The clarification would be, I think, you did about 21% EBITDA margin this quarter. The guidance, I think, implies 19%. So when you say current levels, I'm assuming it would be off the kind of 19% guidance, not the 21% you just did. But just clarifying that, number one. And then secondly, Steve Trundle, as you think about, you know, holding those very, very healthy EBITDA margins, maybe you can speak about, you know, how you thought about the internal balance between growth and profitability. You know, on one hand, you know, we could say you've got a lot of room to potentially invest even more on that line. So just wonder how you thought about potentially balancing, you know, maybe investing a little bit more to bump up the growth versus holding EBITDA margins at current levels. Thanks.
spk08: Yeah, good question again. So yes, the number we're guiding on in the initial look is the 19%, and I think what I said is we're going to hold things there. It might be a little above that if you do the exact math, a couple, 20 basis points or so above. And that's up from sort of where we've been the last couple of years, so that's a meaningful transition for us. But the plan at the moment is we're sort of constantly scrutinizing the way that we allocate capital, what things make sense, what things have nice return characteristics. Through time, those things evolve. Some businesses have grown nicely and are now reaching a scale where we see them actually, as we look into the future, beginning to actually contribute, shift a bit more from sort of pure investment mode to a mode where, again, they're sort of more mature, contributing cash back to the parent. So we've talked for a while about our various growth businesses or growth initiatives. Specifically, we referenced Energy Hub. We referenced the commercial business, and we referenced the international business. and each of those now is a bit larger than it's been in the past, beginning to contribute more. So that left us comfortable that with their increased scale, we could shift a bit more of the cash production capacity of the company into the EBITDA line, and we expect that to be the case going forward.
spk09: Very helpful. Thank you. One moment for our next question. Our next question comes from Mason Marion with Jefferies. Your line is open. All right. Thanks for taking the questions today.
spk04: So your NRR was really strong at 95%. Can you talk about some of the drivers there? So you alluded to the lower term, but are you also seeing better cross-selling within your base?
spk01: Yeah, I think it's a combination of fewer moves, and Churn has really driven a lot by moves. But also, we think that the video is very compelling with the analytics, and I think we're starting to see the benefit of that. We came out with video a number of years ago, analytics, a couple years ago as well, and we think that that's really enabling the users to really interact with the system every single day. And so we think that's driving up the usage and driving up the retention quite nicely.
spk08: And you could almost think of that, at times, that is what you would call a cross-sell. We sometimes refer to it as an upsell. So if we have the same subscriber that moves from an account without video to one with video, obviously that creates a benefit, and that would be a cross-sell. Or if they already have a video subscription and then they opt into a more advanced video analytics package, that also would help us on that revenue retention metric. So there's a little bit of all of that going on. It probably is true that the reduction in subscriber moves is the main driver, but as Steve just said, the account characteristics are also looking more positive.
spk04: Gosh, understood. And then I believe your EBS integration, I think you're largely complete with that now. Can you talk us through that? What is early feedback been? Are you seeing benefits from that acquisition?
spk08: Yeah, good memory. We're right on the cusp of beginning to see the rollout of the technology and the capabilities that we went after when we did the EBS acquisition as sort of a refresher. EBS is a business based in Europe that has a a history of being able to support a wide range of various intrusion panels. We wanted to be able to attack a different part of the market than just the new installs that Alarm.com typically gets. So we're beginning that rollout now. The EBS low-cost communication product works with the Alarm.com backend at this moment. And our belief at the moment is that we'll probably be successful in adding another 40,000 to 50,000 subscribers in the rest of world markets next year using the low-cost communication technology from EVS. And those would be subscribers we otherwise wouldn't get. So it's beginning to contribute to the growth story on the international side of the business.
spk04: Great. Thank you.
spk09: Sure. One moment for our next question. Our next question comes from Adam Hotchkiss with Goldman Sachs. Your line is open.
spk05: Great. Thanks so much for taking the questions. Nice speaking with you both. Just curious on how you're viewing pricing opportunities here, particularly around some of the cost augmentation that some of these AI initiatives are potentially providing for your customer base. How do you balance the ability to take price by allowing customers to manage costs more effectively versus this just being a bit of a customer success tool to increase retention?
spk08: Yeah, good question. So AI provides some ability for cost augmentation, and I spoke a bit about that in my prepared remarks. If we're using what we call AI deterrence or an AI bot, to replace some of the previously expensive human monitoring activity that would be required to offer that same service, then we're helping our partners, our service provider partners, with their cost to serve. And that does correctly give us some ability to price that capability in a way that's beneficial to us. So we work with our partners. We try to figure out sort of what's the right the right pricing that works for them. We're careful not to price things at a level that we sort of corner ourselves in a niche market and sort of we prefer to be broad and we prefer to be broadly applicable and that's really probably our primary focus with what we're doing with AI and that necessitates keeping the costing at a level that our partners can afford to bring it to a broad swath of the market. Otherwise, with pricing, it's sort of normal course. We look at pricing, and there are always pricing increases that are sort of part of the plan. But you're correct. The AI piece is particularly interesting to think about right now.
spk05: Okay, great. That's really helpful. And then could you just refresh us on sort of the top of funnel opportunity on the commercial side? I guess in your view, where is the rest of the market behind there? And then how does OpenEye and some of these other investments on the technology side you're making open up more conversion opportunities for you over time?
spk08: Yeah, the top of funnel opportunity, I'm trying to... Adam, what do you mean by that when you say, what are we seeing in the top of funnel opportunity?
spk05: Yeah, more just in terms of commercial prospects and being able to convert those commercial prospects into customers. What's driving, or I guess, how are you viewing the demand for security products on the commercial side and your ability to convert those? Yeah.
spk08: Okay, I understand. The demand to us looks fairly constant, maybe picking up a tad. If we're trying to read the tea leaves of the fourth quarter, there was increased demand, particularly on the access control side. We had a meaningful beat on the hardware number. Sorry, I said fourth quarter. I meant third quarter. Had a meaningful beat on the hardware number, and I think Steve indicated some of that was driven by access control hardware, so that's a good indicator. Oftentimes, those solutions are sold pull through video, we also saw pretty good behavior on the video side. So I feel like we feel like the market's pretty healthy on the commercial side right now. We attack it a couple different ways through integrators on the very high sort of enterprise side of the market, through our regular service provider partners in the mid-market, and then we do run some demand generation activity there as well on the commercial side, and everything I'm hearing and seeing is that it's setting sort of slightly better than maybe it was in the first half of the year.
spk05: Okay, incredibly helpful, Keller. Thanks so much.
spk09: Thank you. Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. Our next question comes from Matt Fleck with William Blair. Your line is open.
spk07: Hey, everyone. You have Matt Feilich on for Stephen Sheldon. Thank you for taking my questions. Starting with one on hardware, given the strong performance there this quarter, curious on what you think it would take to see hardware revenue return to growth in 2025, as I think the early look expectations imply more flat growth in 2025.
spk08: Hey, Matt. Yeah, I think at this moment, you know, we're sticking with our sort of initial look estimates on hardware revenue. I think that if we saw sort of unexpected strength on the commercial side or if we saw, you know, I talked about sort of the headwind, a couple of headwinds, but one being the ADT Google rollout. If we saw that sort of dampen, then obviously that might result in more hardware sales as well, but I'd say the biggest one that would be nice to see, but not, you know, we're not, I think the model we've run and the one we present with our forecast is, to the best of our knowledge, the right model, but we could see upside if we saw, in particular, more takeoff on the commercial side of the business.
spk07: Got it. That's helpful, Claire. Thank you. And then had one on R&D, just thinking about priorities. in the R&D department over the coming year. Are there any capabilities you're focused on building out, or is it more about enhancing the existing product catalog?
spk08: No, we're pretty focused on, I would say, building out new capabilities, particularly in the video and the analytics space. That would mean new form factors, different cameras. We just had our partner summit, and we had the opportunity to preview a couple different form factors on video cameras, some battery-powered video camera technology that we're excited about. We previewed the EBS stuff with our international partners, and we're pleased to get that out to them. All of these are sort of contributing and focused on the markets that we're already driving in, so we don't envision next year really introducing something that takes us into a different market. We're going to stay focused on the commercial, the residential, and the international markets with most of the R&D effort that we're deploying right now.
spk09: Very helpful. Thank you. One moment for our next question. Our next question comes from Darren Afti with Roth. Your line is open.
spk03: My question, too, if I may. I think it may have been the beginning of this year, Steve T., but you kind of talked about 18% on EBITDA margins, if I recall, as being kind of a steady state. I guess why the pivot now? And second question, you talked about some headwinds to SAS growth for 25, I guess, years. Where are there areas where things could go right beyond maybe commercial, which you talked about, which could counterbalance those headwinds? Thanks.
spk08: Hey, Darren. Yeah, good memory. You guys always have a good memory. That makes my life harder. I did talk about the 18% level at the beginning of the year. As we've seen recently, Some of the growth initiatives reach a more impressive level of scale. We got comfortable, or we are comfortable at this point, that even the margins will be more in the 19% plus range coming into next year. And we're comfortable sort of saying that we don't envision going backwards off of that. So that's just an update. And as far as the... Where can we get extra increased SAS growth contribution? I would say that some of it's going to be, can we land a new logo someplace, either domestically or internationally, and increase the size of the pipeline and get that done in the first part of the year? It could be that something in corp dev results in some additional growth. It could be that we see sort of increased acceleration in the international business that we're not currently anticipating. The challenge right now, though, is we're looking at five quarters. So when we provide an initial look, and we don't like to lean into too many things that are sort of ethereal and not right in front of us. And I guess I would say we're relatively pleased that on sort of a larger base, we're able to essentially see the same growth contribution coming next year as we're able to get this year, even with some of these headwinds.
spk03: Fair enough. Thank you. Appreciate it.
spk09: One moment for our next question. Our next question comes from Jack Vandarde with Maxim Group. Your line is open.
spk06: Okay, great. Thanks, guys. Nice results. Looking at your 2025 initial SAS outlook, maybe for Steve Trundle, For the international side of business, do you have plans to grow the number of service providers you currently have in the international markets? Is there an assumption baked in there? And then also, are the existing partners you do have internationally, are they growing? Are they kind of assumed to be flat? Just curious to get if we can dissect that a bit further for your 2025 outlook.
spk08: Sure. Hey, Jack. Yeah, I think we'll continue. So we're super fortunate to have a great set of sort of anchor tenants in the international service provider partner framework that we're going to market with right now. So there really aren't a lot of names or brands that one could have at the largest, at sort of the enterprise side of the business that we don't already have. That said, we're continuing to work to add a few. And then we want to build out the sort of the base of smaller service providers in many of the markets. There's still some markets where we're not particularly active yet. And we're working on that. So there will be some additional of, you know, there will be some new names. We're adding partners still on the international side at a faster clip than we are domestically where we're more mature. Once we add someone, it usually takes, you know, at least a year, but a couple years oftentimes to kind of reorient their business around alarm.com and change the way they go to market. So there is some latency in the system after we add a partner, but we are still working to add partners. I'm trying to remember the second piece of your question.
spk01: Yeah, I was just wondering if...
spk06: I was wondering if you had plans that baked in new countries expansion into that 2025 outlook, as well as just do you assume you're adding more partners internationally in general? I think you've covered most of that.
spk08: Yeah, so in our 2025 outlook, we're not assuming we're signing new logos at this point. When we do modeling, we model off things that are real. we may add new logos. That would create some upside. And we may add some new markets that we're not currently servicing. Just keep in mind, though, there is some latency between those ads and between the point that you actually see the result of that flow into our P&L.
spk06: Got it. Very helpful. And then maybe just a quick housekeeping for Steve. Can you just reiterate what the actual 2025 SAS Outlook range was again? I think I missed the actual keeling of that range.
spk01: So the range for 2025 is 668 to 671 million.
spk06: Very helpful.
spk01: Yep.
spk06: Much appreciated. Thank you, guys. Good results again. Thank you.
spk09: And I'm not showing any further questions at this time. So ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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