Alarm.com Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. Amounts below are in millions of dollars unless noted.
Business context and results
Alarm.com provides cloud-based security, video monitoring, automation, energy management and related solutions, primarily through a network of more than 9,000 service-provider partners. Its Alarm.com segment generated 94% of revenue in Q2 and the first half of 2020. The company reported growth despite COVID-19 disruption, while warning that its effects remain uncertain.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| SaaS and license revenue | $95.7 | $82.3 | $187.7 | $162.4 |
| Hardware and other revenue | $45.9 | $39.3 | $105.9 | $71.6 |
| Total revenue | $141.6 | $121.7 | $293.6 | $234.0 |
| Operating income | $15.0 | $14.0 | $24.9 | $23.3 |
| Net income | $16.6 | $13.8 | $25.2 | $22.8 |
| Net income attributable to common stockholders | $17.0 | $13.8 | $25.8 | $22.8 |
| Diluted EPS | $0.34 | $0.27 | $0.51 | $0.45 |
| Adjusted EBITDA, non-GAAP | $29.2 | $27.7 | $58.4 | $52.0 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $48.0 | $22.9 |
Financial position and cash flow
- Cash and cash equivalents were $205.8 at June 30, 2020, up from $119.6 at December 31, 2019. Working capital was $255.3, compared with $167.9.
- Long-term debt was $112.0, up from $63.0 at year-end. The $125.0 revolving facility had $13.0 available; it is secured by substantially all assets, including intellectual property, and matures in October 2022. The company was in covenant compliance at quarter-end.
- First-half operating cash flow of $48.0 was partly offset by $9.3 of investing outflows; financing generated $47.5, principally reflecting $50.0 of facility borrowings. Cash increased $86.2 during the period.
- Gross margin, calculated as revenue less reported cost of revenue, was approximately 65.4% in Q2 2020 versus 63.4% in Q2 2019, and 63.6% versus 64.3% for the first half. Operating margin was approximately 10.6% versus 11.5% in Q2 and 8.5% versus 9.9% for the first half.
Material changes and unusual items
- Q2 revenue rose 16%; first-half revenue rose 25%. SaaS and license revenue increased 16% in both periods, primarily from subscriber-base growth. Hardware and other revenue rose 17% in Q2 and 48% for the first half, reflecting increased video-camera shipments and OpenEye, acquired in October 2019.
- Operating expenses grew faster than revenue in several areas: Q2 R&D expense rose 29% and first-half R&D rose 39%, reflecting higher headcount and, in the first half, $4.4 of acquired in-process R&D. The company had 1,317 employees versus 1,005 a year earlier.
- Q2 net income benefited from a $2.3 income-tax benefit, compared with a $0.3 tax provision a year earlier. First-half tax benefit was $1.1 versus a $0.6 provision. Q2 earnings also included a $1.7 reduction in OpenEye contingent consideration; that liability was $0.3 at June 30, down $2.3 since year-end.
- First-half inventory increased $16.2 to $50.4; management attributed purchases in part to precautionary supply-chain planning amid COVID-19 uncertainty. The company repurchased $5.1 of shares in Q1; none were repurchased in Q2.
- A May 2020 secondary offering sold 5.6 million shares for selling stockholders; Alarm.com received no proceeds and recorded approximately $0.5 of related expenses.
Outlook, risks and contingencies
- Management did not provide numerical financial guidance in the supplied filing text. It expects hardware revenue in the remainder of 2020 to be lower than in the first half. It cautioned that prolonged economic weakness could also reduce SaaS and license revenue growth if customers defer or cancel purchases.
- COVID-19 may disrupt hardware manufacturing, production, transportation and service-provider sales activity; the duration and financial impact are not predictable. Management said the business and partner channel showed some resilience toward the end of Q2.
- The company said existing cash, facility availability and expected operating cash flows should cover anticipated needs for at least 12 months. It estimated approximately $6.5 of capital expenditures for the remaining six months of 2020.
- Material exposures include patent litigation, including Vivint and EcoFactor matters, and putative TCPA-related class actions. The company stated that losses were not considered probable or reasonably estimable based on currently available information; adverse outcomes could nevertheless involve damages, royalties, injunctions or import restrictions.
- Other cited risks include partner and supplier concentration, possible China-related tariffs, cybersecurity and privacy regulation, competition, and variable interest-rate exposure. A 100-basis-point change in the facility rate was estimated to affect annual interest expense by about $1.1 at June 30.
- Subsequent event: on July 31, 2020, a platform partner was sold, entitling Alarm.com to $25.7 of proceeds for its shares, subject to an approximately $1.8 holdback and other adjustments. This was not included in June 30 cash.
Key facts for investors to verify
- Whether hardware sales and margins hold up as management anticipates lower second-half hardware revenue, and how much recent growth reflects OpenEye and product mix.
- Subscriber growth, the reported 94% trailing-12-month SaaS and license revenue renewal rate, and the durability of recurring-revenue growth.
- Cash generation excluding the $50.0 borrowing, inventory buildup and working-capital timing; also monitor debt, facility capacity and covenant headroom.
- The sustainability of reported earnings given tax benefits and acquisition-related fair-value changes; compare GAAP results with Adjusted EBITDA and its exclusions.
- Receipt and final amount of the post-quarter $25.7 partner-sale proceeds, and developments in the disclosed litigation and COVID-19-related supply and channel risks.