Alarm.com Holdings, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2019. Alarm.com provides cloud-based security, video monitoring, automation and energy-management services, software licenses and related hardware, primarily through a network of more than 8,000 service-provider partners.
Financial performance
Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| SaaS and license revenue | $80.1 | $68.0 | +18% |
| Hardware and other revenue | $32.3 | $24.8 | +30% |
| Total revenue | $112.3 | $92.8 | +21% |
| Gross profit | $73.4 | $64.4 | +14% |
| Gross margin | 65.3% | 69.4% | Down 4.1 points |
| Operating income / margin | $9.2 / 8.2% | $12.0 / 12.9% | Income down 23% |
| Net income / margin | $9.0 / 8.0% | $10.5 / 11.3% | Income down 14% |
| Diluted EPS | $0.18 | $0.21 | Down $0.03 |
| Adjusted EBITDA (non-GAAP) | $24.3 | $23.0 | +6% |
Revenue growth reflected subscriber-base expansion, higher license fees and increased camera sales. Hardware and other revenue rose faster than its associated costs: hardware cost was 82% of hardware revenue versus 71% a year earlier, pressuring consolidated gross margin. Operating expenses increased 22% to $64.2 million, led by 30% growth in research and development and higher legal costs. SaaS and license revenue renewal rate was 94% for the trailing 12 months, compared with 93%.
Cash flow, liquidity and debt
- Operating cash flow was negative $1.2 million, versus positive $3.5 million a year earlier. Management attributed the decline principally to working-capital timing, including inventory and receivables.
- Investing cash outflow was $23.0 million, including $16.4 million paid to acquire a secured note from a hardware supplier and additional supplier financing. Financing provided $0.6 million, including $1.0 million of debt repayment and equity-plan proceeds.
- Cash and equivalents were $122.4 million at quarter-end, down $23.6 million from year-end. Working capital was $164.9 million.
- Debt under the senior secured revolving facility was $66.0 million, with $59.0 million available. The facility matures in October 2022; the effective interest rate was 4.88%. The company reported covenant compliance and no defaults.
- Management said cash, the facility and expected operating cash flows should cover anticipated needs for at least 12 months. It expected approximately $8.0 million of capital expenditures over the remaining nine months of 2019.
Material changes, outlook and key risks
- Supplier credit exposure: Promissory notes to a financially restructuring hardware supplier were in default at March 31. Notes and the acquired secured note totaled $29.4 million outstanding, excluding interest, before impairment adjustments; management recorded no impairment based on its collateral assessment. A $6.0 million contingent payment to the prior noteholder was accrued. On May 6, the supplier agreed to repay principal and interest before June 30, 2019, and Alarm.com temporarily agreed to forbear from collateral remedies if payments are timely. The supplier is strategically important: one supplier accounted for 30% of hardware and other revenue in Q1, and the supplier under restructuring generated 15%–25% of hardware revenue over the prior 12 months.
- Litigation: A TCPA class-action settlement totals $28.0 million. Alarm.com paid $5.0 million in January; the remaining $23.0 million was accrued at March 31 and is payable after the settlement becomes effective. Final approval was scheduled for August 13, 2019. Patent disputes, including the Vivint case, remain unresolved; the company said outcomes cannot be predicted.
- Tariffs and margins: A 25% additional import duty applied to its thermostat product. On April 19, 2019, U.S. Customs notified the company that certain imported camera products had been reclassified and would incur an additional 10% duty while an appeal proceeds. Further tariff increases could raise hardware costs and reduce margins; management described the impact to date as modest.
- Management outlook: The filing gives no clear numerical full-year revenue or earnings guidance. Management expects continued investment and increases in sales and marketing and research and development expenses; it also noted that hardware revenue mix may fluctuate.
- Other exposures: The 10 largest service-provider partners contributed 53% of Q1 revenue. The company highlighted competition, partner and supplier dependence, cybersecurity and service reliability, regulation and privacy compliance, and potential disruption from wireless-network transitions as business risks.
- Accounting change: Alarm.com adopted lease accounting Topic 842 on January 1, recognizing operating lease right-of-use assets and liabilities. The adoption did not materially affect reported operations or cash flows.
Important facts for investors to verify
- Whether supplier repayment occurred by the June 30 deadline and whether the notes remain recoverable at their recorded values.
- Final court approval and payment timing for the $28.0 million TCPA settlement, and developments in material patent litigation.
- The actual effect of camera and other potential tariffs on hardware costs, pricing and gross margin.
- Whether subscriber growth and the 94% renewal-rate metric persist, particularly given service-provider concentration.
- How working-capital movements, supplier financing and the settlement payment affect cash generation and liquidity.