Alarm.com Holdings, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Alarm.com provides cloud-based security, video monitoring, automation and energy-management services, primarily through a network of more than 7,000 service-provider partners.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $92.8 million | $74.2 million | +25% |
| SaaS and license revenue | $68.0 million | $50.2 million | +35% |
| Hardware and other revenue | $24.8 million | $24.0 million | +3% |
| Gross profit / margin | $64.4 million / 69.4% | $47.6 million / 64.1% | Margin +5.3 pts |
| Operating income / margin | $12.0 million / 12.9% | $4.5 million / 6.0% | Operating income +167% |
| Net income | $10.5 million | $4.0 million | +165% |
| Diluted EPS | $0.21 | $0.08 | — |
| Adjusted EBITDA (non-GAAP) | $23.0 million | $14.1 million | +63% |
| Cash from operations | $3.5 million | $13.0 million | Down $9.4 million |
Cash and cash equivalents were $96.8 million at quarter-end, versus $96.3 million at December 31, 2017. Working capital was $136.8 million. Long-term debt was $70.0 million, leaving $55.0 million available under the $125.0 million revolving facility; cash exceeded debt by approximately $26.8 million. The facility is secured by substantially all assets, including intellectual property, and matures in October 2022. The company reported covenant compliance and no defaults.
Material changes versus the prior comparable period
- Growth was led by recurring SaaS and license revenue, including Connect software-license revenue, which rose to $9.9 million from $2.3 million. Management attributed SaaS growth primarily to subscriber-base growth, including subscribers added in 2017, and Connect platform activity.
- Hardware revenue grew modestly; lower hardware costs and product mix improved hardware gross margin. Total cost of revenue was 31% of revenue versus 36% a year earlier.
- Research and development expense rose 40% to $20.4 million, and amortization and depreciation rose 75% to $5.0 million, mainly reflecting acquired teams and acquired intangible assets. General and administrative expense included $3.3 million of litigation expense; acquisition-related expense fell by $3.6 million year over year.
- Operating cash flow declined despite higher earnings, chiefly due to working-capital timing, increased prepaid expenses (including inventory prepayments), and a $2.8 million settlement of subsidiary-unit awards. Investing cash use was $3.0 million versus $157.9 million, which included acquisition spending in Q1 2017.
- Revenue renewal rate, measured on a trailing 12-month basis, was 93%, unchanged year over year. The company adopted Topic 606 in Q1 using the modified retrospective method; the financial-statement impact was not material, although eligible commissions are now capitalized and amortized over three years.
Outlook, commentary, risks and contingencies
- Management said cash, the revolving facility and expected operating cash flows should cover anticipated operating needs for at least 12 months. It expected approximately $4.4 million of capital expenditures over the remaining nine months of 2018 and disclosed a $5.2 million inventory-parts prepayment made in April. The filing provides no specific revenue or earnings guidance.
- Management expects continued investment in research and development and sales and marketing; it anticipated these expenses would rise in absolute dollars, with R&D also increasing as a share of revenue in the short term. Interest expense was expected to be higher in 2018 than in 2017 because of acquisition-related borrowing.
- Partner and customer concentration remain important: the ten largest service-provider partners generated 59% of Q1 revenue. One partner represented more than 10% but no more than 15%, and another more than 15% but no more than 20%. Substantially all Connect platform revenue historically came from ADT, creating specific customer-concentration exposure.
- A single hardware supplier accounted for 25% of hardware and other revenue. Other highlighted business risks include competition, partner retention, technology and component supply, service interruptions, cybersecurity and privacy, and execution and integration of acquisitions.
- Material legal matters include Vivint patent litigation, a certified TCPA class action with trial anticipated in October 2018, and a new TCPA/telemarketing class action. Management stated losses in certain matters were not probable or reasonably estimable; adverse outcomes could nevertheless be costly. A wrongful-death matter had a settlement agreement pending court approval. The Vessal case was dismissed with prejudice in May 2018.
- Other notable exposure includes $154.1 million of goodwill and identifiable intangible assets, which could be impaired; variable-rate debt, for which a 100-basis-point rate change would affect annual interest expense by approximately $0.7 million; and anticipated lease-accounting changes, whose balance-sheet impact had not yet been determined.
Important facts for investors to verify
- Whether recurring SaaS and license growth—and Connect revenue in particular—continues, and how much growth reflects subscriber expansion versus acquisition-related comparisons.
- Partner concentration, ADT’s use of the Connect platform, and the renewal-rate measure’s limitations as a predictor of contractual renewals or churn.
- Cash conversion and working-capital trends, alongside planned capital spending and inventory prepayments.
- Progress and potential financial impact of the Vivint, TCPA and other legal matters, and any changes to management’s loss assessments.
- Debt, covenant headroom and interest-rate exposure; future impairment indicators for acquired goodwill and intangibles; and the eventual impact of lease-accounting adoption.