Business context and reporting period
Alarm.com Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. The company provides cloud-based security, video monitoring, automation and energy-management services, principally through more than 6,000 service-provider partners. The year-end results do not include the Connect and Piper businesses, acquired on March 8, 2017.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $261.1 million | $208.9 million |
| SaaS and license revenue | $173.5 million | $140.9 million |
| Hardware and other revenue | $87.6 million | $68.0 million |
| Gross profit / margin | $161.7 million / 61.9% | $131.5 million / 63.0% |
| Operating income / margin | $14.1 million / 5.4% | $18.0 million / 8.6% |
| Net income / margin | $10.2 million / 3.9% | $11.8 million / 5.6% |
| Adjusted EBITDA, non-GAAP | $49.0 million | $34.4 million |
| Operating cash flow | $17.5 million | $27.1 million |
Revenue rose 25%; SaaS and license revenue increased 23%, while hardware and other revenue grew 29%. Fourth-quarter 2016 revenue was $69.8 million and net income was $3.0 million. SaaS and license revenue renewal rate was 94%, up from 93%.
At year-end, cash and cash equivalents were $140.6 million, working capital excluding deferred revenue was $153.1 million, and debt was $6.7 million. Investing cash outflow was $11.4 million, including $9.1 million of property and equipment additions. Total contractual obligations were $58.2 million, including $45.8 million of operating lease commitments. The auditor gave an unqualified opinion on the financial statements.
Material changes versus prior year
- Net income fell 14%, and operating income declined 22%, despite 25% revenue growth. Operating expenses increased 30%, including higher general and administrative costs.
- General and administrative expense rose $22.5 million; the company cited $11.0 million of acquisition-related costs and increased intellectual-property litigation costs.
- Adjusted EBITDA increased 43%, but excludes $11.1 million of acquisition-related expense and $13.4 million of litigation expense in 2016. It is a non-GAAP measure and should be considered alongside GAAP results.
- Operating cash flow declined $9.6 million, reflecting working-capital changes, including higher receivables and inventory.
Outlook, commentary, risks and unusual items
- Management expects continued investment in research and development and sales and marketing; it expects those expenses to rise in absolute dollars. It also expects interest expense to increase following acquisition-related borrowing. Planned capital expenditures for the next 12 months were approximately $8.8 million. No clear numerical revenue or earnings guidance for FY 2017 is provided in the filing.
- On March 8, 2017, Alarm.com completed the $148.5 million Connect and Piper acquisition, funded with approximately $81.5 million cash and a $67.0 million credit-facility draw. The purchase-price allocation was not final at filing. The company identified integration, assumed liabilities and execution risks.
- Connect historically depended substantially on ADT for revenue. An amended ADT agreement provides for exclusivity for certain professionally installed residential offerings for up to five years, subject to performance conditions and other terms. The filing cautions that ADT may not maintain or expand use of Connect.
- The FTC concluded its acquisition review but had not concluded its review of pre-closing activities. The filing also reports pending patent, TCPA class-action and wrongful-death litigation; management said losses were not probable or reasonably estimable for the cited claims. The wrongful-death suit seeks $7.0 million compensatory and $350,000 punitive damages.
- Key operating risks include dependence on service-provider partners (the ten largest generated 59.9% of 2016 revenue), competition, cybersecurity and service reliability, and supplier concentration (one supplier represented 33% of hardware and other revenue). Approximately 45,000 accounts relied on AT&T’s discontinued 2G network and required upgrades to avoid potential termination.
Important facts for investors to verify
- Whether Connect and Piper meet integration, cost and growth expectations, and whether ADT continues using Connect under the amended agreement.
- The post-acquisition cash, debt, borrowing availability, covenant headroom and interest burden; the $6.7 million year-end debt balance predates the additional $67.0 million draw.
- Underlying earnings and cash generation relative to Adjusted EBITDA, including the scale and recurrence of litigation and acquisition costs.
- Partner concentration, SaaS renewal trends, hardware margins and inventory/receivables growth.
- Developments in the FTC review and material litigation, including the acquired businesses’ assumed liabilities.