Alarm.com Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. Alarm.com provides cloud-based security, video monitoring, automation, energy management and related services through a network of more than 9,000 service-provider partners.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $151.9 million | $112.3 million | +35% |
| SaaS and license revenue | $92.0 million | $80.1 million | +15% |
| Hardware and other revenue | $60.0 million | $32.3 million | +86% |
| Operating income | $9.9 million | $9.2 million | +7% |
| Net income | $8.6 million | $9.0 million | -5% |
| Net income attributable to common stockholders | $8.8 million | $9.0 million | -2% |
| Diluted EPS | $0.18 | $0.18 | Flat |
| Adjusted EBITDA, non-GAAP | $29.2 million | $24.3 million | +20% |
Hardware and other revenue rose primarily on higher video-camera shipments and revenue from the 2019 OpenEye acquisition. SaaS and license growth reflected subscriber-base expansion; software license revenue declined to $9.7 million from $11.0 million as customers transitioned to the hosted platform. SaaS and license revenue represented 61% of total revenue versus 71% a year earlier.
Gross profit was approximately $94.0 million, with gross margin about 61.8%, compared with approximately $73.4 million and 65.3% in Q1 2019. Cost of hardware and other revenue rose 71%; the company attributed changes in hardware margins to sales mix. Operating margin was approximately 6.5%, compared with 8.2%. Research and development expense increased 50% to $39.7 million, including acquired in-process research and development and higher staffing costs. The effective tax rate increased to 12.3% from 2.6%, contributing to lower net income.
Cash, debt and liquidity
- Operating cash flow was $12.9 million, versus cash used of $1.2 million in Q1 2019. Investing activities used $7.0 million; financing activities provided $46.2 million.
- Cash and cash equivalents were $171.7 million at March 31, 2020, up from $119.6 million at year-end. The increase was substantially supported by a $50 million credit-facility draw.
- Working capital was $231.6 million, compared with $167.9 million at December 31, 2019. Long-term debt was $113.0 million, up from $63.0 million. Cash less debt was approximately $58.7 million.
- The $125 million senior secured revolving facility matures in October 2022; $12 million remained available. It is secured by substantially all company assets and includes financial covenants. The company reported covenant compliance and no defaults at quarter-end.
- Management said cash, the facility and expected operating cash flows should cover anticipated needs for at least 12 months. Capital expenditures for the final nine months of 2020 were estimated at approximately $15 million.
Material changes and notable items
- The company drew $50 million on its revolving facility as a precaution amid COVID-19-related market uncertainty. It also repurchased 147,153 shares for $5.1 million during the quarter.
- Alarm.com adopted the expected-credit-loss standard on January 1, 2020, recording an $816,000 cumulative adjustment to accumulated deficit. It recorded $1.4 million of credit-loss expense in Q1; the accounts-receivable allowance was $4.8 million at quarter-end, versus $2.6 million at year-end.
- Two March asset acquisitions consisted substantially of in-process research and development with no alternative future use; the associated amounts were expensed. The company said these purchases support smart-intercom and other product development.
- Trailing-twelve-month SaaS and license revenue renewal rate was 93%, versus 94% a year earlier. The 10 largest service-provider partners generated 49% of revenue, down from 53%; one partner accounted for more than 15% but no more than 20%.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management expects hardware revenue in future 2020 periods to be lower than in Q1 and warns that SaaS and license revenue growth may slow as consumers and small businesses defer or cancel purchases. COVID-19 may disrupt hardware supply, manufacturing, transportation and service-provider sales channels; the duration and financial impact were uncertain.
Other material risks include exposure to tariffs on imported hardware, supplier dependence, concentration among service-provider partners, potential deterioration in receivable collections, competition, cybersecurity and service reliability, and integration of acquisitions. The company’s hardware margins may also be affected by tariffs and product mix. Substantially all revenue was derived from North America.
Patent matters include Vivint litigation and EcoFactor proceedings, including an ITC investigation that could affect imports of certain thermostats. The company stated that losses in these matters were not probable or reasonably estimable based on information then available; adverse outcomes could nevertheless require damages, royalties, or restrictions on sales. Vivint litigation was temporarily stayed through August 10, 2020 due to the pandemic. Varatec’s suit against ADT was voluntarily dismissed without prejudice in April 2020.
Investor verification points
- Track subsequent hardware sales and gross margins, and assess whether the expected COVID-19 disruption materialized.
- Monitor SaaS and license growth, renewal rate, subscriber trends and the transition away from non-hosted software licenses.
- Review receivable aging, credit-loss provisions and collections, particularly under the new expected-credit-loss methodology and pandemic conditions.
- Assess liquidity and covenant headroom after the $50 million borrowing, including remaining revolver availability, debt costs and planned capital spending.
- Follow the outcomes and financial exposure of the Vivint and EcoFactor matters, as well as OpenEye earn-out and acquisition integration developments.
- Evaluate revenue concentration and supply-chain exposure, including dependence on major service providers and hardware suppliers.