Alarm.com Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Alarm.com provides cloud-based security, video monitoring, automation, energy management and related services through a network of more than 10,000 service-provider partners. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $192.3M | $158.9M | $553.7M | $452.4M |
| SaaS and license revenue | $118.1M | $100.1M | $338.6M | $287.8M |
| Hardware and other revenue | $74.3M | $58.7M | $215.1M | $164.6M |
| Operating income | $19.1M | $18.1M | $50.8M | $42.9M |
| Net income | $13.3M | $35.8M | $42.3M | $61.0M |
| Net income attributable to common stockholders | $13.5M | $36.1M | $43.1M | $61.9M |
| Diluted EPS | $0.26 | $0.71 | $0.83 | $1.22 |
| Adjusted EBITDA, non-GAAP | $37.6M | $34.5M | $111.2M | $92.9M |
Revenue rose 21% in Q3 and 22% year to date. SaaS and license revenue grew 18% in both periods; hardware and other revenue increased 26% in Q3 and 31% year to date. Management attributed SaaS growth principally to subscriber-base growth, and hardware growth to higher camera and recorder shipments and the Shooter Detection Systems acquisition. The SaaS and license revenue renewal rate was 96% for the trailing 12 months, versus 94% a year earlier.
Margins compressed: total cost of revenue was 42% of revenue in Q3 versus 39% a year earlier, and 40% year to date versus 37%. Hardware cost rose with shipment volume, freight and component costs. Operating margin was approximately 9.9% in Q3 versus 11.4%; year-to-date operating margin was approximately 9.2% versus 9.5%.
Cash flow, balance sheet and debt
- Operating cash flow for the first nine months was $83.2M, up from $66.7M. Property-and-equipment additions were $8.9M; operating cash flow less these additions was approximately $74.3M.
- Cash and cash equivalents were $700.3M at September 30, 2021, compared with $253.5M at year-end 2020. Working capital was $769.1M. Inventory increased to $56.5M from $44.3M, reflecting, in part, precautionary supply-chain purchases and prepayments.
- In January 2021, the company issued $500M of 0% convertible senior notes due 2026, receiving $484.3M net of issuance costs, and used proceeds to repay its $110M revolving facility, which was terminated. Notes had a $421.1M net carrying value; principal was $500M. The company stated it intends to settle note principal in cash, subject to the indenture terms.
- Interest expense increased to $4.2M in Q3 and $11.7M year to date, mainly due to non-cash amortization of the notes’ discount and issuance costs. The reported nine-month net-income comparison also reflects the absence of the prior-year $24.7M gain on sale of an investment.
- Management said available cash and expected operating cash flows should fund anticipated operating needs for at least 12 months. Estimated capital expenditures for the final three months of 2021 were approximately $1.3M.
Outlook, risks and unusual items
The filing provides no specific numeric revenue or earnings guidance. Management cautioned that COVID-19 and its variants make results difficult to predict. Risks include hardware component shortages, longer lead times and shipping delays; restrictions affecting partner installations; and possible reductions in purchases if economic conditions weaken. U.S. tariffs and higher freight and component costs may pressure hardware margins; the company said tariffs had so far had a modest margin impact.
Other significant risks include dependence on service-provider partners and a concentrated revenue base: the 10 largest partners represented 48% of Q3 revenue and 49% year to date; one partner contributed more than 15% but no more than 20%. The filing also highlights competition, cybersecurity and service reliability, privacy and regulatory compliance, and the transition away from 3G/CDMA networks, which may require customer equipment upgrades and incremental costs.
Patent litigation remains a material uncertainty. Vivint’s case is ongoing; EcoFactor matters remain pending, although the ITC ruled for Alarm.com in one investigation and EcoFactor appealed; and Causam brought district-court and ITC actions concerning thermostats. The company also faces possible indemnification costs in litigation involving service-provider ADT. Management said losses in these matters were not probable or reasonably estimable based on information available at filing. A $0.2M loss on extinguishment of the former credit facility was recorded in the nine-month period. The company reported effective disclosure controls and no material quarter-on-quarter change in internal control over financial reporting.
The company expects to adopt convertible-instrument accounting guidance on January 1, 2022 and anticipates a material balance-sheet reclassification and effects on interest expense, diluted shares and EPS. Management was still assessing the full impact.
Key facts for investors to verify
- Whether subscriber growth and the 96% renewal rate continue to support SaaS growth, and how the planned transition from non-hosted software affects license revenue.
- Whether supply constraints, freight and component costs continue to raise hardware costs and compress margins; check inventory levels and fulfillment trends.
- How much of the cash increase reflects the convertible-note financing versus recurring operating cash generation, and the company’s intended use of remaining proceeds.
- Potential dilution or cash requirements under the 2026 notes, including conversion, fundamental-change repurchase provisions and the impact of the 2022 accounting adoption.
- Developments in the Vivint, EcoFactor and Causam disputes, ADT-related indemnification exposure, and the IRS examination of the 2018 federal tax return.
- Partner concentration and the terms and future contribution of major relationships, particularly ADT.