Alarm.com Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparative periods are the corresponding 2020 periods. Alarm.com provides cloud-based connected-property services and hardware through a network of more than 10,000 service-provider partners. Figures below are in millions of dollars except per-share data and percentages.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| SaaS and license revenue | $113.2 | $95.7 | $220.6 | $187.7 |
| Hardware and other revenue | $75.7 | $45.9 | $140.8 | $105.9 |
| Total revenue | $188.9 | $141.6 | $361.4 | $293.6 |
| Operating income | $16.7 | $15.0 | $31.7 | $24.9 |
| Net income | $14.5 | $16.6 | $29.0 | $25.2 |
| Net income attributable to common stockholders | $14.7 | $17.0 | $29.6 | $25.8 |
| Diluted EPS | $0.28 | $0.34 | $0.57 | $0.51 |
| Adjusted EBITDA (non-GAAP) | $38.0 | $29.2 | $73.6 | $58.4 |
Margins: Gross margin was approximately 59.0% in Q2, versus 65.4% in Q2 2020; first-half gross margin was approximately 60.4%, versus 63.6%. Operating margin was approximately 8.9% in Q2 and 8.8% for the first half, compared with 10.6% and 8.5%, respectively. Net margin was approximately 7.7% in Q2 and 8.0% for the first half, versus 11.7% and 8.6%.
- Cash flow: First-half cash from operations was $45.3, down from $48.0. Investing used $12.4, including a $5.0 investment in a technology partner. Financing provided $376.3, principally reflecting convertible-note proceeds and repayment of the prior credit facility. Cash increased to $662.7 from $253.5 at year-end 2020.
- Liquidity: Working capital was $733.7 at June 30, up from $307.2 at December 31, 2020. Current assets were $837.8 and current liabilities $104.1.
- Debt: The company issued $500.0 principal of 0% convertible senior notes due January 2026, receiving $484.3 net of issuance costs, and repaid and terminated its $110.0 revolving facility. Notes had a $416.9 net carrying amount at June 30 after unamortized discount and issuance costs. The notes have a 4.0% effective interest rate for accounting purposes, resulting in non-cash interest expense; the company currently intends to settle principal in cash.
- Other metrics: The trailing 12-month SaaS and license revenue renewal rate was 95%, compared with 94% a year earlier. The Alarm.com segment generated 95% of revenue. The ten largest service-provider partners accounted for 48% of Q2 revenue.
Material changes versus the prior comparable period
- Q2 revenue grew 33%; first-half revenue grew 23%. SaaS and license revenue increased 18% in both periods, mainly from subscriber-base growth. Hardware and other revenue rose 65% in Q2 and 33% in the first half, driven by greater camera and recorder shipments and revenue from Shooter Detection Systems, acquired in December 2020.
- Q2 net income declined despite higher revenue, primarily as interest expense rose to $4.2 from $0.9, mainly due to non-cash discount and issuance-cost amortization on the 2026 Notes. First-half net income increased to $29.0 from $25.2.
- Hardware cost pressure weakened gross margin: freight costs and product mix contributed to hardware cost of revenue rising to 80% of hardware revenue in Q2 from 78%; first-half ratio was 79%, up from 77%.
- Research and development expense increased 19% in Q2 and 13% in the first half, reflecting personnel and related costs. First-half general and administrative expense increased 21%, including higher intellectual-property litigation costs and personnel expense.
- Software license revenue, included in SaaS and license revenue, declined to $8.3 in Q2 from $9.8 and to $17.0 in the first half from $19.5 as customers continued transitioning from non-hosted software to the cloud platform.
Outlook, risks, contingencies and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said existing cash and expected operating cash flows should cover anticipated operating needs for at least 12 months, and estimated approximately $4.1 of capital expenditures for the remainder of 2021.
- Management cautioned that COVID-19 continues to create uncertainty, including potential supply-chain and shipping disruption, inventory constraints and limits on service providers’ ability to meet customers. Results for the reported periods are not necessarily indicative of full-year results.
- Tariffs of up to 25% may apply to certain imported products; approximately one-fifth to one-half of hardware products sold are imported from China and could be exposed. Freight costs and tariffs may pressure hardware margins. The company also highlighted potential component shortages and supplier concentration; one supplier’s products and components generated 16% of first-half hardware and other revenue.
- Intellectual-property matters include the long-running Vivint lawsuit and EcoFactor lawsuits. The ITC affirmed a ruling in Alarm.com’s favor in the EcoFactor thermostat investigation on July 20, 2021; related district-court cases remain. Causam filed a thermostat patent lawsuit and an ITC complaint in July 2021, after quarter-end. Management stated losses for the described matters were not probable or reasonably estimable at the filing date.
- The company may have indemnification exposure related to service-provider litigation. Litigation can incur substantial costs and divert management attention, even where the company believes it has valid defenses.
- Other notable items: stock-based compensation was $10.1 in Q2 and $17.9 in the first half. No shares were repurchased in the first half under the current $100.0 million authorization. Management reported disclosure controls effective as of June 30, 2021.
Important facts for investors to verify
- Whether hardware growth and subscriber-driven SaaS growth persist, and whether freight, product mix, tariffs or supply constraints further affect gross margins.
- How cash generation and working capital evolve, particularly inventory, receivables and supplier-related prepayments; the cash balance includes substantial proceeds from the new notes.
- The notes’ conversion, cash-settlement and potential dilution implications, and the continuing non-cash interest expense from their accounting treatment.
- Developments in Vivint, EcoFactor and Causam litigation, including any potential damages, injunctions, import restrictions or indemnification costs.
- Revenue concentration in major service-provider partners and reliance on key hardware suppliers, alongside the reported 95% renewal-rate metric.
- Whether management’s stated liquidity assessment and remainder-of-2021 capital expenditure estimate remain applicable as COVID-19 and market conditions evolve.