Alarm.com Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results. Alarm.com operates a cloud-based connected-home and business platform, selling SaaS, licenses and related hardware primarily through service providers. Management reported more than 2.3 million subscribers, more than 25 million connected devices and a network of over 5,000 service providers.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $51.9 million | $42.1 million | $98.0 million | $78.9 million |
| SaaS and license revenue | $34.1 million | $27.0 million | $66.1 million | $52.2 million |
| Hardware and other revenue | $17.8 million | $15.1 million | $31.9 million | $26.8 million |
| Operating income | $4.3 million | $3.6 million | $9.4 million | $10.7 million |
| Net income | $2.5 million | $2.1 million | $5.6 million | $6.3 million |
| Operating cash flow | — | — | $7.7 million | $6.6 million |
| Adjusted EBITDA (non-GAAP) | $7.9 million | $5.2 million | $14.9 million | $14.0 million |
Margins: Gross margin was approximately 61% in Q2 and 62% in the first half, compared with 57% and 59%, respectively, a year earlier. Operating margin was about 8% in Q2 (versus 8%) and 10% in the first half (versus 14%). Net margin was about 5% in Q2 and 6% in the first half, versus about 5% and 8%.
Common-stockholder EPS: The company reported a Q2 net loss attributable to common stockholders of $16.5 million, or $6.09 per share, and a first-half loss of $13.4 million, or $5.03 per share, despite positive consolidated net income. The difference reflects $19.0 million of dividends paid to participating preferred securities and the related EPS allocation; it does not represent an operating net loss.
Balance sheet, liquidity and debt
- At June 30, cash and cash equivalents were $20.9 million, down from $42.6 million at year-end 2014; accounts receivable was $23.6 million and inventory was $8.3 million.
- Current assets were $60.2 million and current liabilities $31.7 million. Working capital excluding deferred revenue was $30.4 million, versus $50.8 million at December 31, 2014.
- Long-term debt was $6.7 million. The company had a $50 million revolving facility, $2.8 million of letters of credit outstanding and $40.5 million available to borrow. It was in compliance with covenants; the facility matures in May 2017 and is secured by substantially all assets, including intellectual property.
- Operating cash flow of $7.7 million was more than offset by $8.9 million of investing outflows and $20.5 million of financing outflows, leaving cash down $21.7 million. The financing outflow primarily reflected the $20 million dividend paid in June.
Material changes and management commentary
- Q2 revenue rose 23% year over year; first-half revenue rose 24%. SaaS and license revenue grew 27% in both periods, chiefly due to subscriber growth: subscribers increased 17% from June 30, 2014 to June 30, 2015. Renewal rate was 93% for both trailing 12-month periods reported.
- Hardware and other revenue grew 18% in Q2 and 19% in the first half. Management expects it to remain flat in the short term, grow over the longer term, and decline as a share of revenue as SaaS grows.
- First-half operating income fell 12% despite revenue growth, as operating expenses increased 42%, including 62% growth in R&D. Management attributed spending increases largely to expanding headcount, facilities and product development. Q2 net income increased, while first-half net income declined.
- Management expects continued near-term investment in R&D and sales and marketing and higher public-company costs. It estimated capital expenditures of $10–12 million over the next 12 months, including $6–8 million for headquarters leasehold improvements. Management stated that cash and expected operating cash flows should cover anticipated needs for at least 12 months. No revenue or earnings guidance was provided.
- The March 2015 SecurityTrax acquisition involved $5.6 million paid at closing, additional unpaid consideration and contingent earn-out consideration; the purchase added $3.3 million of goodwill. The company also reported a $0.1 million gain from remeasurement of the earn-out liability.
IPO, risks and unusual items
- After quarter-end, the July 2015 IPO and over-allotment raised $105.4 million gross and approximately $93.0 million net. Preferred shares converted into common shares. These transactions are not included in the June 30 financial statements.
- The June dividend was a one-time payment made in anticipation of the IPO. Management said it does not expect recurring dividends and anticipates retaining future earnings for the business.
- Vivint sued on June 2, 2015, alleging infringement of six patents and seeking injunctions, enhanced damages and fees. Alarm.com asserted non-infringement and invalidity defenses. Management said a loss was not then probable or reasonably estimable, but an adverse outcome could entail damages, royalties or restrictions on products; litigation may also be costly and disruptive.
- Revenue is concentrated among service providers: the ten largest accounted for 63.6% of first-half revenue. The company also highlighted dependence on service providers and hardware suppliers, competition, technology and cybersecurity risks, and seasonality, with sales historically stronger in Q2 and Q3.
- Disclosure controls were judged effective at a reasonable-assurance level. The company had not yet performed an internal-control-over-financial-reporting evaluation or obtained auditor attestation, citing its newly public and emerging-growth-company status.
Important facts for investors to verify
- Whether subscriber growth and the reported 93% SaaS and license renewal rate persist, and how renewal rate differs from contract renewal or churn.
- Whether expense growth—especially R&D, public-company costs and headquarters spending—translates into revenue growth and improved operating margins.
- How the Vivint patent litigation develops, including potential financial exposure, product restrictions or licensing requirements.
- How the IPO proceeds are deployed, the post-IPO share count and dilution, and the effect of preferred-stock conversion on per-share comparisons.
- Whether service-provider and supplier concentration, the revolving-credit covenants and the company’s capital-expenditure plans affect future liquidity.