Alarm.com Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020. Alarm.com provides cloud-based security, video monitoring, automation, energy management and related solutions, primarily through a network of more than 10,000 service-provider partners.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| SaaS and license revenue | $107.4 million | $92.0 million | Up 17%; 62% of revenue versus 61% |
| Hardware and other revenue | $65.1 million | $60.0 million | Up 9%; 38% of revenue versus 39% |
| Total revenue | $172.5 million | $151.9 million | Up 14% |
| Gross profit and margin | $106.7 million; 61.9% | $94.0 million; 61.8% | Margin approximately stable, calculated from reported revenue and cost of revenue |
| Operating income and margin | $15.0 million; 8.7% | $9.9 million; 6.5% | Margin improved, calculated from reported results |
| Net income | $14.6 million | $8.6 million | Net income attributable to common stockholders was $14.8 million, or $0.29 diluted per share, versus $8.8 million, or $0.18 |
| Adjusted EBITDA | $35.6 million | $29.2 million | Up 22%; non-GAAP measure |
| Operating cash flow | $21.2 million | $12.9 million | Up $8.3 million |
| Cash and working capital | $642.2 million; $704.7 million | $253.5 million; $307.2 million at Dec. 31, 2020 | Cash increase principally reflects convertible-note proceeds |
Cost of hardware and other revenue was 78% of that revenue, versus 76%; cost of SaaS and license revenue was 14%, versus 13%. The filing attributes the hardware cost ratio increase to product mix. Cash used in investing activities was $9.1 million, including a $5.0 million investment in a technology partner. Cash from financing activities was $376.5 million, principally reflecting the convertible-note issuance and repayment of the credit facility.
Material changes and financing
- Growth in SaaS and license revenue primarily reflected subscriber-base expansion, including subscribers added in 2020. Hardware growth reflected increased camera shipments and revenue from Shooter Detection Systems, acquired in December 2020. Software-license revenue declined to $8.7 million from $9.7 million as customers continued shifting from non-hosted to cloud-based services.
- Operating expenses rose overall, including R&D expense of $42.5 million versus $39.7 million. The prior-year period included $4.4 million of acquired in-process R&D expense that did not recur; current-period staffing and consultant costs increased. G&A included $2.4 million more intellectual-property litigation expense than the prior-year period.
- On January 20, 2021, the company issued $500 million of 0% senior unsecured convertible notes due January 2026, receiving $484.3 million net of issuance costs. It repaid and terminated its $110 million secured revolving credit facility. The notes’ initial conversion price is $147.19 per share; the company stated its current intent to settle principal in cash. Reported note liability carrying value was $412.8 million, reflecting accounting discounts and issuance costs.
- Interest expense rose to $3.4 million from $0.6 million, primarily due to non-cash amortization of the notes’ discount and issuance costs. The company recorded a $2.9 million income-tax benefit, compared with a $1.2 million tax provision, primarily due to employee stock-award tax benefits and other tax estimate changes.
Outlook, risks and unusual items
- Management said existing cash and expected operating cash flows should cover anticipated operating cash needs for at least 12 months. It expected approximately $7.4 million of capital expenditures over the remaining nine months of 2021. No specific revenue or earnings guidance for full-year 2021 is provided in the supplied filing text.
- Management cautioned that COVID-19 may continue to disrupt hardware manufacturing, component availability, shipping and service-provider sales activity. A weak recovery or renewed shutdowns could slow SaaS growth and hardware sales. Results for the quarter are not necessarily indicative of full-year results.
- Tariffs of up to 25% on certain imports from China have modestly affected hardware margins; expanded tariffs could increase costs. The filing also flags supply-chain shortages and dependence on suppliers and service-provider partners.
- Customer concentration is material: the ten largest service-provider partners generated 50% of Q1 revenue, and one partner contributed more than 15% but no more than 20%. A supplier provided products or components generating 14% of hardware and other revenue.
- Significant IP matters remain, including Vivint litigation and EcoFactor proceedings. The company reported that the administrative law judge’s April 20, 2021 initial determination in the EcoFactor ITC matter favored Alarm.com, subject to further review. Management said losses in the principal matters were not probable or reasonably estimable at the reporting date; adverse outcomes could still involve damages, royalties, import restrictions or indemnification costs.
- Other notable exposures include cybersecurity and privacy risks, competition, possible hardware-margin pressure, and potential cash requirements or dilution under the convertible notes. A $0.2 million loss on early extinguishment of the former credit facility was recorded. The OpenEye acquisition earn-out liability was zero after 2020 revenue targets were not met.
Investor verification checklist
- Verify the durability of 17% SaaS and license growth, subscriber retention (reported renewal rate: 95%, versus 93%), and the ongoing decline in legacy software-license revenue.
- Track hardware availability, product mix, tariffs and gross-margin trends, including the effect of supplier concentration and COVID-related disruption.
- Review the convertible-note indenture and cash-versus-share settlement terms, conversion triggers, maturity obligations and potential dilution; distinguish principal debt from its discounted balance-sheet carrying value.
- Assess cash generation excluding financing proceeds, planned capital spending and intended uses of remaining note proceeds.
- Follow developments in the Vivint and EcoFactor matters and related indemnification exposure, as well as service-provider concentration and cybersecurity risks.