Business context and reporting period
Alarm.com Holdings, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company provides cloud-based security, video, automation, energy-management and related solutions, primarily through a network of more than 9,000 service-provider partners. Its Alarm.com segment generated 94% of revenue in both the quarter and nine-month period.
Financial performance
Amounts are in millions, except per-share data. Year-over-year changes are calculated from the filing’s reported figures.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| SaaS and license revenue | $100.1 (+18%) | $84.9 | $287.8 (+16%) | $247.3 |
| Hardware and other revenue | $58.7 (+37%) | $43.0 | $164.6 (+44%) | $114.6 |
| Total revenue | $158.9 (+24%) | $127.9 | $452.4 (+25%) | $361.9 |
| Operating income | $18.1 | $12.2 | $42.9 | $35.5 |
| Net income | $35.8 | $17.7 | $61.0 | $40.5 |
| Net income attributable to common stockholders | $36.1 | $17.7 | $61.9 | $40.5 |
| Diluted EPS | $0.71 | $0.35 | $1.22 | $0.81 |
| Adjusted EBITDA (non-GAAP) | $34.5 | $26.3 | $92.9 | $78.3 |
Q3 gross margin was approximately 61.5%, compared with 62.8% a year earlier; operating margin was approximately 11.4%, compared with 9.5%. For the nine months, gross margin was approximately 62.8% versus 63.8%, and operating margin approximately 9.5% versus 9.8%. Adjusted EBITDA margins were approximately 21.7% and 20.6% for Q3, and 20.5% and 21.6% for the respective nine-month periods.
For the nine months, operating cash flow was $66.7 million (versus $23.8 million), investing cash flow was positive $12.2 million (versus negative $5.9 million), and financing cash flow was positive $48.6 million (versus $0.3 million). Operating cash flow less capital expenditures was approximately $56.0 million, compared with $13.2 million a year earlier; this is a simple calculation, not a company-reported non-GAAP measure.
At September 30, 2020, cash and equivalents were $247.2 million, working capital was $304.3 million, and debt was $111.0 million. Cash exceeded debt by approximately $136.2 million. The $125 million revolving facility had $14 million available; it matures in October 2022, is secured by substantially all company assets, and includes financial covenants. The company reported covenant compliance and no defaults.
Material changes versus the prior comparable period
- Revenue growth reflected subscriber-base expansion, higher video-camera sales and OpenEye revenue following its 2019 acquisition. Hardware and other revenue grew faster than recurring SaaS and license revenue and increased as a share of total revenue.
- Software license revenue declined to $9.5 million in Q3 from $10.8 million, and to $29.0 million for nine months from $32.8 million, as customers continued shifting from non-hosted to hosted software.
- Operating expenses rose, notably research and development, which increased 25% in Q3 and 34% for nine months. Headcount increased to 1,361 from 1,043 a year earlier.
- Net income included a $24.7 million gain from the sale of a platform-partner investment. This materially boosted reported earnings; the gain is not part of Adjusted EBITDA.
- Cash rose substantially, supported by operating cash generation, $50 million borrowed under the credit facility and $25.7 million proceeds from the investment sale. Debt increased from $63.0 million at December 31, 2019.
- The company repurchased $5.1 million of stock in Q1 2020; there were no repurchases in Q3. A May secondary offering was entirely by selling stockholders, and the company received no proceeds.
Outlook, commentary, risks and unusual items
- Management said the business and service-provider channel showed resilience from late Q2 through Q3, but COVID-19 could continue to disrupt hardware supply and partner sales channels. If recovery stalls or restrictions return, management expects SaaS and license revenue growth could be lower, with a corresponding reduction in hardware revenue. Results to date are not necessarily indicative of full-year results.
- The filing does not provide a clear numerical financial forecast or formal guidance. Management expected approximately $3 million of capital expenditures in the final three months of 2020 and said cash, facility availability and operating cash flows should cover anticipated needs for at least 12 months.
- Trade tariffs may increase hardware costs: management said roughly one-fifth to one-half of finished-goods hardware sold is imported from China and could be subject to tariffs. Tariffs had a modest impact on hardware margins to date, but broader or higher duties could pressure margins.
- Customer/channel concentration remains important: the 10 largest service-provider partners generated 50% of Q3 revenue and 49% for the nine months. One partner represented more than 15% but no more than 20% of revenue. A hardware supplier provided products or components representing 16% of hardware and other revenue for the nine months.
- Material patent matters include Vivint litigation and EcoFactor proceedings concerning smart thermostats, including an ITC investigation that could affect imports. Management said losses were not probable or reasonably estimable based on information available. A TCPA/VTPPA class action was dismissed; a separate TCPA class action remained pending.
- OpenEye earn-out fair value fell to less than $0.1 million from $2.6 million at year-end, primarily reflecting lower projected 2020 revenue. OpenEye minority holders’ put and call options may be exercised beginning in 2023.
- Subsequent event: on November 4, 2020, Alarm.com and ADT amended their master services agreement, extending its initial term through January 1, 2023 and addressing Google Nest integration and continued subscriber access to Alarm.com platforms, subject to conditions. A related patent license provides for monthly royalties on certain ADT subscribers not supported on Alarm.com platforms.
Important facts for investors to verify
- How much of reported earnings growth is attributable to recurring operations versus the $24.7 million investment-sale gain, and how should the unusually low nine-month effective tax rate be interpreted?
- Whether subscriber growth and the 94% SaaS and license revenue renewal rate continue, and how the company’s recurring revenue performs relative to the faster-growing, lower-margin hardware business.
- Whether COVID-19 conditions, supply-chain constraints and tariffs affect product availability, sales, costs or future growth.
- Developments and potential financial or operational effects of the Vivint, EcoFactor and partner-indemnification patent matters.
- Credit-facility capacity, covenant headroom and repayment plans for the $111 million debt balance, given the facility’s October 2022 maturity and security over company assets.
- The complete terms and expected economic effect of the ADT amendment and patent license, which the filing says would be filed later as an exhibit.