Alarm.com Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 filing; quarterly figures below are unaudited. Financial amounts are in U.S. dollars.
Business context
Alarm.com provides cloud-based connected-property services, including security, video monitoring, automation, energy management and wellness solutions. It primarily sells through more than 8,000 independent service-provider partners. Revenue comes from recurring SaaS and license fees, plus hardware and other sales. In 2018, its platforms processed more than 200 billion data points from over 90 million connected devices.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $420.5 million | $338.9 million | +24% |
| SaaS and license revenue | $291.1 million | $236.3 million | +23% |
| Hardware and other revenue | $129.4 million | $102.7 million | +26% |
| Operating income | $12.2 million | $33.4 million | Down 63% |
| Net income | $21.5 million | $29.3 million | Down 26% |
| Diluted EPS | $0.43 | $0.59 | Down 27% |
| Adjusted EBITDA (non-GAAP) | $93.1 million | $71.6 million | +30% |
| Operating cash flow | $60.7 million | $57.2 million | +$3.5 million |
Gross margin was approximately 65.3%, versus 65.7% in 2017; operating margin declined to approximately 2.9% from 9.8%. The company reported a tax benefit of $9.8 million in 2018, compared with tax expense of $3.0 million in 2017, contributing to net income being higher than pretax income. Adjusted EBITDA excludes, among other items, litigation expense, stock compensation, depreciation and amortization; it is not a GAAP substitute for earnings or cash flow.
Cash and cash equivalents were $146.1 million at year-end, up from $96.3 million. Working capital was $152.8 million, compared with $119.4 million. Investing activities used $13.4 million, including $11.0 million of capital expenditures; financing activities provided $2.4 million. The company had $67.0 million outstanding on its $125.0 million secured revolving facility, with $58.0 million available; the debt matures in October 2022. It was in compliance with covenants at year-end. Total assets were $441.0 million and stockholders’ equity was $277.6 million.
Fourth-quarter snapshot
Unaudited Q4 2018 revenue was $111.4 million, comprising $77.8 million of SaaS and license revenue and $33.6 million of hardware and other revenue. Net income was $7.9 million, or $0.16 diluted EPS. Q4 2017 revenue was $88.8 million and net income was $0.3 million. Revenue grew sequentially in SaaS and license services; hardware revenue varies with order timing.
Material changes and unusual items
- Recurring SaaS and license revenue continued to grow, but operating income fell as operating expenses rose 39% to $262.6 million. R&D expense increased 23% to $89.2 million, and sales and marketing increased 29% to $55.9 million.
- General and administrative expense rose 73% to $95.8 million, driven mainly by a $28.0 million charge for a proposed TCPA class-action settlement and increased legal costs. The settlement had preliminary court approval but was not final at year-end; $5.0 million was paid in January 2019 and the remaining $23.0 million is payable after the settlement becomes effective.
- A $3.3 million impairment was recorded in Q4 on a secured subordinate convertible note to a supplier. After year-end, Alarm.com advanced the supplier another $3.1 million; the note balance, including accrued interest, reached $6.6 million, and further funding was expected. Future recoverability remains uncertain.
- The 93% SaaS and license revenue renewal rate was unchanged from 2017. Management cautions that this metric is not the same as customer-contract renewal or churn.
- Revenue recognition standard Topic 606 was adopted in 2018 with no material financial-statement impact; certain employee commissions are now capitalized and amortized over three years. The company expected to recognize lease right-of-use assets and liabilities upon adopting the new lease standard in 2019.
Outlook, risks and contingencies
No specific forward revenue or earnings guidance is provided in the supplied filing text. Management expected continued investment in R&D, sales and marketing, headcount and international expansion; it anticipated approximately $11.0 million of capital expenditures over the next 12 months and said existing cash, the credit facility and operating cash flows should cover anticipated needs for at least that period. A $75.0 million share-repurchase authorization was approved in November 2018, with no shares repurchased by year-end; the program is discretionary and subject to credit-agreement conditions.
Key risks include reliance on service-provider partners and revenue concentration: the ten largest partners accounted for 57% of 2018 revenue, and one partner represented more than 15% but not more than 20%. The business also faces competition from large technology and security companies; cybersecurity, privacy, service reliability and life-safety exposure; supplier and hardware availability risks; regulatory and litigation uncertainty; and variable-rate debt exposure. The filing identifies continuing patent disputes, including Vivint litigation, for which outcomes are uncertain. International revenue was 2% of total revenue.
Important facts for investors to verify
- How much of the 2018 net-income and margin decline reflects recurring cost growth versus the TCPA settlement, supplier-note impairment and tax benefits; review the non-GAAP reconciliation and cash implications.
- Final court approval, timing and payment of the TCPA settlement, and the status and potential exposure of patent litigation.
- The supplier’s restructuring, collateral position, additional advances and recoverability of the $6.6 million note balance and any further expected funding.
- Revenue retention, partner concentration and the performance of major partners, particularly given short provider agreements and dependence on channel sales.
- Credit-facility covenant headroom, variable interest-rate exposure, and the effect of lease adoption and planned repurchases on liquidity.