Alarm.com Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. Alarm.com operates a cloud-based connected-home and business platform, sold primarily through service providers. Management reported more than 2.3 million subscribers, over 25 million connected devices, and a network of more than 5,000 service providers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $54.0 million | $42.8 million | $152.0 million | $121.8 million |
| SaaS and license revenue | $36.2 million | $28.5 million | $102.2 million | $80.7 million |
| Hardware and other revenue | $17.8 million | $14.4 million | $49.7 million | $41.1 million |
| Gross margin | 63% | 59% | 62% | 59% |
| Operating income | $4.3 million | $3.3 million | $13.7 million | $14.0 million |
| Net income | $3.2 million | $2.7 million | $8.8 million | $9.0 million |
| Adjusted EBITDA (non-GAAP) | $9.7 million | $5.1 million | $24.6 million | $19.1 million |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $21.2 million | $6.5 million |
Revenue grew 26% in Q3 and 25% in the nine-month period. SaaS and license revenue grew 27% in both comparisons. Q3 net income attributable to common stockholders was $3.2 million, or $0.07 per diluted share; the nine-month figure was a loss attributable to common stockholders of $10.2 million, or $0.60 per share, reflecting preferred-stock dividends and allocation to participating securities. Consolidated net income for the nine months was $8.8 million.
Operating margin was 8% in Q3 2015 and 8% in Q3 2014; for the first nine months it was 9% versus 11%. The Q3 gross-margin improvement reflected SaaS operating scale and lower hardware costs as a share of hardware revenue. Nine-month operating income declined slightly as operating expenses rose substantially.
Balance sheet, liquidity, and debt
- Cash and cash equivalents were $126.6 million at September 30, 2015, compared with $42.6 million at December 31, 2014. Working capital excluding deferred revenue was $135.2 million.
- Operating cash flow of $21.2 million was offset in part by $13.7 million of investing outflows, including $6.5 million of capital expenditures and $5.8 million for the SecurityTrax acquisition.
- Financing cash flow was $76.6 million, principally reflecting IPO proceeds, partly offset by $20.0 million in dividends and offering costs.
- Long-term debt was $6.7 million. The company had a $50 million revolving facility, $39.3 million available to borrow after $4.0 million of letters of credit, and was in compliance with its covenants. The facility matures in May 2017 and is secured by substantially all assets, including intellectual property.
- Operating lease commitments totaled $33.4 million, including $17.3 million due after five years.
Material changes and significant items
- The July 2015 IPO issued 7.525 million shares and generated approximately $93.0 million in net proceeds. All outstanding convertible preferred stock converted into approximately 35.0 million common shares.
- The company paid a one-time $20.0 million dividend in June 2015 and stated it does not anticipate recurring dividends in the foreseeable future.
- SecurityTrax was acquired in March 2015 for estimated total consideration of $6.7 million, including contingent consideration. The purchase-price allocation remained preliminary; goodwill recorded was $3.3 million.
- Q3 general and administrative expense increased 47%, primarily including $3.0 million of intellectual-property litigation expense. Nine-month litigation expense was $3.5 million.
- Research and development expense increased 61% in Q3 and 62% for the nine months, principally due to hiring and investment in product development. Headcount rose to 491 from 253 at the start of 2014.
- The trailing 12-month SaaS and license revenue renewal rate was 93%, compared with 94% a year earlier.
Outlook, risks, and contingencies
- Management said existing cash and expected operating cash flows should cover anticipated needs for at least 12 months. Expected capital expenditures over the next 12 months were approximately $13–$15 million, including $11–$13 million for headquarters leasehold improvements; an $8 million landlord allowance had been provided, of which $3.2 million had been used.
- Management expects continued investment in sales and marketing, research and development, public-company compliance, and facilities. It expects hardware and other revenue to be flat in the short term, with SaaS and license revenue expected to grow faster over time. No specific revenue or earnings guidance was provided.
- Results are subject to seasonality, including stronger second- and third-quarter activity from some service providers. The company also identified dependence on a limited number of service providers; its ten largest accounted for 63.7% of Q3 revenue.
- Vivint sued in June 2015, alleging infringement of six patents and seeking injunctions, damages, and attorneys’ fees. Alarm.com asserted non-infringement and invalidity defenses; management said a loss was not currently probable or reasonably estimable. An adverse outcome could require damages, royalties, or restrictions on products.
- Other principal risks include competition, service-provider and hardware-supplier dependence, cybersecurity and service continuity, product liability, changing technology, and execution of growth and acquisitions. The filing also noted a potential impairment indicator for a note receivable from an installation partner, but management concluded it was not impaired at quarter-end.
- Management reported that disclosure controls were effective as of September 30, 2015, and that no material change in internal control over financial reporting occurred during the period.
Most important facts for investors to verify
- Whether recurring SaaS and license growth and the 93% renewal rate persist, and whether concentration among major service providers changes.
- How the Vivint patent case develops and whether litigation expense, potential damages, or operational restrictions increase.
- Whether rising R&D, G&A, and public-company costs convert into growth while operating margins remain under pressure.
- Actual cash conversion and spending against the $13–$15 million capital-expenditure outlook, including headquarters improvements and lease obligations.
- Adjusted EBITDA’s reconciliation and exclusions, particularly litigation and stock-based compensation, alongside GAAP operating income and net income.
- Final SecurityTrax purchase accounting, contingent consideration, and recoverability of related-party loans and investments.