Alarm.com Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless stated otherwise. Alarm.com provides connected-property IoT platforms and services, with revenue primarily generated through service-provider partners.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| SaaS and license revenue | $135.4 million | $123.2 million | +10% |
| Hardware and other revenue | $74.3 million | $82.2 million | -10% |
| Total revenue | $209.7 million | $205.4 million | +2% |
| Gross profit and gross margin | $133.5 million; 63.7% | $115.4 million; 56.2% | Margin expanded |
| Operating income and margin | $8.8 million; 4.2% | $8.9 million; 4.3% | Income slightly lower |
| Net income | $14.2 million | $8.9 million | +60% |
| Net income attributable to common stockholders | $14.4 million; $0.29 basic EPS, $0.28 diluted | $9.1 million; $0.18 basic and diluted EPS | Increased |
| Non-GAAP adjusted EBITDA | $30.6 million | $29.9 million | +2% |
| Cash flows from operating activities | -$3.5 million | -$14.0 million | Cash use narrowed |
Gross margin improvement chiefly reflected lower hardware and freight costs and product price increases. Hardware cost fell 23%; cost of hardware and other revenue was 76% of that revenue, versus 89% a year earlier. SaaS and license cost rose 16% with subscriber growth, while remaining 14% of SaaS and license revenue. Operating expenses increased 17% to $124.7 million, led by research and development (+20%), general and administrative (+19%), and sales and marketing (+15%).
Net income growth included a substantial increase in interest income to $5.2 million from $0.1 million, mainly on cash balances. Research and development headcount and overall staffing also grew; stock-based compensation was $12.7 million versus $12.1 million. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, stock-based compensation, acquisition costs and specified litigation costs.
Cash, liquidity and debt
- Cash and cash equivalents were $606.4 million at March 31, 2023, down from $622.2 million at year-end 2022; cash, cash equivalents and restricted cash totaled $607.3 million.
- Working capital was $719.6 million, compared with $726.2 million at December 31, 2022. Total current assets were $880.9 million and current liabilities $161.2 million.
- Operating cash use was $3.5 million. Investing activities used $12.9 million, including $9.7 million net cash for the EBS acquisition; financing activities provided $0.8 million. Cash decreased $15.6 million during the quarter.
- The company had $500 million principal amount of 0% convertible senior notes due January 2026; their net carrying amount was $491.2 million. The balance sheet also included $2.5 million of acquired EBS debt. Management stated cash and anticipated operating cash flows should cover expected operating needs for at least 12 months.
- Capital expenditure expectations for the remaining nine months of 2023 were $5–$7 million. The company reported no Q1 share repurchases; in February it authorized a new program of up to $100 million through February 2025.
Material changes and business developments
- SaaS and license revenue growth was partly offset by hardware revenue contraction. Management attributed SaaS growth primarily to subscriber-base growth and revenue from subscribers added in 2022; Other-segment growth included energy management and demand-response sales.
- Software license revenue declined to $6.2 million from $7.1 million as customers continued shifting from non-hosted software to the cloud platform.
- The company said the 2022 shutdown of certain 3G and CDMA networks contributed to lower sales volumes of video cameras and cellular radio modules.
- Vivint stopped paying license fees under a patent cross-license agreement. The company estimates this reduces SaaS and total revenue, earnings and cash flow by approximately $6 million per quarter, before additional legal fees.
- Alarm.com acquired EBS, a Poland-based smart-communicator device producer, in January for $9.8 million net cash at closing, with a potential earn-out of up to $2.5 million. The purchase accounting was not final. The company cited international expansion and supply-chain benefits as objectives.
- The trailing-12-month SaaS and license revenue renewal rate was 93%, versus 94% a year earlier. The 10 largest service-provider partners or distributors represented 50% of revenue in both periods; one partner individually represented more than 15% but no more than 20%.
Outlook, risks and contingencies
- The filing provides no clear full-year revenue or earnings guidance. Management cautioned that macroeconomic uncertainty makes Q1 results an unreliable indicator of full-year performance.
- Management estimated additional 2023 federal and state cash taxes related to required capitalization and amortization of research and development costs could be $45–$50 million if the requirement is not changed. The company paid its additional 2022 federal liability in February and $7.5 million of additional state tax in April 2023.
- Risks cited include economic and consumer-spending uncertainty, supply-chain and component availability, tariffs on some China-sourced products, competition, cybersecurity and service reliability, reliance on service-provider partners and key suppliers, and customer concentration.
- Patent disputes remain significant. Vivint litigation and arbitration, EcoFactor litigation, and cases involving Causam and service-provider partners could lead to damages, royalties, injunctions, indemnification costs or ongoing legal expense. The company stated losses were not probable or reasonably estimable for the matters described. The ITC ruled for Alarm.com and EnergyHub in the Causam matter; Causam appealed.
- The company reported a $1.2 million income-tax benefit and a negative 9.4% effective tax rate for the quarter, primarily citing research and development tax credits and the foreign-derived intangible income deduction. IRS examinations of its 2018 and 2019 federal returns were ongoing.
Most important facts for investors to verify
- Whether recurring SaaS and license growth continues to offset hardware revenue declines and the lost Vivint license fees.
- Whether hardware margins remain improved and whether component, freight or tariff costs reverse that improvement.
- Whether operating cash flow improves after the quarter’s cash use and the anticipated Section 174 tax payments.
- Progress and financial impact of Vivint arbitration and patent litigation, including potential partner indemnification exposure.
- Integration and earn-out outcomes for EBS, and whether the 93% renewal rate and partner concentration change.