Alarm.com Holdings, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. This is an annual report, not a standalone Q4 filing. Alarm.com provides cloud-based security, video monitoring, automation, energy management and related services through a network of more than 10,000 service providers.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $618.0 million | $502.4 million | +23% |
| SaaS and license revenue | $393.3 million | $337.4 million | +17% |
| Hardware and other revenue | $224.7 million | $165.0 million | +36% |
| Operating income | $56.3 million | $50.4 million | +12% |
| Net income | $76.7 million | $53.3 million | +44% |
| Net income attributable to common stockholders | $77.9 million | $53.5 million | +45% |
| Diluted earnings per share | $1.53 | $1.06 | +44% |
| Adjusted EBITDA, non-GAAP | $125.3 million | $108.3 million | +16% |
Revenue mix shifted toward hardware and other, which rose to 36% of revenue from 33%; SaaS and license represented 64%, versus 67%. Total cost of revenue was 37% of revenue in both years, for an approximate 63% gross margin. Operating margin was approximately 9.1%, compared with 10.0% in 2019. Net margin increased to approximately 12.4% from 10.6%, boosted by non-operating gains. The SaaS and license renewal rate was 94%, unchanged from 2019.
Q4 2020 revenue was $165.6 million, versus $140.5 million in Q4 2019. Q4 net income was $15.6 million, versus $12.8 million; diluted EPS was $0.31, versus $0.26.
Cash flow, liquidity and debt
- Cash and cash equivalents were $253.5 million at year-end, up from $119.6 million. Working capital was $307.2 million, compared with $167.9 million.
- Operating cash flow was $102.1 million, versus $47.1 million. Investing activities used $20.3 million; financing activities provided $52.0 million. Capital expenditures were $16.1 million.
- Year-end long-term debt was $110.0 million under a secured revolving facility; the company reported covenant compliance. It had $15.0 million of borrowing availability at year-end.
- After year-end, Alarm.com issued $500.0 million of 0% convertible senior notes due 2026, receiving $484.3 million net of issuance costs. It used proceeds to repay and terminate the revolving facility; remaining proceeds were intended for working capital and general corporate purposes, potentially including acquisitions or strategic investments.
Material changes, outlook and notable items
- Growth in hosted-platform subscribers drove SaaS and license gains. Hardware growth reflected higher video-camera shipments and the inclusion of OpenEye, acquired in October 2019. Non-hosted software license revenue declined to $38.0 million from $43.4 million as customers transitioned to the hosted platform.
- Research and development expense rose 33% to $152.1 million, reflecting headcount growth and acquired in-process research and development. Sales and marketing expense rose 23%; total operating expenses increased 25%.
- Net income included a $24.7 million gain from the sale of an investment in a platform partner. Other income, net, was $25.6 million, compared with $6.5 million in 2019. The 2020 effective tax rate was 4.4%, versus 9.5%, mainly due to research and development credits and stock-based compensation tax benefits.
- The company acquired Shooter Detection Systems for approximately $26.5 million net of a working-capital adjustment, expanding commercial gunshot-detection offerings. The purchase-price allocation was preliminary at filing.
- Management gave no specific FY2021 financial guidance in the provided filing text. It said cash and expected operating cash flows should cover anticipated needs for at least 12 months and estimated approximately $11.3 million of capital expenditures over the next 12 months.
- COVID-19 disrupted supply chains and service-provider sales channels; management noted business resilience from late Q2 onward but warned that renewed restrictions or a weak recovery could constrain future SaaS growth and hardware sales. Hardware availability, longer lead times and shipping costs remained risks.
Risks, contingencies and other matters
- Revenue is concentrated among channel partners: the ten largest accounted for 48% of 2020 revenue; ADT represented more than 15% but no more than 20%. The ADT master agreement was extended through January 2023; a patent-license arrangement is expected to generate per-subscriber royalties for certain services beginning in 2023, at lower per-subscriber fees than hosted SaaS.
- A supplier provided products or components representing 16% of hardware and other revenue. COVID-related supply disruption, tariffs on some China-sourced hardware, and the planned 3G/CDMA network shutdowns by certain carriers through 2022 could affect costs, availability and subscriber upgrades.
- Material intellectual-property disputes include Vivint litigation and EcoFactor proceedings involving smart thermostats. The EcoFactor ITC matter could result in import restrictions; the company said losses were not considered probable or reasonably estimable. Alarm.com also faces potential indemnification costs in patent suits against ADT.
- The OpenEye 2020 revenue targets for a potential earn-out were not met; its $2.6 million year-end 2019 contingent-consideration liability fell to zero in 2020. A separate TCPA class action was resolved and dismissed in January 2021.
- Other key risks include cybersecurity and service reliability, intense competition, subscriber retention, privacy regulation, acquisition integration and the possibility that connected-property adoption or growth is weaker than anticipated. The auditor and management concluded internal control over financial reporting was effective; SDS was excluded from the control assessment because it was acquired late in 2020.
Investor verification priorities
- Separate recurring SaaS growth and renewal trends from hardware growth, acquisition contribution and the declining non-hosted software business.
- Assess earnings quality: quantify the effect of the $24.7 million investment-sale gain and the unusually low tax rate on reported net income and EPS.
- Review cash conversion, inventory build, receivable allowances and the impact of the 2019 TCPA settlement on year-over-year operating cash flow comparisons.
- Examine convertible-note settlement, conversion and dilution terms, use of remaining proceeds, and the change from secured facility debt to unsecured convertible notes.
- Track ADT relationship and revenue exposure, supplier concentration, COVID-related supply constraints, tariff exposure and 3G/CDMA migration costs.
- Monitor the status and potential financial or operating impact of the Vivint, EcoFactor and ADT-indemnification litigation, as well as final accounting for the SDS acquisition.