Alarm.com Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone Q4 report. Alarm.com provides cloud-based security, video, automation, energy management and related services through a network of more than 9,000 service providers. SaaS and license fees are primarily recurring; hardware sales are a substantial additional revenue source.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $502.4 million | $420.5 million |
| SaaS and license revenue | $337.4 million | $291.1 million |
| Hardware and other revenue | $165.0 million | $129.4 million |
| Operating income | $50.4 million | $12.2 million |
| Net income | $53.3 million | $21.5 million |
| Net income attributable to common stockholders | $53.5 million | $21.5 million |
| Diluted earnings per share | $1.06 | $0.43 |
| Adjusted EBITDA (non-GAAP) | $108.3 million | $93.1 million |
| Cash from operating activities | $47.1 million | $60.7 million |
Revenue grew 19% year over year: SaaS and license revenue rose 16%, while hardware and other revenue rose 27%. Gross margin was approximately 63% (versus 65% in 2018); the filing attributes the lower overall margin mainly to revenue mix and higher hardware costs. SaaS and license cost was 15% of that revenue in both years; hardware cost increased to 81% of hardware revenue from 78%. Operating margin increased to approximately 10% from 3%.
FY2019 Q4 revenue was $140.5 million and net income was $12.8 million; net income attributable to common stockholders was $13.0 million. Q4 2018 revenue was $111.4 million and net income was $7.9 million.
Financial position and liquidity
- At December 31, 2019, cash and cash equivalents were $119.6 million, down from $146.1 million a year earlier. Working capital was $167.9 million, up from $152.8 million.
- Long-term debt was $63.0 million, down from $67.0 million. The $125.0 million secured revolving facility had $62.0 million available; it matures in October 2022 and is secured by substantially all assets, including intellectual property. The company reported covenant compliance.
- Operating cash flow decreased $13.6 million to $47.1 million. Investing activities used $73.4 million, including the OpenEye acquisition, property and equipment, and supplier-note activity. Financing activities used $0.1 million.
- Management said existing cash, the credit facility and expected operating cash flows should cover anticipated operating needs for at least 12 months. Expected 2020 capital expenditures were approximately $18 million.
Material changes, outlook and unusual items
- Operating income improved substantially, while net income was also affected by non-operating items. FY2019 included $4.9 million of interest income and $6.5 million of other income, including $1.7 million of interest and a $6.9 million gain related to repayment and conversion of supplier notes, partly offset by a $0.6 million investment impairment.
- FY2018 general and administrative expense included a $28.0 million TCPA class-action settlement charge. The settlement was paid in 2019; the year-over-year decline in G&A largely reflects this comparison, along with a reversal of a previously recorded supplier-note reserve.
- In October 2019, Alarm.com acquired 85% of OpenEye for approximately $67.0 million of total consideration, including holdback and estimated contingent consideration. Up to a further $11.0 million may be payable based on 2020 revenue targets. OpenEye contributed $5.9 million of revenue and a $1.6 million net loss after acquisition. Purchase accounting remained preliminary.
- Management expects continued investment in sales and marketing and research and development; it anticipated R&D expense would rise in the short term. No specific FY2020 revenue or earnings guidance is provided in the filing.
- Risks highlighted include dependence on service-provider partners (the 10 largest generated 52% of 2019 revenue; ADT contributed more than 15% but no more than 20%), competition, cybersecurity and service reliability, and supplier concentration. Approximately one-third to one-half of finished-goods hardware was imported from China; tariffs had a modest impact on hardware margins, and the company anticipated possible supply disruption from the coronavirus outbreak. It also identified expected costs to address carrier 3G and CDMA network shutdowns by the end of 2022.
- Material legal matters include the settled $28.0 million TCPA case, ongoing Vivint patent litigation, and EcoFactor patent proceedings involving smart thermostats. The company said losses in the ongoing matters were not probable or reasonably estimable at filing; an adverse ITC outcome could restrict imports of certain thermostats.
Important facts for investors to verify
- Whether recurring SaaS growth and the 94% SaaS and license revenue renewal rate continue; the rate is not the same as subscriber contract renewal or churn.
- Whether hardware growth can be maintained without further erosion in hardware margins, and how tariffs, China-related supply disruption and network technology transitions affect costs and demand.
- Whether OpenEye meets its 2020 revenue targets, how acquisition integration progresses, and the final purchase-price allocation and contingent consideration.
- Whether major service-provider relationships remain stable, particularly ADT, and whether customer concentration or partner credit quality changes.
- Developments and potential financial or operating effects of the Vivint, EcoFactor, Applied Capital and Varatec litigation matters, including any indemnification exposure.
- Cash conversion and debt capacity: operating cash flow fell despite higher earnings, and the credit facility is secured and subject to financial and other covenants.
Audit and controls: PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2019; OpenEye was excluded from the controls assessment.