Alarm.com Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Alarm.com provides cloud-based security, video monitoring, automation, energy management and related services through a network of more than 8,000 service-provider partners.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $121.7 million | $104.5 million | $234.0 million | $197.2 million |
| SaaS and license revenue | $82.3 million | $71.0 million | $162.4 million | $139.0 million |
| Hardware and other revenue | $39.3 million | $33.5 million | $71.6 million | $58.3 million |
| Operating income | $14.0 million | $8.5 million | $23.3 million | $20.5 million |
| Net income | $13.8 million | $10.7 million | $22.8 million | $21.2 million |
| Diluted EPS | $0.27 | $0.22 | $0.45 | $0.43 |
| Adjusted EBITDA (non-GAAP) | $27.7 million | $23.4 million | $52.0 million | $46.4 million |
- Growth and margins: Q2 revenue rose 16% year over year; SaaS and license revenue grew 16%, mainly on subscriber-base growth, while hardware and other revenue grew 17%, primarily from higher video-camera sales. Q2 gross margin was approximately 63.4%, down from 65.1%; operating margin was approximately 11.5%, up from 8.1%. First-half gross margin was approximately 64.3%, down from 67.1%, and operating margin was approximately 9.9%, versus 10.4%.
- Cash flow: First-half operating cash flow was $22.9 million, versus $15.2 million. Investing used $18.4 million, including supplier-note funding; financing provided $0.3 million. Cash increased $4.8 million to $150.9 million.
- Liquidity and debt: Working capital was $185.3 million. Long-term debt was $65.0 million, with $60.0 million available under the $125 million revolving facility. The company reported covenant compliance and no defaults under that facility.
Changes, outlook and notable items
- Q2 net income increased despite higher R&D spending; R&D expense rose 32% to $28.4 million, reflecting increased hiring and development investment. Headcount rose to 1,005 from 828 a year earlier.
- Hardware cost pressure weakened product economics: cost of hardware and other revenue was 81% of that revenue in Q2, versus 76% a year earlier; for the first half, it was 82%, versus 74%. Management cited product mix and warned that additional tariffs could further reduce hardware margins. Certain camera products and smart thermostats faced additional U.S. import duties; roughly one-third of finished-goods hardware sold was imported from China.
- Q2 G&A expense included a $3.3 million reversal of a prior supplier-note reserve. The filing also reports $3.1 million of Q2 litigation expense; Adjusted EBITDA excludes specified litigation costs and is a non-GAAP measure.
- Supplier exposure: At June 30, notes receivable from a financially distressed hardware supplier were $22.0 million, excluding interest, and the notes were in default. The company received $7.4 million from the supplier on June 24. Subsequent to quarter-end, on July 15, it received another $25.0 million and converted the remaining notes receivable into an equity investment. The filing also records a $6.0 million contingent payment related to acquiring a secured note, payable in September 2019 subject to stated conditions.
- Outlook: Management said cash, the credit facility and expected operating cash flows should cover anticipated needs for at least 12 months. It expected approximately $5.3 million of capital expenditures in the second half of 2019. Management expected sales and marketing and R&D spending to increase as the business grows; no specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Other risks and contingencies: The $28 million TCPA class-action settlement remained subject to final court approval; $5 million had been paid, with the remaining $23 million payable after the settlement becomes effective. Vivint patent litigation remained pending, with potential damages, royalties or injunctive relief; management said any loss was not then probable or reasonably estimable. Brinks Home Security filed for Chapter 11 in July 2019; Alarm.com reported an unsecured trade claim and expected ordinary-course payment. The 10 largest service-provider partners accounted for 51% of Q2 revenue, and one hardware supplier generated 21% of hardware and other revenue.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing $27.7 million of operating lease right-of-use assets and $42.1 million of lease liabilities at June 30. Management said adoption did not materially affect results of operations or cash flows.
Investor verification priorities
- Track collections, impairment risk and the terms/value of the equity investment resulting from the distressed supplier’s notes, as well as the related contingent $6.0 million payment.
- Verify final approval and payment timing for the TCPA settlement, and developments in Vivint and other patent cases.
- Monitor tariff exposure, hardware gross margin and reliance on key hardware suppliers, including the supplier undergoing financial restructuring.
- Assess service-provider concentration and Brinks Home Security’s ability to pay amounts owed during its Chapter 11 proceedings.
- Compare GAAP earnings and cash flow with Adjusted EBITDA, which excludes stock compensation, depreciation and specified litigation expenses.