Alarm.com Holdings, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Alarm.com provides cloud-based security, video monitoring, automation and energy-management services through a network of more than 6,000 service-provider partners. Revenue comes primarily from recurring SaaS and license fees, plus hardware and other sales.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $74.2 million | $59.0 million | Up 26% |
| SaaS and license revenue | $50.2 million | $40.0 million | Up 26% |
| Hardware and other revenue | $24.0 million | $19.0 million | Up 26% |
| Operating income | $4.5 million | $4.3 million | Up 5% |
| Net income | $4.0 million | $2.7 million | Up 45% |
| Diluted EPS | $0.08 | $0.06 | Up |
| Adjusted EBITDA (non-GAAP) | $14.1 million | $10.8 million | Up 30% |
| Operating cash flow | $13.0 million | $7.3 million | Up |
Total cost of revenue was 36% of revenue in both periods, implying a 64% gross margin. SaaS and license cost was 16% of that revenue versus 17% a year earlier; hardware and other cost rose to 77% of its revenue from 75%. Operating margin was approximately 6% versus 7%; net margin was approximately 5% in both periods. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, acquisition-related and specified litigation expenses.
Cash and cash equivalents were $63.2 million at March 31, down from $140.6 million at December 31, 2016. Investing activities used $157.9 million, principally for acquisitions; financing provided $67.5 million. Current assets were $119.3 million and current liabilities $41.0 million. Long-term debt was $73.7 million, compared with $6.7 million at year-end. The $75 million revolving facility matures in November 2018; $1.3 million remained available at quarter-end. The company reported compliance with its covenants and no defaults.
Material changes versus the prior comparable period
- Revenue growth reflected subscriber-base expansion, including accounts added in 2016, as well as Connect-platform revenue and higher intellectual-property fees. Hardware growth came mainly from video cameras and other peripherals.
- Operating expenses rose 28% to $43.1 million. Research and development increased 46% to $14.5 million, and amortization and depreciation rose 80% to $2.9 million, reflecting increased staffing and acquired intangibles. General and administrative expense rose 17% to $15.4 million, including acquisition-related costs; lower litigation expense partly offset the increase.
- The effective tax rate fell to 12.1% from 36.8%, mainly due to the accounting change that recognizes stock-based award tax benefits in the income tax provision, along with research and development credits. This helped net income grow faster than operating income.
- The trailing 12-month SaaS and license revenue renewal rate was 93%, versus 94% in the prior-year measure.
Outlook, commentary and risks
- Management said existing cash and expected operating cash flows should cover anticipated operating needs for at least 12 months. It expected approximately $8 million of capital expenditures over the remaining nine months of 2017, including headquarters improvements.
- The March 2017 Icontrol acquisition included Connect and Piper; the January acquisition of ObjectVideo Labs added video analytics technology and engineering capabilities. The Icontrol transaction’s cash consideration was $148.5 million after estimated working-capital adjustment, funded with $81.5 million of cash and $67 million drawn on the credit facility. Purchase-price allocations remained preliminary. Acquired businesses contributed $2.6 million of revenue and a net loss of $0.9 million in the quarter after acquisition dates.
- Connect revenue historically depended substantially on ADT, creating customer-concentration risk. More broadly, the 10 largest service-provider partners accounted for 60% of quarterly revenue. One partner accounted for $8.6 million of receivables at quarter-end.
- Material disclosed risks include acquisition integration and assumed liabilities, increased debt and variable interest rates, competition, reliance on service-provider and hardware partners, technology and cybersecurity disruptions, and intellectual-property and other litigation. The company said it could not determine that losses were probable or reasonably estimable in several pending cases; the TCPA class action was certified in May 2017. The filing reports no specific revenue or earnings guidance.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Connect retains ADT and whether the amended arrangement supports the acquired business’s expected contribution.
- Acquisition integration progress, final purchase-price allocations, ongoing transaction and integration costs, and the acquired businesses’ subsequent revenue and profitability.
- Cash generation, acquisition-related spending, debt repayment capacity, facility availability, variable-rate exposure and covenant headroom.
- Revenue renewal and concentration trends, especially the largest service-provider partners and hardware suppliers.
- Developments in the Vivint patent litigation, TCPA matters and other pending legal proceedings, including potential costs or operational effects.