Alarm.com Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Alarm.com sells cloud-based security, video monitoring, automation and energy-management services, licenses software and intellectual property, and sells related hardware through a network of more than 6,000 service-provider partners.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $86.0m | $64.4m | $160.2m | $123.5m |
| SaaS and license revenue | $58.9m | $42.0m | $109.2m | $82.0m |
| Hardware and other revenue | $27.1m | $22.4m | $51.0m | $41.4m |
| Gross profit / margin | $56.2m / 65% | $39.2m / 61% | $103.7m / 65% | $77.2m / 63% |
| Operating income / margin | $5.9m / 7% | $2.8m / 4% | $10.4m / 6% | $7.1m / 6% |
| Net income | $9.9m | $1.9m | $13.8m | $4.6m |
| Adjusted EBITDA (non-GAAP) | $15.9m | $12.1m | $30.0m | $22.9m |
| Diluted EPS | $0.20 | $0.04 | $0.28 | $0.10 |
Q2 revenue grew 33%, led by 40% growth in SaaS and license revenue; first-half revenue grew 30%. SaaS and license revenue represented 69% of Q2 revenue versus 65% a year earlier. Management attributed growth to subscriber-base expansion, Connect platform subscribers, increased license fees, and higher sales of cameras and peripherals. The SaaS cost ratio improved to 14% of related revenue in Q2 from 17%, while hardware cost was 79% of related revenue versus 80%.
Q2 research and development expense rose 86% to $20.1m, and amortization and depreciation rose to $4.8m, largely reflecting added personnel and acquired assets. Net income was boosted by a $4.5m income-tax benefit; the reported effective tax rate was negative 84.1%, mainly reflecting stock-based-compensation tax benefits and R&D credits. This makes net-income growth less comparable with operating performance.
Cash flow, balance sheet and liquidity
- For the first half, operating cash flow was $24.7m, compared with $7.9m in 2016. Investing used $164.0m, principally including $154.3m of acquisition cash outflow and $5.7m of capital expenditures. Financing provided $67.5m, mainly from credit-facility borrowings.
- Cash and equivalents fell to $68.9m at June 30 from $140.6m at year-end; working capital was $89.0m, down from $150.5m.
- Long-term debt was $72.7m, compared with $6.7m at year-end. The $75m secured revolving facility matures in November 2018; $2.3m remained available. The company was in covenant compliance. The facility is secured by substantially all assets, including intellectual property.
- Total assets were $356.2m, including $101.1m of net intangible assets and $64.1m of goodwill, substantially increased by acquisitions. Stockholders’ equity was $211.3m.
Material changes, outlook and risks
- In March, the company acquired Icontrol’s Connect and Piper businesses for $148.5m cash consideration, funded with $81.5m of cash and $67.0m of facility borrowings. It also acquired ObjectVideo Labs in January for $6.0m. Purchase-price allocations remained preliminary. Acquired businesses contributed $12.3m of revenue and a $3.5m net loss during the first half after acquisition dates.
- Management said existing cash and expected operating cash flows should cover anticipated needs for at least 12 months. It expected approximately $6.7m of capital expenditures in the second half of 2017, including $3.4m for headquarters leasehold improvements. Management expects investment in R&D and sales and marketing to continue; the filing provides no specific revenue or earnings forecast.
- Key exposure: substantially all Connect platform revenue historically came from ADT, creating customer-concentration and integration risk. The company’s ten largest service-provider partners represented 61% of revenue in both Q2 and the first half. The trailing 12-month SaaS and license revenue renewal rate was 93%.
- Material legal matters include Vivint patent litigation, with the district-court stay lifted and proceedings continuing on four patents; a TCPA class action certified in May 2017; and a wrongful-death suit seeking $7.0m compensatory and $350,000 punitive damages. Management said losses in these matters were not then probable or reasonably estimable.
- The company identified integration, acquired-liability, competition, partner concentration, cybersecurity, service reliability, supplier dependence, and intellectual-property litigation as risks. Connect revenue dependence on ADT and the increased debt burden merit particular attention. Topic 606 revenue-recognition adoption was required in Q1 2018; its financial impact was still under evaluation.
Important facts for investors to verify
- Whether ADT retains and expands its use of Connect, and whether acquired businesses meet integration and performance expectations.
- How much reported growth and profitability is organic versus acquisition-related, and how sustainable the tax benefits are.
- Debt repayment capacity before the November 2018 maturity, covenant headroom, and sensitivity to floating interest rates.
- Customer and supplier concentration, subscriber retention, and hardware-return experience.
- Developments in Vivint, TCPA and other litigation, and any resulting financial exposure.
- The final acquisition purchase-price allocations and the eventual impact of Topic 606 adoption.