Alarm.com Holdings, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 29, 2016. This is an annual filing, not a standalone fourth-quarter report. Alarm.com provides cloud-based connected-home and business services—security, automation, video and energy management—primarily through a network of more than 5,000 service providers. It reported more than 2.6 million subscribers.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $208.9 million | $167.3 million | +25% |
| SaaS and license revenue | $140.9 million | $111.5 million | +26% |
| Hardware and other revenue | $68.0 million | $55.8 million | +22% |
| Gross profit / gross margin | $131.5 million / 63% | $100.1 million / 60% | Margin improved |
| Operating income / margin | $18.0 million / 9% | $21.0 million / 13% | Income down 14% |
| Net income / margin | $11.8 million / 6% | $13.5 million / 8% | Down 13% |
| Adjusted EBITDA (non-GAAP) | $34.3 million | $28.3 million | Up 21% |
| Cash from operating activities | $27.1 million | $15.6 million | Up $11.5 million |
Revenue growth was led by subscriber-base expansion. SaaS and license revenue was 67% of total revenue. Cost of revenue fell to 37% of revenue from 40%, reflecting scale efficiencies and lower hardware unit costs. Operating expenses rose 43% to $113.5 million, including research and development expense of $40.0 million (up 72%) and general and administrative expense of $35.5 million (up 36%). The latter included $6.3 million of intellectual-property litigation expense.
FY 2015 GAAP net income was $11.8 million, but the amount attributable to common stockholders was a loss of $7.2 million, or $0.30 per share, chiefly because $19.0 million of dividends were allocated to participating securities in connection with the pre-IPO capital structure. The company paid an aggregate $20.0 million dividend in June 2015; it does not expect regular cash dividends in the foreseeable future.
In Q4 2015, revenue was $56.9 million and net income was $3.3 million, compared with $54.0 million and $2.9 million in Q3. Q4 results included $2.8 million of intellectual-property litigation expense. Quarterly hardware revenue varies with order timing.
Financial position, liquidity and capital
- Cash and cash equivalents were $128.4 million at year-end, versus $42.6 million a year earlier. Working capital, excluding deferred revenue, was $134.3 million.
- Investing activities used $18.0 million, including $10.3 million of capital expenditures, $5.6 million for SecurityTrax assets and $1.0 million for patent licenses. Financing activities provided $76.7 million, principally from the IPO, partly offset by dividends and offering costs.
- The July 2015 IPO issued 7.525 million shares. The company reported $93.0 million of net proceeds after underwriting discounts and offering expenses; it intended to use proceeds for working capital, general corporate purposes and potentially acquisitions or strategic investments.
- Long-term debt was $6.7 million under a $50 million revolving facility, leaving $43.3 million available. The facility matures in May 2017, is secured by substantially all assets including intellectual property, and had a 2.63% effective interest rate for 2015. The company reported compliance with covenants at year-end.
- Management expected approximately $10 million of capital expenditures over the next 12 months, including headquarters improvements; $2.4 million of the anticipated improvements were expected to be funded by tenant allowances. Management stated existing cash and expected operating cash flows should cover anticipated needs for at least 12 months.
Material changes, outlook and risks
- Net income declined despite strong sales growth as operating expenses expanded, particularly R&D and legal costs. Adjusted EBITDA increased, but excludes litigation and other items and is not a GAAP substitute.
- Revenue renewal rate was 93%, unchanged from 2014. The top ten service providers generated approximately 63.4% of revenue; Monitronics represented more than 15% but no more than 20%. This concentration exposes results to partner retention and purchasing decisions.
- Management expected cost of revenue and operating expenses to rise in absolute dollars. It anticipated continued investment in R&D, sales and marketing, international expansion and public-company infrastructure. No specific revenue or earnings guidance was provided.
- International revenue was less than 1% of 2015 revenue, despite products being localized in 21 countries outside the U.S. and Canada. Expansion therefore presents opportunity but also execution, regulatory, currency and partner risks.
- Vivint sued in June 2015 alleging infringement of six patents and seeking injunctions and damages. The company disputed the claims and said a loss was not probable or reasonably estimable. A separate wrongful-death suit filed in February 2016 sought $7 million in compensatory and $350,000 in punitive damages; the company was still reviewing it.
- Other key risks include competition from technology, security, cable and telecom companies; reliance on cellular networks, hardware suppliers and service providers; cybersecurity, privacy, outages and product reliability; and the ability to manage rapid hiring and growth. One hardware supplier accounted for 37% of hardware and other revenue in 2015.
- The company corrected an immaterial stock-compensation error in Q3 2015: general and administrative expense increased by $480,000, tax provision decreased by $194,000 and net income decreased by $286,000. Management said the previously issued quarterly statements were not materially misstated.
- The company early adopted a deferred-tax balance-sheet presentation change retrospectively. The auditor issued an unqualified opinion; management concluded disclosure controls were effective, while the filing did not include management’s internal-control assessment or auditor attestation under the newly public company transition exemption.
Most important facts for investors to verify
- Whether recurring SaaS growth and the 93% renewal metric continue to offset hardware variability and customer attrition.
- The sustainability of margins and earnings as R&D, hiring, public-company costs and litigation expenses increase; review GAAP results alongside Adjusted EBITDA.
- Exposure to the largest service providers, especially Monitronics, and the impact of any partner changes or competing offerings.
- Developments and potential financial or operating effects of the Vivint patent litigation and the wrongful-death claim.
- Use of IPO proceeds, progress on planned capital spending and headquarters improvements, and compliance with the secured credit facility as it approaches its 2017 maturity.