Alarm.com Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Amounts are in U.S. dollars.
Business context
Alarm.com provides a cloud-based connected-home and business platform, including interactive security, automation, video monitoring and energy management. It sells primarily through a network of more than 6,000 service providers. The company reported more than 2.6 million subscribers at December 31, 2015. Its Alarm.com segment generated 94% of Q1 2016 revenue; the Other segment focuses on adjacent automation and energy-management markets.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $59.0 million | $46.0 million | +28% |
| SaaS and license revenue | $40.0 million | $32.0 million | +25% |
| Hardware and other revenue | $19.0 million | $14.1 million | +35% |
| Operating income | $4.3 million | $5.1 million | Down 17% |
| Net income | $2.7 million | $3.0 million | Down 10% |
| Adjusted EBITDA (non-GAAP) | $10.2 million | $7.0 million | +45% |
| Operating cash flow | $6.9 million | $3.5 million | +$3.5 million |
- Gross margin was approximately 64% of revenue versus 63%; operating margin declined to approximately 7% from 11%, and net margin to approximately 5% from 7%.
- Cost of SaaS and license revenue was 17% of that revenue, down from 19%, which management attributed to subscriber growth and scale. Hardware cost was 75% of hardware and other revenue, versus 77%.
- Cash and cash equivalents were $135.8 million at March 31, 2016, up from $128.4 million at year-end 2015. Working capital excluding deferred revenue was $140.6 million.
- Long-term debt was $6.7 million. The $50 million revolving credit facility had $43.1 million available for borrowing after $0.2 million of letters of credit; it matures in May 2017. The company reported compliance with covenants.
- Total assets were $235.9 million and total liabilities $61.4 million at March 31, 2016. Cash from investing activities was a net use of $0.2 million, including $2.4 million received on repayment of a distribution-partner loan.
Material changes versus Q1 2015
- Revenue growth reflected subscriber-base expansion and higher intellectual-property license fees; hardware growth was driven mainly by video cameras and cellular radio modules.
- Operating expenses rose 40% to $33.7 million. General and administrative expense increased 86% to $13.1 million, primarily because of $4.5 million more legal expense, including $3.5 million related to ongoing intellectual-property litigation, as well as public-company and other operating costs.
- Research and development expense increased 29% to $10.0 million, reflecting higher staffing. Sales and marketing expense rose 13% to $9.0 million.
- Adjusted EBITDA increased, but it excludes litigation expense and other items; GAAP operating income and net income declined. The 2015 EPS comparison is affected by income allocated to participating preferred securities, which converted to common stock upon the July 2015 IPO.
- The trailing 12-month SaaS and license revenue renewal rate improved to 94% from 92%. The filing cautions that this measure is not a direct estimate of contractual subscriber renewals.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said existing cash and expected operating cash flows should cover anticipated needs for at least 12 months.
- For the remaining nine months of 2016, management expected approximately $8.5 million of capital expenditures, including about $4.0 million for headquarters leasehold improvements; approximately $1.8 million of those improvements were expected to be funded by landlord allowances.
- Management expected sales and marketing, research and development, and general and administrative expenses to increase in the near term. G&A was expected to include additional intellectual-property litigation costs.
- Three pending matters were disclosed: Vivint’s patent-infringement suit seeking injunctions and damages; a TCPA class action based on alleged responsibility for service providers’ marketing; and a wrongful-death suit seeking $7 million in compensatory and $350,000 in punitive damages. Management said losses were not probable or reasonably estimable based on information then available; outcomes remain uncertain.
- Revenue is concentrated in the service-provider channel: the ten largest providers accounted for 60% of Q1 2016 revenue, and one provider contributed more than 10% but no more than 15%. Risks also include competition, service-provider retention, hardware supply, cybersecurity and service continuity, and rapid growth and hiring needs.
- The company relocated to new Tysons, Virginia headquarters in February 2016. It had used $6.2 million of the $8.0 million tenant-improvement allowance by quarter-end. The SecurityTrax acquisition earn-out liability was remeasured to $0.2 million, producing less than $0.1 million of income in the quarter.
Important facts for investors to verify
- Whether recurring SaaS growth, subscriber retention and the 94% renewal metric continue to support revenue growth.
- Whether operating expenses—particularly litigation-related G&A—moderate, and how GAAP earnings compare with Adjusted EBITDA.
- Developments and potential financial or operating effects of the Vivint, TCPA and wrongful-death litigation.
- Service-provider concentration, including the largest providers’ sales trends and any changes in their relationship with Alarm.com.
- Capital-expenditure requirements, use of headquarters tenant allowances, and the company’s plans for the $6.7 million debt balance maturing in May 2017.