Alarm.com Holdings, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2019. Alarm.com provides cloud-based security, video monitoring, automation and related services, primarily through a network of more than 8,000 service-provider partners. SaaS and license revenue is generally recurring; hardware sales are a significant additional revenue source.
Financial performance and liquidity
- Revenue: Q3 revenue rose 14% to $127.9 million from $111.8 million. SaaS and license revenue increased 14% to $84.9 million; hardware and other revenue rose 14% to $43.0 million. For the first nine months, revenue increased 17% to $361.9 million, including 16% growth in SaaS and license revenue to $247.3 million and 20% growth in hardware and other revenue to $114.6 million.
- Profitability: Q3 operating income was $12.2 million, versus an operating loss of $16.7 million a year earlier; net income was $17.7 million, versus a $7.7 million net loss. Diluted EPS was $0.35 versus a loss of $0.16. Nine-month operating income was $35.5 million versus $3.8 million; net income was $40.5 million versus $13.6 million, and diluted EPS was $0.81 versus $0.27.
- Margins: Gross margin was approximately 63% in Q3 versus 62% in Q3 2018; for the nine months it was approximately 64% versus 65%. Hardware cost of revenue rose to 82% of hardware revenue for both Q3 and the nine-month period, compared with 81% and 77%, respectively. SaaS and license cost was 15% of that revenue in Q3 and 15% year to date.
- Adjusted EBITDA: The company reported non-GAAP Adjusted EBITDA of $26.3 million for Q3, up from $25.8 million, and $78.3 million for nine months, up from $72.2 million. The measure excludes, among other items, stock compensation, acquisition costs and specified litigation expenses.
- Cash flow: Nine-month operating cash flow was $23.8 million, down from $35.0 million. Investing used $5.9 million, while financing provided $0.3 million. Cash increased by $18.3 million to $164.3 million at September 30.
- Liquidity and debt: Working capital was $207.0 million, compared with $152.8 million at December 31, 2018. Long-term debt was $64.0 million under a $125 million revolving facility, with $61.0 million available; the facility matures in October 2022. The company reported compliance with its covenants and no default. Operating lease liabilities totaled approximately $42.0 million.
Changes versus the prior comparable period
- Growth was led by subscriber-related SaaS and license revenue and higher video-camera unit sales. The SaaS and license revenue renewal rate was 94%, unchanged from the prior-year measurement.
- Q3 and nine-month comparisons benefited from the prior-year $28.0 million TCPA settlement expense recorded in general and administrative costs. That settlement was approved in August 2019 and fully paid by September 30, 2019.
- 2019 results included a $6.9 million gain and $1.7 million interest income related to repayment and conversion of notes involving a hardware supplier, partly offset by a $0.6 million investment impairment. These items increased reported pretax income.
- Research and development expense rose 29% in Q3 and 30% year to date, reflecting headcount growth and a $1.0 million in-process research and development acquisition. Nine-month operating cash flow also reflected working-capital movements and payment of the TCPA settlement.
Outlook, commentary and key risks
- Outlook: No specific updated full-year revenue or earnings guidance is provided in the supplied filing text. Management said existing cash, the credit facility and expected operating cash flows should cover anticipated needs for at least 12 months, and estimated approximately $1.5 million of capital expenditures for Q4 2019. It expected continued investment and increases in sales and marketing, research and development, and general and administrative costs as the business grows.
- Acquisition: On October 21, 2019, after quarter-end, the company acquired 85% of OpenEye, a cloud-managed commercial video-surveillance provider, for $61.3 million cash after an agreed holdback. The price is subject to adjustments; up to $11.0 million of additional earn-out may be payable based on 2020 targets. The purchase-price allocation was not final. This cash outlay occurred after the September 30 balance-sheet date.
- Tariffs and hardware: Tariffs affected certain products imported from China, including thermostat, camera and sensor products. Management said the effect to date on hardware margins was modest, but expanded tariffs could raise costs or further reduce margins. Between one-third and one-half of finished-goods hardware sold is imported from China.
- Customer and supplier exposure: Revenue depends substantially on service-provider partners; the 10 largest accounted for 52% of Q3 and nine-month revenue. One hardware supplier represented 21% of hardware and other revenue for those periods and had undergone financial restructuring. A remaining $5.6 million note balance was converted into an equity investment in July.
- Legal matters: A new EcoFactor patent complaint filed October 22, 2019 names the company and other parties; the company was reviewing the matter and had not determined its merits. The company also disclosed ongoing patent litigation, including Vivint claims, but said losses were not probable or reasonably estimable based on information then available. The TCPA class settlement is concluded and paid.
- Other risks and accounting: The filing highlights competition, reliance on service providers and wireless carriers, cybersecurity and service-continuity risks, privacy regulation, acquisition integration, and potential margin pressure. Adoption of lease accounting in 2019 added right-of-use assets and lease liabilities to the balance sheet without a material reported effect on earnings or cash flows. Management stated disclosure controls were effective as of September 30.
Most important facts for investors to verify
- Whether recurring SaaS and license growth and the 94% renewal rate persist, and how subscriber additions, churn and partner concentration develop.
- Hardware gross-margin trends, product mix, supplier continuity and the financial effect of current or expanded import tariffs.
- The quality and sustainability of earnings, particularly the supplier-note gain and interest income, the prior-year TCPA settlement comparison, and the reconciliation of Adjusted EBITDA to GAAP results.
- Post-acquisition cash, debt and liquidity after the $61.3 million OpenEye payment, including any purchase-price adjustments or earn-out and the acquired business’s performance and integration.
- Developments in the EcoFactor and other patent matters, including possible indemnification exposure, and any changes to management’s loss assessments.
- Cash conversion and working-capital trends, including receivables, accrued liabilities and the cash impact of settlement and investment activity.