Alarm.com Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Comparisons are with the corresponding 2017 periods unless noted.
Business context
Alarm.com provides cloud-based security, video monitoring, automation, energy management and related services through a network of more than 7,000 service-provider partners. Revenue comes principally from recurring SaaS and license fees, alongside hardware and other sales. The core Alarm.com segment generated 93% of Q2 and 94% of first-half 2018 revenue.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Total revenue | $104.5 million | $86.0 million | $197.2 million | $160.2 million |
| SaaS and license revenue | $71.0 million | $58.9 million | $139.0 million | $109.2 million |
| Hardware and other revenue | $33.5 million | $27.1 million | $58.3 million | $51.0 million |
| Gross margin | 65.1% | 65.3% | 67.1% | 64.7% |
| Operating income | $8.5 million | $5.9 million | $20.5 million | $10.4 million |
| Net income | $10.7 million | $9.9 million | $21.2 million | $13.8 million |
| Diluted EPS | $0.22 | $0.20 | $0.43 | $0.28 |
| Adjusted EBITDA (non-GAAP) | $23.4 million | $15.9 million | $46.4 million | $30.0 million |
| Operating cash flow | Not stated quarterly | $15.2 million | $24.7 million |
Q2 operating margin was 8.1%, versus 6.9%; first-half operating margin was 10.4%, versus 6.5%. Net income benefited from income-tax benefits of $2.6 million in Q2 and $1.4 million in H1. Adjusted EBITDA is a company-defined non-GAAP measure that excludes, among other items, stock compensation and specified litigation expenses.
Liquidity, cash flow and debt
- Cash and cash equivalents were $106.0 million at June 30, 2018, up from $96.3 million at year-end 2017. Working capital was $148.3 million, compared with $119.4 million.
- Current assets were $193.9 million and current liabilities $45.6 million. Long-term debt was $69.0 million, down from $71.0 million at year-end.
- First-half operating cash flow was $15.2 million, down $9.5 million year over year. Property and equipment additions were $6.1 million; operating cash flow less those additions was approximately $9.1 million.
- The $125 million senior secured revolving facility had $56.0 million available at June 30 and matures in October 2022. It is secured by substantially all assets, including intellectual property. The company reported covenant compliance and no defaults.
Material changes versus prior period
- Q2 revenue increased 22%; H1 revenue increased 23%. SaaS and license revenue grew 20% in Q2 and 27% in H1, primarily from subscriber-base growth. Hardware and other revenue rose 24% in Q2 and 14% in H1, with camera and peripheral sales contributing.
- Software license revenue increased to $10.2 million in Q2 from $8.5 million and to $20.1 million in H1 from $10.8 million; the H1 comparison also reflects acquisition timing.
- H1 operating cash flow declined despite higher net income, primarily because of operating asset and liability movements, including receivables and prepaid inventory, and a $2.8 million subsidiary-award settlement.
- General and administrative expense increased 35% in Q2, principally reflecting $5.6 million more intellectual-property litigation expense, partly offset by lower acquisition-related expense. H1 litigation expense rose $7.4 million, partly offset by $4.8 million less acquisition-related expense.
- The trailing-12-month SaaS and license revenue renewal rate was 94%, up from 93%. The company cautions that this metric is not a direct measure of contractual renewals.
Outlook, risks and unusual items
- Management said existing cash, the credit facility and expected operating cash flows should fund anticipated operating needs for at least 12 months. It expected approximately $8.0 million of capital expenditures in the second half of 2018, primarily for office build-out and equipment. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management expects continued investment in sales and marketing and research and development; it anticipated these expenses would increase in absolute dollars and, in the short term, as a percentage of revenue. Headcount rose to 828 from 750 a year earlier.
- Customer and channel concentration remains significant: the ten largest service-provider partners represented 57% of Q2 and 58% of H1 revenue. A single hardware supplier provided products and components equal to 25% of H1 hardware and other revenue. The Connect platform historically depended substantially on ADT.
- Material litigation risks include a certified TCPA class action, with trial anticipated in October 2018 and potential statutory damages of up to $500 per call, potentially trebled for knowing or willful violations; the company said loss was not reasonably estimable. The Vivint patent case remained pending, although an appellate court affirmed invalidation of challenged claims of one patent in July 2018. Other patent disputes and a separate TCPA suit also remained pending.
- Topic 606 adoption in 2018 had no material reported impact; it changed commission accounting to capitalize qualifying costs and amortize them over three years. The company planned to adopt lease standard Topic 842 on January 1, 2019 and expected material balance-sheet recognition of lease assets and liabilities, but no material income-statement impact.
- The filing identifies competitive, product reliability, cybersecurity, privacy and regulatory, supplier, partner-retention, acquisition-integration, interest-rate and growth-management risks. The company reported effective disclosure controls as of June 30, 2018.
Most important facts for investors to verify
- Whether recurring SaaS growth and the 94% renewal-rate metric persist, and how much growth comes from subscriber additions versus license revenue and acquisition-related comparisons.
- Cash conversion: why H1 operating cash flow fell, whether receivables and prepaid inventory normalize, and how planned capital spending affects cash generation.
- Exposure to major service-provider partners, ADT’s role in Connect, and reliance on the supplier responsible for 25% of H1 hardware and other revenue.
- Developments and potential financial exposure in the TCPA and intellectual-property cases, including litigation costs excluded from Adjusted EBITDA.
- Facility covenants, variable-rate debt exposure, and the balance-sheet effect of adopting Topic 842.