Alarm.com Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited consolidated results. Alarm.com sells cloud-based security, video, automation and energy-management services, licenses and hardware through a network of more than 6,000 service-provider partners.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $90.0 million (+33%) | $67.8 million | $250.1 million (+31%) | $191.3 million |
| SaaS and license revenue | $61.9 million (+39%) | $44.6 million | $171.1 million (+35%) | $126.7 million |
| Hardware and other revenue | $28.0 million (+21%) | $23.2 million | $79.1 million (+22%) | $64.7 million |
| Operating income | $10.4 million | $2.8 million | $20.8 million | $9.9 million |
| Net income | $15.1 million | $2.6 million | $28.9 million | $7.2 million |
| Diluted EPS | $0.31 | $0.05 | $0.59 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $19.5 million | $11.8 million | $49.5 million | $34.7 million |
Q3 total gross margin was approximately 65%, compared with 61% a year earlier; operating margin was approximately 11.6%, versus 4.2%. For the nine-month periods, total gross margin was approximately 65% versus 62%, and operating margin was approximately 8.3% versus 5.2%. Management attributed improved cost ratios partly to scale and the Connect platform’s higher gross-margin profile. SaaS and license revenue was 69% of Q3 revenue, up from 66%.
Revenue growth reflected subscriber-base expansion, Connect platform activity and increased video-camera and peripheral sales. R&D expense rose 68% in Q3 and 67% for the nine-month period, with increased headcount and acquired teams contributing. Amortization and depreciation also increased substantially following the acquisitions.
Cash, liquidity and debt
- Cash and cash equivalents were $84.6 million at September 30, 2017, down from $140.6 million at December 31, 2016. Working capital was $106.1 million, versus $150.5 million.
- Nine-month operating cash flow was $38.5 million, compared with $11.5 million in 2016. Investing activities used $163.0 million, primarily reflecting $154.3 million net cash paid for acquisitions; financing activities provided $68.4 million, mainly from credit-facility borrowings.
- Capital expenditures were $7.7 million for the nine months. Operating cash flow less those expenditures was approximately $30.9 million; this is a simple calculation, not a company-reported non-GAAP measure.
- Debt was $72.0 million at quarter-end, under a secured revolving facility maturing in November 2018. The company reported covenant compliance and $3.0 million of remaining availability at September 30.
- After quarter-end, the company refinanced the balance with a new $125 million senior secured revolving facility maturing in October 2022; it borrowed $72 million to repay the prior facility and reported no additional draws as of filing. Management stated existing cash and expected operating cash flows should cover anticipated needs for at least 12 months.
Material changes, outlook and risks
- Acquisitions: The company acquired Icontrol’s Connect business and Piper business on March 8, 2017, and ObjectVideo Labs on January 1, 2017. The acquisitions materially increased goodwill, intangible assets, amortization, R&D staffing and debt. Acquired businesses contributed $23.0 million revenue and a $3.0 million net loss during the nine months after acquisition.
- Tax benefit: Q3 and nine-month results included income-tax benefits of $5.0 million and $9.0 million, respectively. The effective rates were negative 49.8% and negative 45.0%, primarily due to tax benefits from employee stock awards and R&D credits. This materially boosted reported net income; management cautioned that the effective tax rate may vary with stock price and option exercises.
- Outlook: No quantified revenue or earnings guidance is provided in the supplied filing text. Management expected R&D expense to rise in the near term, sales and marketing costs to increase in absolute dollars, and approximately $0.7 million of capital expenditures during Q4 2017.
- Customer and channel concentration: The ten largest service-provider partners represented 60% of Q3 and nine-month revenue. ADT historically generated substantially all Connect revenue, making Connect dependent on continued use and retention of that customer. The SaaS and license revenue renewal rate was 93% for the trailing 12 months, down from 94%.
- Litigation: Pending matters include Vivint patent litigation, a certified TCPA class action, a wrongful-death claim seeking $7.0 million compensatory and $350,000 punitive damages, and other intellectual-property and partner-related disputes. The company said losses in specified matters were not probable or reasonably estimable based on information then available; outcomes remain uncertain.
- Other notable risks: Integration and execution risks from acquisitions; competition and technology changes; reliance on service providers, ADT and hardware suppliers; cybersecurity, service availability and product-liability exposure; and potential effects of new revenue-recognition rules. The company planned to adopt Topic 606 on January 1, 2018, expected to capitalize some commissions, and had not finalized the overall quantitative impact.
Investor facts to verify
- How much of reported earnings growth is sustainable apart from stock-award tax windfalls and R&D credits?
- Whether ADT retains and expands Connect accounts, and whether Alarm.com can diversify Connect revenue.
- Acquisition integration progress, acquired-business profitability, and the returns on the $149.9 million Connect/Piper consideration and ObjectVideo purchase.
- Debt terms, leverage and covenant headroom under the new facility, including the effect of variable interest rates and secured collateral.
- Developments in major litigation and any resulting financial exposure, including the Vivint case and TCPA matters.
- The final Topic 606 adoption impact, particularly commission capitalization and any effects on reported revenue or comparability.
- Subscriber growth and retention trends, partner concentration, and any supply or service interruptions affecting hardware or the platform.