Alarm.com Holdings, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and six months ended June 30, 2016, compared with the same 2015 periods. Alarm.com provides a cloud-based connected-home and business platform, sold primarily through a network of more than 6,000 service providers. Revenue comes from SaaS and licenses, hardware, activation fees and other services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $64.4m | $51.9m | $123.5m | $98.0m |
| SaaS and license revenue | $42.0m | $34.1m | $82.0m | $66.1m |
| Hardware and other revenue | $22.4m | $17.8m | $41.4m | $31.9m |
| Gross margin, approximate | 60.9% | 60.6% | 62.5% | 61.9% |
| Operating income | $2.8m | $4.3m | $7.1m | $9.4m |
| Net income | $1.9m | $2.5m | $4.6m | $5.6m |
| Adjusted EBITDA, non-GAAP | $11.9m | $7.9m | $22.6m | $14.9m |
Revenue grew 24% in Q2 and 26% in the first half, led by subscriber-related SaaS growth and higher video-camera and peripheral sales. SaaS and license revenue renewal rate was 93% for the trailing twelve months, unchanged from the prior-year period. Approximate operating margin was 4.4% in Q2 (8.2% prior year) and 5.7% for the first half (9.6% prior year). Net income margin was approximately 2.9% in Q2 and 3.7% in the first half.
Operating income and GAAP net income declined despite revenue growth, primarily amid higher general and administrative costs, including intellectual-property litigation and proposed-acquisition expenses, alongside investment in personnel and product development. Q2 G&A expense rose 67% to $14.2m; the filing attributes $3.9m of the increase to IP litigation and $2.0m to acquisition-related costs. First-half litigation expense included in the company’s Adjusted EBITDA reconciliation was $7.9m, and acquisition-related expense was $2.6m. Adjusted EBITDA rose 50% in Q2 and 51% in the first half, but excludes, among other items, litigation and acquisition costs and is not a GAAP measure.
Reported 2015 net income attributable to common stockholders was a loss because $19.0m of dividends were allocated to participating securities ahead of the IPO; the 2015 common-share count was also far below the 2016 count. Thus, reported common-stockholder EPS comparisons are not directly comparable: 2016 basic and diluted EPS were $0.04 for Q2 and $0.10 for the first half.
Cash, liquidity and debt
- Cash and cash equivalents were $134.2m at June 30, 2016, up from $128.4m at December 31, 2015. Working capital excluding deferred revenue was $144.2m.
- First-half operating cash flow was $7.5m, versus $7.7m in 2015. Investing activities used $2.3m, compared with $8.9m; financing provided $0.7m, versus $20.5m used in 2015, which included a $20.0m dividend.
- Long-term debt was $6.7m. At June 30, $42.5m remained available under the then-$50m credit facility; the company reported covenant compliance. The facility is secured by substantially all assets, including intellectual property.
- On August 10, after quarter-end, the facility capacity increased to $75m, with an option for lender-approved capacity up to $125m; maturity was extended to November 2018 and the maximum leverage covenant increased. The company expected to draw an additional $55m–$65m to help fund its proposed acquisition.
Outlook, material developments and risks
- On June 23, 2016, Alarm.com agreed to acquire Icontrol’s Connect and Piper businesses for approximately $140m, subject to customary conditions, regulatory approval and the closing of Comcast’s acquisition of Icontrol. Management expected the transaction to support growth and be accretive to full-year 2017 non-GAAP EPS; this is a transaction-specific expectation, not general earnings guidance. Completion, timing and benefits were uncertain.
- The filing identifies significant acquisition risks, including financing and integration costs, assumed liabilities, and Connect’s reliance on a single key customer. The company expected to use cash and additional debt to fund the transaction.
- Three disclosed legal matters include Vivint’s patent-infringement suit seeking injunctive relief and damages; a putative Telephone Consumer Protection Act class action relating to service-provider marketing; and a wrongful-death suit seeking $7.0m in compensatory and $350,000 in punitive damages. Management said losses were not probable or reasonably estimable at the reporting date.
- Other key risks include service-provider and supplier concentration, competition, technology and cybersecurity failures, customer retention, regulatory and privacy compliance, and the costs and outcomes of IP litigation. The ten largest service providers generated 60.5% of first-half revenue. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- Management expected continued spending on sales and marketing, research and development, and general administration; it believed cash and operating cash flows would cover anticipated needs for at least 12 months. The filing cautions that interim results may not indicate full-year performance.
Most important facts for investors to verify
- Whether the Icontrol transaction closed, its final financing and purchase price, and whether Connect retained its key customer.
- Actual post-acquisition debt, leverage, covenant headroom and liquidity compared with the expected $55m–$65m incremental borrowing.
- Developments, potential exposure and cash costs in the Vivint, TCPA and wrongful-death matters.
- Whether recurring SaaS growth and the 93% renewal-rate measure persist, and how service-provider concentration affects revenue.
- Whether rising litigation and acquisition expenses, continued investment and stock-based compensation affect GAAP profitability and cash generation; assess Adjusted EBITDA alongside GAAP results.