Alarm.com Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; financial statements are unaudited. Comparisons are with the corresponding 2017 period unless otherwise noted. Alarm.com provides cloud-based security, video monitoring, automation, energy management and related services through more than 7,000 service-provider partners.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $111.8 million | $90.0 million | $309.1 million | $250.1 million |
| SaaS and license revenue | $74.3 million | $61.9 million | $213.2 million | $171.1 million |
| Hardware and other revenue | $37.6 million | $28.0 million | $95.8 million | $79.1 million |
| Operating income (loss) | ($16.7 million) | $10.4 million | $3.8 million | $20.8 million |
| Net income (loss) | ($7.7 million) | $15.1 million | $13.6 million | $28.9 million |
| Diluted EPS | ($0.16) | $0.31 | $0.27 | $0.59 |
| Adjusted EBITDA (non-GAAP) | $25.8 million | $19.5 million | $72.2 million | $49.5 million |
- Revenue rose 24% in both Q3 and the first nine months. SaaS and license revenue grew 20% and 25%, respectively; hardware and other revenue grew 34% and 21%.
- Management attributed SaaS and license growth mainly to subscriber-base expansion; hardware growth primarily reflected higher video-camera sales. Software license revenue was $10.5 million in Q3 and $30.6 million year to date.
- Q3 gross profit was approximately $69.9 million, or 62% of revenue, versus approximately $58.1 million, or 65%, in Q3 2017. Hardware cost was 81% of hardware and other revenue versus 79%; SaaS and license cost was 15% of that revenue in both periods. The filing attributes hardware margin changes to product mix.
- Q3 operating results included a $28.0 million TCPA class-action settlement expense and $33.2 million total litigation expense. The settlement was the principal reason for the reported operating loss. Adjusted EBITDA excludes specified litigation costs and is not a GAAP measure.
- Q3 income tax benefit was $9.1 million; the effective tax rate was 54.2%. For the nine-month period the tax benefit was $10.4 million and the reported effective rate was (327.1)%, reflecting the small pretax-income base and tax items.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $35.0 million, down from $38.5 million. Capital expenditures were $9.3 million; investing cash outflow was $9.3 million versus $163.0 million in 2017, when acquisition payments were substantial.
- Cash increased by $27.9 million from year-end 2017 to $124.2 million at September 30, 2018. Working capital was $140.5 million.
- Long-term debt was $68.0 million, down from $71.0 million at December 31, 2017. The $125 million revolving facility matures in October 2022; $57 million remained available. It is secured by substantially all assets, including intellectual property. The company reported compliance with covenants and no defaults.
- Management stated that cash, the credit facility and expected operating cash flow should fund anticipated operating needs for at least 12 months. It expected approximately $3.0 million of capital expenditures in the final three months of 2018.
Material changes, outlook and risks
- General and administrative expense rose to $43.7 million in Q3 from $13.0 million, primarily due to litigation costs, including the $28.0 million settlement accrual. The definitive settlement agreement was signed October 25, 2018, after quarter-end, and remained subject to court approval. It provides for $5.0 million after preliminary approval and the remaining $23.0 million after the agreement becomes effective. The company agreed to compliance-related business changes and to stop new activations through the implicated service provider after preliminary approval.
- The company expects continued investment in sales and marketing and research and development; it said these expenses may increase in absolute dollars, and R&D may also rise as a percentage of revenue in the short term. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- The trailing 12-month SaaS and license revenue renewal rate was 94%, compared with 93% a year earlier. Management cautions that this metric is not a direct measure of contractual renewals.
- Key exposures include reliance on service-provider channels and a concentrated customer base: the ten largest service providers generated 57% of Q3 revenue and 58% year to date. One hardware supplier accounted for 25% of hardware and other revenue in the first nine months.
- Material uncertainties include ongoing patent disputes, particularly the Vivint litigation, and the $28.0 million TCPA settlement pending court approval. The filing says potential litigation outcomes are uncertain; management did not consider a loss in the Vivint matter probable or reasonably estimable at the time.
- Other risks include competition, partner or supplier disruption, cybersecurity and service outages, regulatory and privacy compliance, execution of growth and acquisitions, and variable-rate debt. A 100-basis-point rate change would affect annual interest expense by approximately $0.7 million.
- The company adopted revenue standard Topic 606 in 2018; the reported impact was not material. It planned to adopt lease standard Topic 842 on January 1, 2019 and expected material right-of-use assets and lease liabilities, but no material effect on operating results. An October 2018 headquarters lease amendment added 23,493 square feet.
Investor verification priorities
- Confirm court approval, payment timing and cash-flow impact of the $28.0 million TCPA settlement.
- Assess underlying operating performance apart from the settlement, including GAAP operating results and the company’s reconciliation of non-GAAP Adjusted EBITDA.
- Track SaaS growth, renewal rate, hardware mix and margins, and dependence on major service providers and hardware suppliers.
- Review outcomes and potential exposure in the Vivint and other patent proceedings, as well as the status of the company’s own infringement claims.
- Monitor cash conversion, available revolver capacity, covenant compliance, and the balance-sheet effect of adopting Topic 842.