Start Time: 16:30 January 1, 0000 5:26 PM ET Alarm.com Holdings, Inc. (NASDAQ:ALRM) Q4 2020 Earnings Conference Call February 25, 2021, 16:30 PM ET Company Participants Stephen Trundle - President and CEO Steve Valenzuela - CFO David Trone - VP of IR Conference Call Participants Jeff Kessler - Imperial Capital Adam Tindle - Raymond James David Robinson - William Blair Darren Aftahi - ROTH Capital Partners Aditya Dagaonkar - Northland Capital Jack Vander Aarde - Maxim Group Operator Ladies and gentlemen, tha ...

Financial Data and Key Metrics Changes - SaaS and license revenue for Q3 2020 was $100.1 million, an increase of 17.9% year-over-year [11][23] - Adjusted EBITDA for Q3 2020 was $34.5 million, up 31.1% from $26.3 million in Q3 2019 [27] - GAAP net income for Q3 2020 was $36.1 million compared to $17.7 million in Q3 2019 [27] - Total revenue for Q3 2020 was $158.9 million, a growth of 24.2% from Q3 2019 [24] - Hardware and other revenue was $58.7 million, up 36.7% over Q3 2019 [24] Business Line Data and Key Metrics Changes - Growth initiatives accounted for 22.5% of SaaS revenue in Q3 2020, growing 42% year-over-year [17] - Residential video services saw 40% of new subscribers opting for video services [17] - Connect software license revenue was approximately $9.5 million for Q3 2020, down from $10.8 million in the previous year [23] Market Data and Key Metrics Changes - The professionally serviced smart home market in the US and Canada showed ongoing strength [11] - The commercial market began to show positive momentum, although it has not fully recovered to pre-COVID levels [11] Company Strategy and Development Direction - The company is focusing on new product launches, including the Flex I/O security sensor and Smart Water Valve + Meter [12][14] - There is an emphasis on intelligent integration with central monitoring stations to improve service efficiency and reduce false alarms [15] - The partnership with ADT has been extended, allowing continued promotion and installation of their Command and Control offering until early 2023 [20][21] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the ongoing strength in the residential market, attributing it partially to changes in consumer behavior due to COVID-19 [42] - The company anticipates SaaS and license revenue for 2021 to be around $435 million, with total revenue expected between $640 million and $650 million [31] - Management noted that the high revenue renewal rate of 94% indicates strong customer retention [24] Other Important Information - The company ended Q3 2020 with $247.2 million in cash and cash equivalents [28] - Free cash flow for Q3 2020 was $15.1 million, compared to a negative $4 million in the same quarter last year [28] Q&A Session Summary Question: What is the expected service life of subscribers? - Management indicated that the average customer life tends to be around eight to nine years, with attrition rates of 10% to 15% [33][34] Question: How will the transition to the new agreement with ADT affect economics? - Management stated that the new agreement includes a reasonable recurring royalty arrangement, but specific terms could not be disclosed [36] Question: What are the long-term trends observed in the residential market? - Management noted that customers are investing in their homes and adding second properties, which has led to stronger performance than expected [42][43] Question: What is the customer reception of the Flex I/O product? - The Flex I/O product has received positive feedback, with various use cases being identified, including monitoring detached garages and gates [48] Question: What is driving the growth in the other revenue segment? - The other revenue segment, which includes EnergyHub and other initiatives, has been growing at rates of 30% to 40% year-over-year [66]

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited condensed consolidated financial statements show significant year-over-year growth in revenue and net income for the third quarter and first nine months of 2020. Total assets increased to **$698.0 million** from **$557.8 million** at year-end 2019, primarily driven by a rise in cash and cash equivalents. Cash flow from operations saw a substantial increase to **$66.7 million** for the nine-month period, compared to **$23.8 million** in the prior year, reflecting higher net income and favorable changes in operating assets and liabilities Condensed Consolidated Financial Statements Key Financial Metrics | Financial Metric | Three Months Ended Sep 30, 2020 ($) | Three Months Ended Sep 30, 2019 ($) | Nine Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2019 ($) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $158.9M | $127.9M | $452.4M | $361.9M | | **Operating Income** | $18.1M | $12.2M | $42.9M | $35.5M | | **Net Income** | $35.8M | $17.7M | $61.0M | $40.5M | | **Diluted EPS** | $0.71 | $0.35 | $1.22 | $0.81 | Condensed Consolidated Balance Sheet Data | Balance Sheet Item | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :--- | :--- | :--- | | **Cash and cash equivalents** | $247.2M | $119.6M | | **Total current assets** | $387.1M | $243.7M | | **Total assets** | $698.0M | $557.8M | | **Long-term debt** | $111.0M | $63.0M | | **Total liabilities** | $248.6M | $190.9M | | **Total stockholders' equity** | $438.7M | $355.7M | Condensed Consolidated Cash Flow Data | Cash Flow Item (Nine Months Ended Sep 30) | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | **Net cash from operating activities** | $66.7M | $23.8M | | **Net cash from / (used in) investing activities** | $12.2M | $(5.9M) | | **Net cash from financing activities** | $48.6M | $304 | | **Net increase in cash** | $127.5M | $18.3M | Notes to the Condensed Consolidated Financial Statements - The company adopted ASU 2016-13 (Topic 326) regarding credit losses on January 1, 2020, resulting in a cumulative-effect adjustment that increased the accumulated deficit by **$0.8 million**[28](index=28&type=chunk)[29](index=29&type=chunk) - On October 21, 2019, the company acquired **85%** of OpenEye, a provider of cloud-managed video surveillance solutions, for **$61.2 million** in cash plus potential earn-outs. The acquisition is intended to enhance the company's commercial enterprise offerings[53](index=53&type=chunk)[54](index=54&type=chunk) - The company operates in two reportable segments: 'Alarm.com' and 'Other'. The Alarm.com segment represents the core platform and solutions, contributing **94%** of total revenue for the first nine months of 2020[144](index=144&type=chunk)[145](index=145&type=chunk) - One service provider partner in the Alarm.com segment accounted for between **15% and 20%** of total revenue for the first nine months of 2020 and 2019, indicating significant customer concentration[137](index=137&type=chunk) - Subsequent to the quarter end, on November 4, 2020, the company amended its master service agreement with ADT, extending the term through January 1, 2023, and entered into a related patent license agreement[157](index=157&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the **24%** YoY revenue growth in Q3 2020 to a **18%** increase in SaaS and license revenue from a growing subscriber base and a **37%** increase in hardware revenue, partly driven by the OpenEye acquisition. The company discusses the ongoing, but so far manageable, impact of the COVID-19 pandemic on its supply chain and sales channels. Liquidity remains strong, bolstered by a **$42.9 million** YoY increase in cash from operations for the nine-month period and a precautionary **$50.0 million** draw on its credit facility in March 2020 Overview and Key Metrics Overview and Key Metrics | Metric | Q3 2020 ($) | Q3 2019 ($) | 9M 2020 ($) | 9M 2019 ($) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $158.9M | $127.9M | $452.4M | $361.9M | | **SaaS & License Revenue** | $100.1M | $84.9M | $287.8M | $247.3M | | **Net Income** | $35.8M | $17.7M | $61.0M | $40.5M | | **Adjusted EBITDA** | $34.5M | $26.3M | $92.9M | $78.3M | - The company's SaaS and license revenue renewal rate remained stable at **94%** for the twelve months ended September 30, 2020, consistent with the prior year[176](index=176&type=chunk)[182](index=182&type=chunk) - The COVID-19 pandemic has caused disruptions to the company's supply chain and sales channels. While business showed resiliency in Q3, management anticipates that a failure of the economy to fully recover could lower future SaaS and license revenue growth rates[174](index=174&type=chunk)[175](index=175&type=chunk) Results of Operations Revenue Growth Analysis | Revenue Stream | Q3 2020 vs Q3 2019 Growth (%) | 9M 2020 vs 9M 2019 Growth (%) | | :--- | :--- | :--- | | **SaaS and license revenue** | +18% | +16% | | **Hardware and other revenue** | +37% | +44% | | **Total revenue** | +24% | +25% | - The increase in hardware and other revenue was driven by a higher volume of video cameras sold and revenue from the OpenEye acquisition in October 2019[212](index=212&type=chunk)[213](index=213&type=chunk) - Cost of hardware and other revenue as a percentage of hardware revenue decreased from **82% to 80%** in Q3 YoY, reflecting a favorable shift in product mix[215](index=215&type=chunk) - Operating expenses increased across the board, primarily due to higher personnel-related costs from increased headcount in Sales & Marketing (**+27%** YoY in Q3), R&D (**+25%** YoY in Q3), and General & Administrative functions[217](index=217&type=chunk)[219](index=219&type=chunk)[222](index=222&type=chunk) - Other income, net, increased by **$18.4 million** in Q3 2020, primarily due to a **$24.7 million** gain on the sale of an investment in a platform partner, partially offset by the non-recurrence of a **$6.9 million** gain on a promissory note recorded in Q3 2019[229](index=229&type=chunk) Liquidity and Capital Resources - As of September 30, 2020, the company had **$247.2 million** in cash and cash equivalents, an increase from **$119.6 million** at the end of 2019[239](index=239&type=chunk)[240](index=240&type=chunk) - Cash flow from operations increased significantly to **$66.7 million** for the nine months ended Sep 30, 2020, up from **$23.8 million** in the prior-year period. The increase was driven by higher net income and favorable changes in operating assets and liabilities[248](index=248&type=chunk)[251](index=251&type=chunk) - In March 2020, the company borrowed **$50.0 million** under its 2017 Facility as a precautionary measure due to COVID-19 uncertainty. As of September 30, 2020, **$111.0 million** was outstanding under the facility[244](index=244&type=chunk)[257](index=257&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=52&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk exposure is to interest rate fluctuations related to its 2017 credit facility, which has a variable interest rate. A **100 basis point** change in interest rates would impact annual interest expense by approximately **$1.1 million**. Foreign currency and inflation risks are considered not material - The company's main market risk is interest rate risk associated with its 2017 senior secured revolving credit facility. A **100 basis point** change in interest rates would affect annual interest expense by approximately **$1.1 million** as of September 30, 2020[268](index=268&type=chunk) - Exposure to foreign currency exchange risk and inflation risk is considered not material to the business, as substantially all revenue and expenses are denominated in U.S. dollars[269](index=269&type=chunk)[270](index=270&type=chunk) [Item 4. Controls and Procedures](index=52&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of September 30, 2020. No material changes to internal control over financial reporting were identified during the quarter, and the shift to remote work due to COVID-19 has not had a material impact - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[271](index=271&type=chunk) - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls. The integration of OpenEye is ongoing and not expected to have a material effect[272](index=272&type=chunk) [PART II. OTHER INFORMATION](index=53&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, key risk factors, equity security sales, and other material information [Item 1. Legal Proceedings](index=53&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in several significant legal proceedings, primarily patent infringement lawsuits. Key cases include ongoing litigation with Vivint, Inc. over six patents, and multiple actions by EcoFactor, Inc. before the U.S. International Trade Commission (ITC) and in district court concerning smart thermostat patents. The company is also incurring costs to indemnify its service provider, ADT, in separate patent infringement suits. While the company believes it has valid defenses, it notes that outcomes are uncertain and could have a material adverse effect - The company is engaged in a patent infringement lawsuit filed by Vivint, Inc. in 2015. The case involves multiple patents and has undergone reviews by the U.S. Patent Trial and Appeal Board (PTAB) and appeals, with some claims invalidated and others still in dispute[275](index=275&type=chunk)[276](index=276&type=chunk) - EcoFactor, Inc. has filed complaints against the company with the U.S. International Trade Commission (ITC) and in U.S. District Court, alleging infringement of several patents related to smart thermostats. EcoFactor is seeking exclusion orders, injunctions, and damages[277](index=277&type=chunk)[278](index=278&type=chunk)[279](index=279&type=chunk) - The company is incurring costs to indemnify its service provider partner, ADT, LLC, in ongoing patent infringement suits brought by Applied Capital, Inc. and Portus Singapore Pte. Ltd[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk) [Item 1A. Risk Factors](index=55&type=section&id=Item%201A.%20Risk%20Factors) The company identifies numerous risks, with significant emphasis on the potential negative impacts of the COVID-19 pandemic on its business, supply chain, and demand. Other key risks include intense competition from large technology and service providers; reliance on a network of service provider partners for sales and significant customer concentration with partners like ADT; potential liability from security solution failures, cyber-attacks, and data breaches; and the risk of technological obsolescence, such as the upcoming shutdown of 3G/CDMA networks which will require subscriber upgrades - The COVID-19 pandemic poses a significant risk, potentially disrupting the hardware supply chain, restricting service providers' ability to meet with customers, and reducing consumer and business spending, which could lower future SaaS and license revenue growth[289](index=289&type=chunk)[290](index=290&type=chunk) - The company faces intense competition from technology platform providers, large cable and broadband companies (AT&T, Comcast), and providers of point products (Google's Nest, Amazon's Ring), many of whom have greater resources[322](index=322&type=chunk)[325](index=325&type=chunk)[326](index=326&type=chunk) - A substantial portion of revenue comes from a limited number of service provider partners. The top **10** partners accounted for **52%** of revenue in 2019, with ADT LLC representing **over 15%** of revenue, creating significant customer concentration risk[344](index=344&type=chunk)[345](index=345&type=chunk) - The business is exposed to significant liability risks from the failure of its security and life safety solutions, as well as from cyber-attacks and data breaches that could compromise sensitive subscriber information[303](index=303&type=chunk)[332](index=332&type=chunk)[335](index=335&type=chunk) - Technological obsolescence is a key risk. For example, the planned shutdown of 3G and CDMA wireless networks by the end of 2022 will require subscribers using that technology to upgrade their equipment to avoid service termination[366](index=366&type=chunk)[370](index=370&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=81&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's stock repurchase program, which was authorized by the board on November 29, 2018, for up to **$75.0 million** of common stock. No shares were repurchased during the three-month period ending September 30, 2020. As of the end of the quarter, approximately **$69.9 million** remained available for repurchase under the program Stock Repurchase Program Summary | Period | Total Shares Purchased | Average Price Paid ($) | Approx. Dollar Value Remaining Under Program ($) | | :--- | :--- | :--- | :--- | | **Q3 2020** | 0 | $0.00 | $69,850,586 | [Item 5. Other Information](index=82&type=section&id=Item%205.%20Other%20Information) On November 4, 2020, subsequent to the quarter's end, the company and ADT LLC amended their master service agreement. The amendment extends the initial term through January 1, 2023, and establishes terms for integrating certain Google Nest products into the ADT platform operated by Alarm.com. Concurrently, a patent license agreement was executed, granting ADT a license to use certain Alarm.com intellectual property post-term in exchange for a monthly royalty on applicable subscribers - On November 4, 2020, the company amended its master service agreement with ADT to extend the term to January 1, 2023, and facilitate the integration of certain Google Nest products[473](index=473&type=chunk) - A concurrent patent license agreement was signed, granting ADT a license to use certain Alarm.com intellectual property after the master agreement's term expires, in exchange for a monthly royalty per subscriber[473](index=473&type=chunk)

Financial Data and Key Metrics Changes - SaaS and license revenue for Q2 2020 was $95.7 million, an increase of 16.2% year-over-year [9][20] - Adjusted EBITDA for Q2 2020 was $29.2 million, up from $27.7 million in Q2 2019 [23] - GAAP net income for Q2 2020 was $17 million, compared to $13.8 million in Q2 2019 [23] - Total revenue for Q2 2020 was $141.6 million, a growth of 16.4% from Q2 2019 [20] - Cash flow from operations was approximately $35.1 million, up from $24.1 million in Q2 2019 [24] Business Line Data and Key Metrics Changes - Connect software license revenue was approximately $9.8 million for Q2 2020, down from $11 million in the same quarter last year [20] - Hardware and other revenue in Q2 2020 was $45.9 million, up 16.8% over Q2 2019, driven by strong sales of video cameras [20] - SaaS and license gross margin for Q2 2020 was 86.4%, an increase of 180 basis points from Q2 2019 [20] Market Data and Key Metrics Changes - The U.S. residential security market has improved significantly from the slowdown experienced in March and April due to COVID-19 [17] - The commercial business and international markets continue to face ongoing impacts from COVID-19 [17] - There is an emerging suburbanization trend where more households are migrating away from dense urban areas, which may favor sales of new security systems [18] Company Strategy and Development Direction - The company aims to continue expanding its offerings and investing in R&D to cover a full spectrum of IoT application services [30] - The acquisition of OpenEye is part of the strategy to enhance commercial opportunities in the enterprise and national accounts market [10] - The company plans to maintain a focus on serving its service provider partners and technology innovation [16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the uncertain environment caused by COVID-19 and highlighted the resilience of consumers in the U.S. residential market [19][61] - The company remains cautious about projecting future conditions due to the ongoing pandemic [19] - Management noted that the pandemic has historically led consumers to prioritize security and asset protection [18] Other Important Information - The company ended Q2 2020 with $205.8 million in cash and cash equivalents, a strong increase of $34.1 million quarter-over-quarter [24] - The company has over 9,000 service provider partners globally, which supports a broad range of services and capabilities [16] Q&A Session Summary Question: General strategic update on using business stability as a competitive advantage - Management acknowledged the stability provided by recurring revenues and indicated a focus on reinvesting in R&D and expanding offerings [29] Question: Drivers of SaaS revenue growth and updates on early August performance - Management noted strong performance in the U.S. residential market and indicated that growth was driven by new account installations and strong performance in subsidiary businesses [32] Question: Strategic implications of the convergence between internet and home security - Management discussed the importance of reliable internet connectivity for security services and the ongoing migration towards leveraging consumer internet for video services [37] Question: Update on OpenEye SaaS offering and sales resources - Management confirmed enhancements to the sales team for OpenEye and the introduction of a lightweight SaaS offering tailored for smaller locations [47] Question: European strategy and collaboration with Johnson Controls - Management highlighted the focus on residential services in Europe and the ambition to leverage investments made in North America for international markets [53] Question: Status update on PointCentral and its impact from COVID-19 - Management indicated that PointCentral has been impacted by COVID-19 but is seeing a recovery as vacation rental companies are performing well [71]

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited condensed consolidated financial statements for the quarter and six months ended June 30, 2020, reflect significant revenue and net income growth, increased liquidity, and the adoption of new accounting standards, with the Alarm.com segment as the primary revenue driver [Condensed Consolidated Statements of Operations](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For Q2 2020, total revenue increased 16% to $141.6 million, driven by growth in both SaaS and hardware, leading to increased operating income and net income attributable to common stockholders of $17.0 million or $0.34 per diluted share Condensed Consolidated Statements of Operations (Q2 & H1 2020 vs. 2019) | Financial Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $141,637 | $121,660 | $293,576 | $233,995 | | SaaS and license revenue | $95,704 | $82,334 | $187,654 | $162,389 | | Hardware and other revenue | $45,933 | $39,326 | $105,922 | $71,606 | | **Operating Income** | $14,994 | $14,045 | $24,861 | $23,266 | | **Net Income** | $16,625 | $13,796 | $25,196 | $22,806 | | **Net Income Attributable to Common Stockholders** | $16,995 | $13,796 | $25,802 | $22,806 | | **Diluted EPS** | $0.34 | $0.27 | $0.51 | $0.45 | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2020, the balance sheet reflects total assets of $662.6 million, primarily driven by a significant increase in cash and cash equivalents to $205.8 million, alongside increased total liabilities and stockholders' equity Key Balance Sheet Items (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $205,827 | $119,629 | | Total current assets | $348,089 | $243,674 | | Goodwill | $105,662 | $104,963 | | Total assets | $662,645 | $557,799 | | **Liabilities & Equity** | | | | Total current liabilities | $92,769 | $75,795 | | Long-term debt | $112,000 | $63,000 | | Total liabilities | $258,676 | $190,938 | | Total stockholders' equity | $393,253 | $355,651 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2020, net cash from operating activities significantly increased to $48.0 million, complemented by cash from financing activities primarily due to a $50.0 million credit facility draw, resulting in an $86.2 million net increase in cash and cash equivalents Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $48,048 | $22,867 | | Net cash used in investing activities | ($9,306) | ($18,369) | | Net cash from financing activities | $47,456 | $292 | | **Net increase in cash** | **$86,198** | **$4,790** | [Notes to the Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, including Topic 326 adoption, key acquisitions, precautionary credit facility draw due to COVID-19, Alarm.com's primary revenue contribution, and ongoing legal proceedings including patent litigation - The company adopted Topic 326 (Credit Losses) on January 1, 2020, resulting in a cumulative-effect adjustment that increased the accumulated deficit by **$816 thousand**[28](index=28&type=chunk) - In March 2020, the company acquired in-process research and development (IPR&D) in two separate asset acquisitions totaling **$4.4 million**, which was expensed at the time of acquisition[62](index=62&type=chunk)[64](index=64&type=chunk) - The company is involved in significant legal proceedings, including patent infringement lawsuits filed by Vivint, Inc. and EcoFactor, Inc. The company believes it has valid defenses but cannot estimate the probability or amount of a potential loss at this time[111](index=111&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk) - The Alarm.com segment accounted for **94%** of consolidated revenue for the first six months of 2020. One service provider partner within this segment represented between **15% and 20%** of total revenue[133](index=133&type=chunk)[141](index=141&type=chunk) - On March 25, 2020, the company borrowed **$50.0 million** under its 2017 credit facility as a precautionary measure due to uncertainty from the COVID-19 pandemic, bringing the total outstanding balance to **$112.0 million** as of June 30, 2020[105](index=105&type=chunk)[107](index=107&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes Q2 revenue growth to strong performance across segments, acknowledges ongoing COVID-19 impacts on supply chain and sales, highlights strengthened liquidity with increased cash and a precautionary credit facility draw, and notes increased operating expenses due to growth investments, resulting in Adjusted EBITDA of $29.2 million [Overview and Recent Developments](index=36&type=section&id=Overview%20and%20Recent%20Developments) Alarm.com delivers cloud-based smart property solutions through over 9,000 service providers, experiencing continued growth in Q2 2020 despite COVID-19 disruptions impacting supply chains and sales channels, with a secondary public offering completed by selling stockholders in May - The company's solutions are delivered through a network of over **9,000** service provider partners[156](index=156&type=chunk) - The COVID-19 pandemic is disrupting the company's supply chain and sales channels, with management anticipating lower hardware revenue and potentially slower SaaS and license revenue growth in future periods[169](index=169&type=chunk)[188](index=188&type=chunk) - In May 2020, a secondary public offering of **5,616,451** shares was completed by selling stockholders affiliated with Technology Crossover Ventures, with no proceeds to the company[171](index=171&type=chunk) [Results of Operations](index=43&type=section&id=Results%20of%20Operations) For Q2 2020, total revenue increased 16% to $141.6 million, driven by subscriber growth and video camera sales, while operating expenses rose due to increased headcount and acquisition costs, resulting in net income of $16.6 million Revenue Growth (Q2 & H1 2020 vs. 2019) | Revenue Type | Q2 2020 | Q2 2019 | % Change | H1 2020 | H1 2019 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | SaaS and license revenue | $95,704 | $82,334 | 16% | $187,654 | $162,389 | 16% | | Hardware and other revenue | $45,933 | $39,326 | 17% | $105,922 | $71,606 | 48% | | **Total Revenue** | **$141,637** | **$121,660** | **16%** | **$293,576** | **$233,995** | **25%** | - The increase in hardware revenue was partly due to the acquisition of OpenEye in October 2019 and an increase in the volume of video cameras sold[208](index=208&type=chunk)[209](index=209&type=chunk) - R&D expense increased by **$8.2 million (29%)** in Q2 2020 compared to Q2 2019, primarily due to a **$7.0 million** increase in personnel and related costs from higher headcount[218](index=218&type=chunk) - General and Administrative expense increased by **$3.5 million (25%)** in Q2 2020, partly because Q2 2019 included a **$3.3 million** reversal of a reserve that did not recur in 2020[216](index=216&type=chunk) [Liquidity and Capital Resources](index=50&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2020, the company's liquidity was strong with **$205.8 million** in cash and **$255.3 million** in working capital, bolstered by **$48.0 million** in operating cash flow and a **$50.0 million** precautionary credit facility draw, with management confident in meeting future operating needs Working Capital Summary (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $205,827 | $119,629 | | Working capital | $255,320 | $167,879 | - In March 2020, the company borrowed **$50.0 million** under its 2017 Facility as a precautionary measure due to COVID-19, leaving **$13.0 million** available for borrowing as of June 30, 2020[236](index=236&type=chunk)[237](index=237&type=chunk) - Cash flow from operating activities increased to **$48.0 million** in H1 2020 from **$22.9 million** in H1 2019, driven by higher net income and favorable changes in operating assets and liabilities[239](index=239&type=chunk)[241](index=241&type=chunk) [Non-GAAP Measures](index=53&type=section&id=Non-GAAP%20Measures) The company utilizes Adjusted EBITDA, a non-GAAP measure, to assess core operating performance, with Q2 2020 Adjusted EBITDA reaching **$29.2 million** and **$58.4 million** for the first six months of 2020 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income | $16,625 | $13,796 | $25,196 | $22,806 | | Total adjustments | $12,585 | $13,919 | $33,203 | $29,161 | | **Adjusted EBITDA** | **$29,210** | **$27,715** | **$58,399** | **$51,967** | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=54&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuations on its variable-rate credit facility, with a 100 basis point change impacting annual interest expense by approximately **$1.1 million**, while foreign currency and inflation risks are deemed immaterial despite COVID-19 market volatility - The primary market risk is interest rate risk related to the 2017 Facility, where a **100 basis point (1%)** change in interest rates would affect annual interest expense by approximately **$1.1 million** as of June 30, 2020[262](index=262&type=chunk) - Foreign currency exchange risk is considered immaterial as substantially all revenue and expenses are in U.S. dollars[263](index=263&type=chunk) [Item 4. Controls and Procedures](index=54&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter, despite integrating OpenEye and adapting to remote work due to COVID-19 - Management concluded that disclosure controls and procedures were effective as of June 30, 2020[267](index=267&type=chunk) - There were no material changes to internal control over financial reporting in Q2 2020, with the company integrating OpenEye and adapting to remote work due to COVID-19 without material impact on controls[268](index=268&type=chunk)[269](index=269&type=chunk) [PART II. OTHER INFORMATION](index=55&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=55&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in significant legal proceedings, including ongoing patent infringement lawsuits by Vivint, Inc. and EcoFactor, Inc., and two putative class action lawsuits alleging TCPA violations, for which the company asserts valid defenses but cannot estimate potential losses - Vivint, Inc. filed a lawsuit alleging infringement of **six** patents, with the case partially stayed pending reviews and appeals at the U.S. Patent Trial and Appeal Board (PTAB)[271](index=271&type=chunk) - EcoFactor, Inc. has filed a complaint with the ITC and two separate lawsuits in federal court alleging Alarm.com's smart thermostats infringe on its patents[274](index=274&type=chunk)[275](index=275&type=chunk)[276](index=276&type=chunk) - The company is a defendant in **two** putative class action lawsuits alleging violations of the Telephone Consumer Protection Act (TCPA)[278](index=278&type=chunk)[279](index=279&type=chunk) - The company is incurring costs to indemnify its service provider partner ADT, LLC in ongoing patent infringement suits brought by third parties like Applied Capital and Portus[280](index=280&type=chunk)[281](index=281&type=chunk)[283](index=283&type=chunk) [Item 1A. Risk Factors](index=57&type=section&id=Item%201A.%20Risk%20Factors) The company identifies numerous business risks, including the COVID-19 pandemic's impact on supply chains and demand, intense competition, reliance on key service provider partners, potential system failures or security breaches, intellectual property litigation, evolving data privacy regulations, and challenges in managing growth and acquisitions - The COVID-19 pandemic poses a significant risk, potentially disrupting hardware supply chains, restricting service providers' ability to meet with customers, and reducing overall demand[288](index=288&type=chunk)[289](index=289&type=chunk) - The company faces intense competition from technology platforms like Alula and Honeywell, as well as direct-to-consumer solutions from companies like Google (Nest), Amazon (Ring), and Apple (HomeKit)[327](index=327&type=chunk) - A substantial portion of revenue comes from a limited number of service provider partners; in 2019, the **10** largest partners accounted for **52%** of revenue, with ADT LLC representing over **15%**[349](index=349&type=chunk) - Failure to maintain the security of information technology networks and protect against cyber-attacks could lead to system disruptions, data loss, regulatory fines (under CCPA, GDPR), and reputational damage[334](index=334&type=chunk)[338](index=338&type=chunk)[339](index=339&type=chunk) - The company relies on wireless carriers for network access, and the planned shutdown of **3G** and **CDMA** networks by **2022** will require subscribers to upgrade their technology and may lead to customer attrition[370](index=370&type=chunk)[373](index=373&type=chunk) - Evolving data privacy regulations, such as California's CCPA and Europe's GDPR, and the invalidation of the EU-U.S. Privacy Shield framework, create significant compliance costs and risks of fines and litigation[393](index=393&type=chunk)[394](index=394&type=chunk)[395](index=395&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=83&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or share repurchases during the quarter ended June 30, 2020, with approximately **$69.9 million** remaining authorized for repurchase under the program expiring November 29, 2020 - No shares of common stock were repurchased during the quarter ended June 30, 2020[469](index=469&type=chunk) - As of June 30, 2020, approximately **$69.9 million** remained authorized for repurchase under the company's stock repurchase program, which expires on November 29, 2020[469](index=469&type=chunk) [Item 3. Defaults Upon Senior Securities](index=84&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities were reported - No defaults upon senior securities were reported[470](index=470&type=chunk) [Item 4. Mine Safety Disclosures](index=84&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not applicable[470](index=470&type=chunk) [Item 5. Other Information](index=84&type=section&id=Item%205.%20Other%20Information) No other material information was reported - No other information was reported[470](index=470&type=chunk) [Item 6. Exhibits](index=85&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act of 2002, and Inline XBRL documents - The report includes required certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act[472](index=472&type=chunk)