Alarm.com Holdings, Inc. (NASDAQ:ALRM) Q1 2021 Earnings Conference Call May 4, 2021 2:30 PM ET Company Participants David Trone - Vice President, Investor Relations Stephen Trundle - President and Chief Executive Officer Steve Valenzuela - Chief Financial Officer Conference Call Participants Sterling Auty - JPMorgan Adam Tindle - Raymond James Matt Pfau - William Blair Brian Ruttenbur - Imperial Capital Jack Vander Aarde - Maxim Group Operator Good day and thank you for standing by. Welcome to the Alarm.com ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-37461 ALARM.COM HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 26-4247032 (State or other juris ...

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)