Alarm.com Holdings, Inc. (NASDAQ:ALRM) Q3 2020 Earnings Call November 5, 2020 4:30 PM ET Executives David M. Trone - Alarm.com Holdings, Inc. Stephen S. Trundle - Alarm.com Holdings, Inc. Steve Valenzuela - Alarm.com Holdings, Inc. Analysts Adam Tindle - Raymond James & Associates, Inc. Nikolay Beliov - BofA Securities, Inc. Jeffrey Ted Kessler - Imperial Capital LLC David Robinson - William Blair & Co. LLC Darren Aftahi - ROTH Capital Partners LLC Jack Vander Aarde - Maxim Group LLC Operator Ladies and gen ...

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 September 30, 2020 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 j ...

Alarm.com Holdings, Inc. (NASDAQ:ALRM) Q2 2020 Earnings Conference Call August 5, 2020 4:30 PM ET Company Participants David Trone - Vice President of Investor Relations Stephen Trundle - President & Chief Executive Officer Steve Valenzuela - Chief Financial Officer Conference Call Participants Adam Tindle - Raymond James Nikolay Beliov - Bank of America David Robinson - William Blair Jeff Kessler - Imperial Capital Kevin McVeigh - Credit Suisse Jack Vander Aarde - Maxim Group Operator Ladies and gentlemen, ...

[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)

Financial Data and Key Metrics Changes - SaaS and license revenue for Q1 2020 was $91.9 million, an increase of 14.9% year-over-year [9][19] - Adjusted EBITDA for Q1 2020 was $29.2 million, reflecting a growth of 20.4% from Q1 2019 [19] - Total revenue for Q1 2020 reached $151.9 million, a 35.3% increase compared to Q1 2019 [21] - GAAP net income for Q1 2020 was $8.8 million, slightly down from $9 million in Q1 2019 [19][24] - Non-GAAP adjusted net income increased to $20.9 million in Q1 2020 from $17.2 million in Q1 2019 [19] Business Line Data and Key Metrics Changes - Hardware and other revenue in Q1 2020 was $60 million, up 86% over Q1 2019, driven by strong sales of video cameras [19][21] - SaaS and license gross margin improved to 86.6% in Q1 2020 from 84.6% in Q1 2019 [21] - Hardware gross margin increased to 23.9% in Q1 2020 compared to 17.5% in the same quarter last year [21] Market Data and Key Metrics Changes - Installation rates are currently running at about 70% of normal due to COVID-19 impacts, with expectations to recover to 95% by Q4 2020 [15][16] - Revenue retention rate remained stable at 93% in Q1 2020, consistent with historical performance [19][32] Company Strategy and Development Direction - The company is focusing on enhancing its platform and offerings, including the introduction of new technology and capabilities for subscribers [10][11] - Alarm.com is adapting to market conditions by emphasizing distant selling models and providing service providers with necessary PPE for installations [14][17] - The company is also investing in training programs for service providers to maintain proficiency during the pandemic [17][18] Management's Comments on Operating Environment and Future Outlook - Management noted that the COVID-19 pandemic is pushing out the timeline for fulfilling underlying demand, but revenue retention remains strong [16] - The company expects to see gradual recovery in installation rates as the year progresses, with a positive outlook for the second half of 2020 [15][26] - Management expressed confidence in the company's ability to weather the current environment due to its strong balance sheet and cash flow [27] Other Important Information - The company ended Q1 2020 with $171.7 million in cash and cash equivalents, and drew $15 million on its revolver for additional flexibility [24] - The company activated a $75 million share buyback plan, repurchasing $5.1 million worth of shares in Q1 2020 [24] Q&A Session Summary Question: Guidance for SaaS and license revenue for fiscal 2020 - Management expressed confidence in maintaining guidance due to strong performance in the first two months of the year and stable revenue retention rates [29][30] Question: Impact on cash generation during challenging periods - Management indicated a strong cash flow generation model, projecting around $40 million to $50 million of free cash flow for the year despite potential challenges [34][35] Question: Relative growth rates across different business segments - Commercial business is growing at about 40%, while international markets are performing slightly better [41][42] Question: Changes in service delivery methods post-pandemic - Management noted a shift towards DIY fulfillment methods during the pandemic, with service providers shipping self-installation kits to customers [43][44] Question: Progress on SaaS offerings from OpenEye - The transition to a SaaS model for OpenEye is on track, with positive anecdotal feedback from sales [57][59]

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, 2020 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 ...