Alarm.com(ALRM) - 2018 Q4 - Annual Report

Part I Business Alarm.com provides cloud-based solutions for connected properties, generating $420.5 million in 2018 revenue primarily through its network of service providers Financial Performance (2016-2018) | Financial Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenue | $420.5M | $338.9M | $261.1M | | SaaS and License Revenue | $291.1M | $236.3M | $173.5M | | Net Income | $21.5M | $29.3M | $10.2M | | Adjusted EBITDA | $93.1M | $71.6M | $49.0M | - The company's solutions are delivered through a network of over 8,000 service providers who sell, install, and support the offerings[10] - In 2018, the platform processed over 200 billion data points from more than 90 million connected devices, highlighting its scale[9] - Key service provider partners include ADT LLC, which represented over 15% of revenue in 2018, and Monitronics (Brinks Home Security), which represented over 10% of revenue in 2017[93] Overview The company offers a comprehensive suite of cloud-based solutions for smart properties, generating revenue through SaaS, license, and hardware sales - Alarm.com provides a comprehensive suite of cloud-based solutions for smart residential and commercial properties, including interactive security, video monitoring, intelligent automation, energy management, and wellness[9] - The business model is primarily based on generating Software-as-a-Service (SaaS) and license revenue from over 8,000 service provider partners who pay monthly fees[10] Our Solutions and Integrated Platforms The company provides integrated solutions for subscribers and service providers, including security, video analytics, and business management tools - Subscriber solutions include interactive security, video monitoring with analytics, and intelligent automation for energy management, controllable via mobile apps and voice platforms[14][15][22] - The "Alarm.com for Business" offering provides a unified solution for small and medium businesses, combining intrusion detection, video surveillance, access control, and energy management[34] - Service provider solutions include an enterprise-grade portal for account management and support tools like the MobileTech application to streamline installation and troubleshooting[42][44] Growth Strategy The company's growth strategy focuses on expanding its service provider network, growing its international presence, and pursuing strategic acquisitions - Key growth strategies include driving SaaS revenue by adding new service providers and upgrading traditional security customers[70][71][72] - The company plans to expand its international presence, which is currently localized in approximately 40 countries outside North America[74] - Expansion into the small and medium business (SMB) market and pursuing selective strategic acquisitions are also core components of the growth strategy[75][77] Competition The company operates in a highly competitive and fragmented market, facing rivals from technology platform providers and large direct-to-consumer firms - The connected property market is highly competitive, with key competitors including technology platform providers like Honeywell, Resideo, and Telular[101] - The company also competes with direct-to-consumer solutions from firms like SimpliSafe and large technology companies such as Google (Nest), Amazon (Ring), and Apple (HomeKit)[101] - Principal competitive factors include simplicity, breadth of features, device compatibility, pricing, and brand reputation[102] Intellectual Property The company protects its technology through a combination of patents, trademarks, copyrights, and trade secret laws - As of December 31, 2018, the company owned 193 issued patents and had 178 pending US utility patent applications[106][70] - The company relies on a combination of patent, trademark, copyright, and trade secret laws, alongside confidentiality agreements, to protect its proprietary technology[105] Risk Factors The company faces risks from partner concentration, legal proceedings, intense competition, and potential security breaches - The company's top 10 service provider partners accounted for 57% of revenue in 2018, with ADT LLC representing over 15%, highlighting a concentration risk[165] - A putative class action lawsuit alleging violations of the Telephone Consumer Protection Act (TCPA) was settled for $28.0 million, subject to final court approval[131][132] - Competition is a significant risk, with competitors including large technology companies (Google, Amazon, Apple), broadband providers, and other security platform providers[137][138] - Failure to maintain the security of information and technology networks could lead to significant liabilities and reputational damage under laws like GDPR and CCPA[149][152][209] Unresolved Staff Comments The company reports no unresolved SEC staff comments - None[303] Properties The company's principal offices are leased in Tysons, Virginia, with additional locations across North America and Europe - The main corporate headquarters is a 160,406 square foot leased facility in Tysons, Virginia[304] - Additional offices are located in Minnesota, Massachusetts, Colorado, Florida, Kansas, Utah, California, New York, Oregon, North Carolina, Amsterdam (Netherlands), and Ottawa (Canada)[305][306] Legal Proceedings The company is involved in patent infringement litigation and has settled a class action lawsuit for $28.0 million - A putative class action lawsuit alleging TCPA violations was settled for $28.0 million, with preliminary court approval received on December 19, 2018[313][316] - The company is in ongoing patent infringement litigation with Vivint, Inc., which filed a lawsuit in June 2015[311] - Alarm.com has filed patent infringement complaints against ipDatatel and Protect America, Inc., seeking injunctive relief and damages[308][310] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[321] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq under "ALRM," with a $75.0 million share repurchase program and no plans for dividends - The company's common stock trades on The Nasdaq Global Select Market under the symbol "ALRM"[323] - A stock repurchase program was authorized on November 29, 2018, allowing the company to purchase up to $75.0 million of its outstanding common stock through November 29, 2020[330] - The company does not intend to pay cash dividends in the foreseeable future and is limited by its credit facility[325] Selected Financial Data The company shows strong five-year revenue growth, with total revenue reaching $420.5 million and Adjusted EBITDA at $93.1 million in 2018 Selected Financial Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $420,494 | $338,937 | $261,106 | $208,888 | $167,312 | | SaaS and license revenue | $291,072 | $236,283 | $173,540 | $140,936 | $111,515 | | Net Income | $21,524 | $29,251 | $10,154 | $11,768 | $13,502 | | Adjusted EBITDA | $93,081 | $71,628 | $49,034 | $34,370 | $28,321 | | Total Assets | $440,985 | $371,641 | $261,245 | $226,095 | $120,932 | - The SaaS and license revenue renewal rate has remained stable, reported at 93% for 2018 and 2017, and 94% for 2016[334][336] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 24% in 2018, though net income declined due to a legal settlement, while liquidity remains strong Year-Over-Year Revenue Growth | Revenue Type | 2018 vs. 2017 Growth | 2017 vs. 2016 Growth | | :--- | :--- | :--- | | Total Revenue | 24% | 30% | | SaaS and license revenue | 23% | 36% | | Hardware and other revenue | 26% | 17% | - The increase in General and Administrative expense in 2018 was primarily driven by a $39.9 million increase in legal expenses, which includes a $28.0 million expense for the TCPA legal settlement[404] - Cash flow from operations increased to $60.7 million in 2018 from $57.2 million in 2017, while cash used in investing decreased significantly as 2017 included $154.3 million for acquisitions[476][484] - As of December 31, 2018, the company had $146.1 million in cash and cash equivalents and $67.0 million outstanding under its $125.0 million credit facility[466][473] Results of Operations Revenue growth was driven by an expanding subscriber base, while operating income fell due to a significant legal settlement expense Comparison of Operating Results (2018 vs. 2017) | Line Item | 2018 ($M) | 2017 ($M) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 420.5 | 338.9 | 24% | | Cost of Revenue | 145.7 | 116.2 | 25% | | Sales and Marketing | 55.9 | 43.5 | 29% | | General and Administrative | 95.8 | 55.4 | 73% | | Research and Development | 89.2 | 72.8 | 23% | | Operating Income | 12.2 | 33.4 | (63%) | | Net Income | 21.5 | 29.3 | (26%) | - The 24% increase in total revenue for 2018 was driven by growth in the subscriber base for the Alarm.com segment and increased sales of video cameras[393] - The 73% increase in General and Administrative expense in 2018 was primarily due to a $28.0 million expense for a legal settlement related to the TCPA[404] - The 64% increase in Research and Development expense in 2017 compared to 2016 was primarily due to increased headcount from acquisitions[409] Liquidity and Capital Resources The company maintains a strong liquidity position with significant cash reserves and access to a revolving credit facility - As of December 31, 2018, the company had $146.1 million in cash and cash equivalents and working capital of $152.8 million[466][467] Historical Cash Flows (in thousands) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Operating Activities | $60,710 | $57,187 | $22,600 | | Investing Activities | ($13,377) | ($168,795) | ($11,426) | | Financing Activities | $2,399 | $67,303 | $1,102 | - The primary source of liquidity is a $125.0 million senior secured revolving credit facility, of which $67.0 million was outstanding as of December 31, 2018[472][473] - Total contractual obligations as of December 31, 2018, amount to $131.2 million, primarily comprising debt and operating lease commitments[491] Critical Accounting Policies and Significant Judgments and Estimates Key accounting policies involve revenue recognition, business combinations, goodwill impairment testing, and stock-based compensation estimates - Revenue Recognition: The company adopted Topic 606 on January 1, 2018, recognizing SaaS revenue monthly and hardware revenue upon transfer of control[430][549] - Business Combinations: Purchase prices of acquisitions are allocated to assets and liabilities based on estimated fair values, requiring significant management estimates[449] - Goodwill and Intangible Assets: Goodwill is tested for impairment annually on October 1, with the 2018 assessment indicating no impairment was likely[454][455] - Stock-Based Compensation: Expense is calculated using the Black-Scholes model, which requires subjective assumptions for expected term, volatility, and risk-free interest rate[447] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate exposure from its variable-rate debt, with minimal foreign currency or inflation risk - The primary market risk is interest rate risk from the variable-rate credit facility; a 1% change in interest rates would affect annual interest expense by about $0.7 million[506] - Foreign currency exchange risk is considered immaterial as substantially all revenue and expenses are denominated in U.S. dollars[507] - Inflation is not believed to have had a material effect on the business[508] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and the independent auditor's report for the past three fiscal years - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and internal controls as of December 31, 2018[512][513] Consolidated Statements of Operations Highlights (in thousands) | Line Item | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Revenue | $420,494 | $338,937 | $261,106 | | Operating Income | $12,202 | $33,374 | $14,058 | | Net Income | $21,524 | $29,251 | $10,154 | | Diluted EPS | $0.43 | $0.59 | $0.21 | Consolidated Balance Sheets Highlights (in thousands) | Line Item | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $146,061 | $96,329 | | Total Assets | $440,985 | $371,641 | | Long-term debt | $67,000 | $71,000 | | Total Stockholders' Equity | $277,589 | $232,827 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting and financial disclosure - None[739] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2018 - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[741] - Management concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[742] - There were no material changes in internal control over financial reporting during the fourth quarter of 2018[743] Other Information The company reports no other information for this item - None[745] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Required information on governance and compensation is incorporated by reference from the company's 2019 Proxy Statement - Information for Part III (Items 10-14) is incorporated by reference from the registrant's 2019 Proxy Statement[747] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K[753] Form 10-K Summary This item is not applicable - Not applicable[755]