Alarm.com(ALRM) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019, show continued revenue growth and increased net income, with total assets rising due to the adoption of the new lease accounting standard Condensed Consolidated Statements of Operations Total revenue grew 16% to $121.7 million for the three months ended June 30, 2019, with net income increasing to $13.8 million, driven by growth in both SaaS and hardware sales Condensed Consolidated Statements of Operations (in thousands) | Financial Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $121,660 | $104,488 | $233,995 | $197,244 | | SaaS and license revenue | $82,334 | $70,968 | $162,389 | $138,956 | | Hardware and other revenue | $39,326 | $33,520 | $71,606 | $58,288 | | Operating Income | $14,045 | $8,510 | $23,266 | $20,503 | | Net Income | $13,796 | $10,733 | $22,806 | $21,248 | | Diluted EPS | $0.27 | $0.22 | $0.45 | $0.43 | Condensed Consolidated Balance Sheets Total assets increased to $505.4 million as of June 30, 2019, primarily due to the recognition of $27.7 million in operating lease right-of-use assets following the adoption of Topic 842 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $150,851 | $146,061 | | Total current assets | $268,491 | $228,063 | | Total Assets | $505,421 | $440,985 | | Total current liabilities | $83,216 | $75,270 | | Long-term debt | $65,000 | $67,000 | | Total Liabilities | $192,993 | $163,396 | | Total Stockholders' Equity | $312,428 | $277,589 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $22.9 million for the six months ended June 30, 2019, while cash used in investing activities significantly rose to $18.4 million Six Months Ended June 30, Cash Flow Summary (in thousands) | Cash Flow Category | 2019 | 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $22,867 | $15,204 | | Net cash used in investing activities | ($18,369) | ($6,131) | | Net cash from financing activities | $292 | $557 | | Net increase in cash | $4,790 | $9,630 | | Cash at end of period | $150,851 | $105,959 | Notes to the Condensed Consolidated Financial Statements The notes detail the adoption of Topic 842, revenue recognition from SaaS and hardware sales through service providers, the $28.0 million TCPA class action lawsuit settlement, and the Alarm.com segment's continued revenue dominance - The company adopted the new lease accounting standard, Topic 842, on January 1, 2019, using the modified retrospective approach, resulting in the recognition of $28.4 million in operating lease right-of-use assets and corresponding lease liabilities[22][23][24] - Revenue is derived from SaaS, software licenses, and hardware sales through a network of over 8,000 service provider partners who resell solutions to residential and commercial property owners[10][27] - The company settled a putative class action lawsuit related to the Telephone Consumer Protection Act (TCPA) for total cash consideration of $28.0 million, with an initial payment of $5.0 million made on January 2, 2019[81][82][84] - The Alarm.com segment accounted for 93% of total revenue for the six months ended June 30, 2019, consistent with the prior year period[109] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the second quarter 2019 financial results, highlighting a 16% revenue increase driven by subscriber growth and video camera sales, a strong 94% SaaS renewal rate, increased R&D expenses, and a healthy liquidity position Q2 2019 Financial Highlights (in thousands) | Metric | Q2 2019 | Q2 2018 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $121,660 | $104,488 | 16% | | SaaS and license revenue | $82,334 | $70,968 | 16% | | Hardware and other revenue | $39,326 | $33,520 | 17% | | Net Income | $13,796 | $10,733 | 29% | | Adjusted EBITDA | $27,715 | $23,409 | 18% | - The SaaS and license revenue renewal rate was 94% for the twelve months ended June 30, 2019, consistent with the prior year, indicating strong customer retention[128][137] - The company is monitoring the impact of U.S. trade policy and tariffs on China, as approximately one-third of its finished hardware products are imported from China, with modest impact to date but potential future margin reductions[152] - The company ended the quarter with $150.9 million in cash and cash equivalents and believes existing resources are sufficient to meet operating needs for at least the next 12 months[191][192] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its credit facility, with a 100 basis point change impacting annual interest expense by approximately $0.7 million, while foreign currency and inflation risks are immaterial - The primary market risk is interest rate risk associated with the 2017 Facility, where a 100 basis point change would alter annual interest expense by about $0.7 million[222] - Foreign currency exchange risk is considered immaterial as business is conducted almost entirely in U.S. dollars[223] - Inflation is not believed to have had a material effect on the business[224] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter - As of June 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[227] - No material changes were made to the internal control over financial reporting during the fiscal quarter ended June 30, 2019[228] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in several legal proceedings, including ongoing patent infringement litigation with Vivint, Inc., a patent suit against Protect America, Inc., and a $28.0 million TCPA class action lawsuit settlement, while also indemnifying ADT in two patent infringement suits - The company is engaged in a patent infringement lawsuit filed by Vivint, Inc. in 2015, involving inter partes reviews by the U.S. Patent Trial and Appeal Board (PTAB), with some claims found unpatentable and others still under review or appeal[232][233] - A putative class action lawsuit alleging violations of the Telephone Consumer Protection Act (TCPA) was settled for $28.0 million, with the court granting preliminary approval and a final approval hearing scheduled for August 13, 2019[235][236][237] - The company is indemnifying service provider ADT LLC in two ongoing patent infringement suits: one filed by Applied Capital, Inc. and another by Varatec, LLC[239][240] Item 1A. Risk Factors The company identifies numerous risks, including fluctuating quarterly results, intense competition, reliance on service provider partners, potential liability from solution failures, cybersecurity threats, intellectual property protection, supplier dependence, regulatory changes, and U.S. trade policies - The company faces intense competition from technology platforms (Honeywell, Resideo), managed service providers (Comcast, AT&T), and point product providers (Google's Nest, Amazon's Ring), many of whom have greater resources[267][270] - A substantial portion of revenue comes from a limited number of service provider partners; for the year ended Dec 31, 2018, the 10 largest partners accounted for 57% of revenue, with ADT LLC representing over 15%[293] - The business is exposed to cybersecurity risks, where a security breach could lead to system disruptions, unauthorized data access, and significant fines under regulations like GDPR and the upcoming California Consumer Privacy Act (CCPA)[284][286][340] - Changes in U.S. trade policy, particularly tariffs on goods from China, pose a risk, as approximately one-third of the company's finished hardware products are imported from China and could be subject to increased tariffs, potentially eroding margins[382] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the quarter and made no repurchases under its $75.0 million stock repurchase program - There were no unregistered sales of equity securities in the quarter[429] - The company has a stock repurchase program authorizing up to $75.0 million in purchases, but no shares were repurchased under this program during the quarter ended June 30, 2019[431] Item 5. Other Information Board member Michelle K. Lee notified the board of her resignation, effective September 3, 2019, due to accepting a new executive position with a policy against serving on for-profit boards - Board member Michelle K. Lee resigned effective September 3, 2019, due to a conflict with a new full-time executive position[433]