Alarm.com(US:ALRM)2020-02-25 23:07PART I. Company Information This section details Alarm.com's business operations, solutions, competitive landscape, growth strategies, and critical risk factors Item 1. Business Overview Alarm.com provides cloud-based solutions for smart residential and commercial properties through a network of service providers, driving revenue from SaaS, licenses, and hardware sales - Alarm.com is a leading platform for intelligently connected properties, processing over 200 billion data points from 100 million connected devices in the last year9 - Solutions are delivered through a network of over 9,000 trusted service providers, who handle sales, installation, and support10 Key Financial Highlights (2017-2019) | Metric | 2019 ($M) | 2018 ($M) | 2017 ($M) | | :-------------------------- | :-------- | :-------- | :-------- | | Total Revenue | 502.4 | 420.5 | 338.9 | | SaaS and License Revenue | 337.4 | 291.1 | 236.3 | | Net Income | 53.5 | 21.5 | 29.2 | | Adjusted EBITDA (Non-GAAP) | 108.3 | 93.1 | 71.6 | - The company's growth strategy includes driving SaaS and license revenue, upgrading traditional security customers, investing in platforms, expanding internationally (currently in ~40 countries), expanding into the SMB market, and pursuing selective strategic acquisitions787980818285 Overview Our Solutions and Integrated Platforms Subscriber Solutions Interactive Security Video Monitoring Intelligent Automation and Energy Management Commercial Solutions Service Provider Solutions Benefits of Our Solutions Benefits to Subscribers Benefits to Service Provider Partners Competitive Advantages Growth Strategy Market Opportunity Our Technology Cloud Services Platform Cybersecurity Hardware and Manufacturing Research and Development Service Provider Network Subscribers Sales and Marketing Service Provider Support Our Competition Our Intellectual Property Employees Corporate Information Available Information Item 1A. Risk Factors The company faces operational, competitive, regulatory, and litigation risks, alongside challenges from rapid growth, supply chain dependencies, and potential impacts from acquisitions or accounting changes - Quarterly operating results are subject to fluctuations due to factors like product mix, demand seasonality, competition, and supply chain disruptions (e.g., coronavirus impact)126137 - The company's growth rate may not be sustained, and effective management of future expansion, including integrating acquisitions and expanding internationally, is crucial129130132 - Significant legal proceedings, including patent infringement lawsuits (Vivint, EcoFactor) and class action lawsuits (TCPA), pose risks of monetary damages, operational limitations, and reputational harm140278279281317320322325326330 - Dependence on a network of service provider partners for subscriber acquisition and support means their inability to attract or retain subscribers could adversely affect operating results166167169 - A substantial portion of revenue (52-60% from top 10 partners) comes from a limited number of service provider partners, with ADT LLC representing 15-20% of revenue in 2017-2019174 - The company relies on wireless carriers for network access and is vulnerable to technological obsolescence (e.g., 3G/CDMA network shutdowns by 2022), requiring significant capital expenditures for upgrades196199 - International expansion faces risks including localization challenges, strong local competitors, compliance with foreign regulations, currency fluctuations, and increased costs from tariffs and trade barriers257258264265 Risks Related to Our Business and Industry Risks Related to Our Intellectual Property Risks Related to Ownership of Our Common Stock Item 1B. Unresolved Staff Comments This section confirms the absence of any unresolved comments from the SEC staff - No unresolved staff comments315 Item 2. Properties The company's primary office is in Tysons, Virginia, with additional leased and owned properties supporting various operational functions - Principal office in Tysons, Virginia, occupies 166,952 square feet under a lease expiring in 2026315 - Additional leased offices in Bloomington, Minnesota, and Redwood City, California, and other locations316 - Owns a commercial building in Liberty Lake, Washington, used for sales, training, R&D, warehousing, and administration316 Item 3. Legal Proceedings The company is engaged in significant patent infringement lawsuits with Vivint and EcoFactor, a settled TCPA class action, and indemnifies ADT LLC in other patent disputes - Vivint, Inc. filed a lawsuit on June 2, 2015, alleging infringement of six patents; litigation is ongoing with appeals and reexaminations317319 - EcoFactor, Inc. filed a complaint with the ITC on October 22, 2019, and subsequent lawsuits in U.S. District Courts, alleging infringement of smart thermostat patents, seeking injunctions and damages322323324325 - A class action lawsuit under the TCPA was settled for $28.0 million in 2018, with payments made in 2019, and required business practice changes to enhance TCPA compliance326328329330 - Alarm.com is indemnifying ADT LLC in two ongoing patent infringement suits (Applied Capital, Inc. v. The ADT Corporation et al. and Varatec, LLC v. ADT, LLC)331332333334 Item 4. Mine Safety Disclosures This section confirms that mine safety disclosures are not applicable to the company's operations - Not applicable336 PART II. Financial Information This section presents Alarm.com's financial performance, market data, and management's detailed analysis of operational results and financial condition Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with details on outstanding shares, dividend policy, and a $75.0 million stock repurchase program - Common stock (ALRM) commenced trading on The Nasdaq Global Select Market on June 26, 2015338 - As of February 18, 2020, there were 48,747,310 outstanding shares of common stock3 - The company does not intend to pay cash dividends in the foreseeable future, prioritizing retention of earnings for business development340494 - A stock repurchase program authorized on November 29, 2018, allows for repurchases of up to $75.0 million of common stock by November 29, 2020. No shares were repurchased under this program in Q4 2019347755 Stock Performance (June 2015 - Dec 2019) | Index | June 26, 2015 | Dec 31, 2015 | Dec 31, 2016 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2019 | | :--------------------------- | :------------ | :----------- | :----------- | :----------- | :----------- | :----------- | | Alarm.com Holdings, Inc. | 100 | 99 | 165 | 224 | 307 | 255 | | Nasdaq Composite | 100 | 99 | 106 | 136 | 131 | 177 | | S&P 500 | 100 | 97 | 107 | 127 | 119 | 154 | Item 6. Selected Financial Data This section provides a five-year summary of consolidated financial and operational data, including revenue, net income, Adjusted EBITDA, and balance sheet metrics Consolidated Statements of Operations Data (2015-2019, in thousands) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | | :-------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | SaaS and license revenue | $337,375 | $291,072 | $236,283 | $173,540 | $140,936 | | Hardware and other revenue | $164,988 | $129,422 | $102,654 | $87,566 | $67,952 | | Total revenue | $502,363| $420,494| $338,937| $261,106| $208,888| | Cost of SaaS and license revenue | $50,066 | $44,933 | $35,610 | $30,229 | $25,722 | | Cost of hardware and other revenue | $133,533 | $100,782 | $80,578 | $69,151 | $51,652 | | Total cost of revenue | $183,599| $145,715| $116,188| $99,380 | $77,374 | | Sales and marketing | $61,815 | $55,902 | $43,490 | $38,980 | $32,240 | | General and administrative | $69,959 | $95,750 | $55,396 | $57,926 | $35,473 | | Research and development | $114,443 | $89,204 | $72,755 | $44,272 | $40,002 | | Amortization and depreciation | $22,134 | $21,721 | $17,734 | $6,490 | $5,808 | | Total operating expenses | $268,351| $262,577| $189,375| $147,668| $113,523| | Operating income | $50,413 | $12,202 | $33,374 | $14,058 | $17,991 | | Interest expense | $(2,974) | $(2,918) | $(2,199) | $(190) | $(178) | | Interest income | $4,922 | $2,272 | $1,031 | $451 | $283 | | Other income / (expense), net | $6,535 | $143 | $35 | $62 | $(631) | | Income before income taxes | $58,896 | $11,699 | $32,241 | $14,381 | $17,465 | | Provision for / (benefit from) income taxes | $5,566 | $(9,825) | $2,990 | $4,227 | $5,697 | | Net income | $53,330 | $21,524 | $29,251 | $10,154 | $11,768 | | Net income attributable to common stockholders | $53,531 | $21,521 | $29,238 | $10,142 | $(7,219) | | Basic EPS | $1.11 | $0.45 | $0.63 | $0.22 | $(0.30) | | Diluted EPS | $1.06 | $0.43 | $0.59 | $0.21 | $(0.30) | Other Financial and Operating Data (2015-2019) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | | :-------------------------------- | :---- | :---- | :---- | :---- | :---- | | SaaS and license revenue renewal rate | 94% | 93% | 93% | 94% | 93% | | Adjusted EBITDA | $108,307| $93,081 | $71,628 | $49,034 | $34,370 | Balance Sheet and Other Data (2015-2019, in thousands) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | | :-------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Cash and cash equivalents | $119,629 | $146,061 | $96,329 | $140,634 | $128,358 | | Working capital | $167,879 | $152,793 | $119,433 | $150,485 | $131,971 | | Total assets | $557,799 | $440,985 | $371,641 | $261,245 | $226,095 | | Total long-term obligations | $115,143 | $88,126 | $94,311 | $30,297 | $26,885 | | Total stockholders' equity | $355,651 | $277,589 | $232,827 | $191,249 | $170,131 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition, operational results, revenue streams, recent acquisitions, critical accounting policies, liquidity, and capital resources - SaaS and license revenue is the largest source of revenue, representing 67% of total revenue in 2019, and is generated from monthly fees paid by service provider partners368 - Total revenue increased 19% to $502.4 million in 2019 from $420.5 million in 2018, driven by a 16% increase in SaaS and license revenue and a 27% increase in hardware and other revenue373419 - Net income attributable to common stockholders was $53.5 million in 2019, up from $21.5 million in 2018373 - Adjusted EBITDA increased to $108.3 million in 2019 from $93.1 million in 2018373 - The acquisition of 85% of OpenEye in October 2019 for $61.2 million (cash) aims to enhance cloud-managed video surveillance solutions for the enterprise commercial market376377 - Cash flows from operating activities decreased by $13.6 million in 2019 to $47.1 million, primarily due to the $28.0 million TCPA settlement payment made in 2019499500 - Cash flows used in investing activities increased by $60.0 million to $73.4 million in 2019, mainly due to the OpenEye acquisition and payments for promissory notes506 Overview Executive Overview and Highlights of 2019 and 2018 Results Geographic Areas Recent Developments Other Business Metrics Leases (Topic 842) Components of Operating Results Revenue Cost of Revenue Operating Expenses Interest Expense Interest Income Other Income, Net Provision for / (benefit from) income taxes Results of Operations Comparison of Years Ended December 31, 2019 to December 31, 2018 Comparison of Years Ended December 31, 2018 to December 31, 2017 Quarterly Results of Operations (Unaudited) Segment Information Critical Accounting Policies and Significant Judgments and Estimates Revenue Fair Value Measurements Stock-Based Compensation Business Combinations Goodwill, Intangible Assets and Long-lived Assets Accounting for Income Taxes Impairment of Notes Receivable Recent Accounting Pronouncements Liquidity and Capital Resources Working Capital Liquidity and Capital Resources Sources of Liquidity Dividends Historical Cash Flows Contractual Obligations Off-Balance Sheet Arrangements Debt Obligations Non-GAAP Measures Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuations on its credit facility, while foreign currency and inflation risks are currently immaterial - Primary market risk exposure is from fluctuations in interest rates, specifically related to the 2017 Facility527 - A 100 basis point change in the interest rate on the 2017 Facility would increase or decrease annual interest expense by approximately $0.6 million (2019) and $0.7 million (2018)527 - Foreign currency exchange risk and inflation risk are not considered material due to most revenue and operating expenses being denominated in U.S. dollars528529 Item 8. Financial Statements and Supplementary Data This section includes audited consolidated financial statements, the independent auditor's report, and detailed notes on accounting policies, acquisitions, debt, and other financial disclosures - PricewaterhouseCoopers LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019533 - The company adopted Topic 842 (Leases) in 2019 and changed revenue recognition standards in 2018, as discussed in Note 2534 - Management's assessment of internal control over financial reporting excluded OpenEye, acquired in 2019, which represented 1% of total assets and revenue538 Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Equity Notes to the Consolidated Financial Statements Note 1. Organization Note 2. Summary of Significant Accounting Policies Note 3. Revenue from Contracts with Customers Note 4. Accounts Receivable, Net Note 5. Inventory, Net Note 6. Property and Equipment, Net Note 7. Acquisitions Note 8. Goodwill and Intangible Assets, Net Note 9. Other Assets Note 10. Fair Value Measurements Note 11. Leases Note 12. Liabilities Note 13. Debt, Commitments and Contingencies Note 14. Stockholders' Equity Note 15. Stock-Based Compensation Note 16. Earnings Per Share Note 17. Significant Service Providers Note 18. Income Taxes Note 19. Segment Information Note 20. Related Party Transactions Note 21. Quarterly Financial Data (unaudited) Schedule II. Valuation and Qualifying Accounts and Reserves This schedule details the company's valuation and qualifying accounts and reserves, including allowances for doubtful accounts, product returns, and deferred tax valuation Valuation and Qualifying Accounts and Reserves (in thousands) | Description | Balance at Beginning of Year (2019, $ thousands) | Additions Charged Against Revenue (2019, $ thousands) | Additions Charged to Other Accounts (2019, $ thousands) | Deductions (2019, $ thousands) | Balance at End of Year (2019, $ thousands) | | :--------------------------------- | :---------------------------------- | :--------------------------------------- | :----------------------------------------- | :---------------- | :---------------------------- | | Allowance for doubtful accounts | $1,425 | $— | $1,170 | $(11) | $2,584 | | Allowance for product returns | $1,915 | $(123) | $105 | $(822) | $1,075 | | Allowance for notes receivable | $3,319 | $— | $(3,272) | $(31) | $16 | | Deferred tax valuation allowance | $— | $— | $322 | $— | $322 | | Year Ended December 31, 2018 | | | | | | | Allowance for doubtful accounts | $1,449 | $— | $149 | $(173) | $1,425 | | Allowance for product returns | $2,471 | $273 | $— | $(829) | $1,915 | | Allowance for notes receivable | $— | $— | $3,319 | $— | $3,319 | | Year Ended December 31, 2017 | | | | | | | Allowance for doubtful accounts | $1,282 | $— | $453 | $(286) | $1,449 | | Allowance for product returns | $2,314 | $2,055 | $— | $(1,898) | $2,471 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This section confirms no changes in or disagreements with accountants regarding accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure813 Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective, excluding the recently acquired OpenEye - Disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019815 - Internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework816 - The assessment of internal control over financial reporting excluded the recently acquired OpenEye (85% owned subsidiary), which represented 1% of total assets and revenue818 - No material changes in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2019819 Item 9B. Other Information Simone Wu was appointed as a Class II director to the Board, effective February 21, 2020, serving on the Audit Committee - Simone Wu was appointed as a Class II director to the Board of Directors, effective February 21, 2020823 - Ms. Wu is the Senior Vice President, General Counsel, Corporate Secretary and External Affairs for Choice Hotels International, Inc. and will serve on the Audit Committee824 - She will be compensated in accordance with standard non-employee director arrangements825 PART III. Directors, Executive Officers, and Corporate Governance This section outlines information on the company's directors, executive officers, corporate governance, compensation, and security ownership Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the Code of Business Conduct and Ethics, is incorporated by reference from the 2020 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement829 - A written Code of Business Conduct and Ethics, applicable to all employees, executive officers, and directors, is available on the company's investor relations website829 Item 11. Executive Compensation Executive and director compensation details are incorporated by reference from the company's 2020 Proxy Statement - Executive and director compensation information is incorporated by reference from the 2020 Proxy Statement830 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners, management, and equity compensation plans is incorporated by reference from the 2020 Proxy Statement - Security ownership information for beneficial owners and management, along with equity compensation plan details, is incorporated by reference from the 2020 Proxy Statement830 Item 13. Certain Relationships and Related Transactions and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's 2020 Proxy Statement - Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement831 Item 14. Principal Accounting Fees and Services Details on principal accounting fees and services, including pre-approval policies, are incorporated by reference from the 2020 Proxy Statement - Information on principal accounting fees and services, including pre-approval policies, is incorporated by reference from the 2020 Proxy Statement831 PART IV. Exhibits and Schedules This section lists all exhibits and financial statement schedules filed as part of the Annual Report, encompassing various agreements and certifications Item 15. Exhibits, Financial Statement Schedules This section lists consolidated financial statements, independent auditor reports, and a comprehensive array of exhibits filed or incorporated by reference - Includes consolidated financial statements and reports of Independent Registered Public Accounting Firm834 - A comprehensive list of exhibits, including asset purchase agreements, corporate governance documents, credit agreements, and certifications, are incorporated by reference or filed with the Annual Report834835 Item 16. Form 10-K Summary This section states that a Form 10-K Summary is not applicable for this filing - Not applicable837