Alarm.com(ALRM) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements for the quarter ended March 31, 2020, including statements of operations, balance sheets, cash flows, and equity, along with detailed notes on accounting policies and significant events Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the quarter ended March 31, 2020, including the Statements of Operations, Balance Sheets, Cash Flows, and Equity, along with detailed notes explaining the basis of accounting and significant events, such as acquisitions and the adoption of new accounting standards Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Q1 2020 vs Q1 2019) | Financial Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | | :--- | :--- | :--- | | SaaS and license revenue | $91.95 | $80.06 | | Hardware and other revenue | $59.99 | $32.28 | | Total revenue | $151.94 | $112.34 | | Operating income | $9.87 | $9.22 | | Net income | $8.57 | $9.01 | | Net income attributable to common stockholders | $8.81 | $9.01 | | Diluted Net income per share | $0.18 | $0.18 | Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights | Balance Sheet Item | March 31, 2020 (in millions) | December 31, 2019 (in millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $171.73 | $119.63 | | Total current assets | $309.30 | $243.67 | | Goodwill | $104.96 | $104.96 | | Total assets | $624.08 | $557.80 | | Long-term debt | $113.00 | $63.00 | | Total liabilities | $246.89 | $190.94 | | Total stockholders' equity | $366.22 | $355.65 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Q1 2020 vs Q1 2019) | Cash Flow Activity | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | | :--- | :--- | :--- | | Net cash from operating activities | $12.90 | $(1.19) | | Net cash used in investing activities | $(7.01) | $(23.02) | | Net cash from financing activities | $46.22 | $0.59 | | Net increase/(decrease) in cash | $52.10 | $(23.62) | - The company drew down $50.0 million from its credit facility and purchased $5.1 million of treasury stock during the first quarter of 2020[9] Notes to the Condensed Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial statement items, including the adoption of Topic 326 for credit losses, revenue recognition, the OpenEye acquisition, goodwill, debt facilities, legal proceedings, stock repurchase activity, and segment reporting - The company adopted ASU 2016-13 (Topic 326) on credit losses as of January 1, 2020, resulting in a cumulative-effect adjustment of $0.8 million to accumulated deficit[24][25] - In March 2020, the company acquired in-process research and development (IPR&D) in two separate transactions for a total consideration of $4.4 million, which was expensed at the time of acquisition[55][56][58] - The company's top 10 service provider partners accounted for 49% of consolidated revenue in Q1 2020, with one service provider partner representing between 15% and 20% of revenue[120] - The Alarm.com segment represents 95% of total revenue for Q1 2020, with the Other segment representing the remaining 5%[128] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for Q1 2020, highlighting a 35% increase in total revenue driven by strong hardware sales and continued growth in SaaS and license revenue, while noting the COVID-19 pandemic's significant uncertainty and potential negative impact on future hardware sales and SaaS revenue growth Overview and Recent Developments - The company is the leading platform for the intelligently connected property, offering solutions through a network of over 9,000 service provider partners[138][139] - The COVID-19 pandemic is disrupting the supply chain and sales channels, with the company anticipating lower hardware revenue in future periods of 2020 compared to Q1 and a potential slowdown in SaaS and license revenue growth[151][268] - The company's SaaS and license revenue renewal rate was 93% for the twelve months ended March 31, 2020, compared to 94% for the prior year period[160][162] Results of Operations Revenue Comparison (Q1 2020 vs Q1 2019) | Revenue Type | Q1 2020 (in millions) | Q1 2019 (in millions) | % Change | | :--- | :--- | :--- | :--- | | SaaS and license revenue | $91.95 | $80.06 | 15% | | Hardware and other revenue | $59.99 | $32.28 | 86% | | Total revenue | $151.94 | $112.34 | 35% | - The increase in hardware and other revenue was primarily due to a higher volume of video cameras sold and revenue from the October 2019 acquisition of OpenEye[197] - Research and Development expense increased by $13.2 million (50%) YoY, driven by a $7.6 million increase in personnel costs and $4.4 million in acquired in-process R&D[203] - General and Administrative expense increased by $1.7 million (9%) YoY, primarily due to higher personnel costs and a $1.1 million increase in the provision for credit losses, partially offset by a $1.9 million decrease in legal expenses[201] Liquidity and Capital Resources - As of March 31, 2020, the company had $171.7 million in cash and cash equivalents and working capital of $231.6 million[212][213] - In Q1 2020, the company borrowed $50.0 million under its 2017 Facility as a precautionary measure due to COVID-19 uncertainty, increasing the outstanding balance to $113.0 million[217][231] - The company believes existing cash, cash from operations, and its credit facility will be sufficient to meet operating cash needs for at least the next 12 months[214] Non-GAAP Financial Measures Reconciliation of Net Income to Adjusted EBITDA | Metric (in millions) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net income | $8.57 | $9.01 | | Adjustments | $20.62 | $15.24 | | Adjusted EBITDA | $29.19 | $24.25 | - Adjustments to net income to arrive at Adjusted EBITDA include interest, taxes, D&A, stock-based compensation ($6.4 million), acquisition-related expenses ($4.1 million), and litigation expenses ($2.5 million)[240] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations on its variable-rate debt under the 2017 Facility, where a 100 basis point change would impact annual interest expense by approximately $1.1 million, while foreign currency and inflation risks are not considered material - The primary market risk is interest rate risk related to the 2017 credit facility, where a 100 basis point change would affect annual interest expense by about $1.1 million as of March 31, 2020[243] - Foreign currency exchange risk and inflation risk are not considered material as substantially all revenue and expenses are denominated in U.S. dollars[244][245] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter, despite the integration of OpenEye and the transition to remote work due to COVID-19 - Management concluded that disclosure controls and procedures were effective as of March 31, 2020[248] - There were no material changes to internal control over financial reporting in Q1 2020, and the integration of OpenEye and remote work arrangements due to COVID-19 did not have a material impact[249][250] PART II. OTHER INFORMATION This section covers other material information, including ongoing legal proceedings, detailed risk factors, and disclosures regarding unregistered sales of equity securities and the use of proceeds Legal Proceedings The company is involved in several significant legal proceedings, including ongoing patent infringement lawsuits filed by Vivint, Inc. and EcoFactor, Inc., and is also indemnifying its service provider partner ADT in two separate patent infringement suits - The company is in ongoing patent litigation with Vivint, Inc., which alleges infringement of six patents, with the case partially stayed pending appeals and reexaminations[252][254] - EcoFactor, Inc. has filed complaints with the ITC and in U.S. District Courts alleging infringement of multiple patents related to the company's smart thermostats[256][257] - The company is incurring costs to indemnify its service provider ADT, LLC in two ongoing patent infringement suits: Applied Capital, Inc. v. The ADT Corporation et al. and Varatec, LLC v. ADT, LLC[259] Risk Factors This section details numerous risks that could adversely affect the company's business, including the negative impact of the COVID-19 pandemic, intense competition, reliance on service provider partners, potential failure of security solutions, vulnerability to cyber-attacks, intellectual property litigation, regulatory changes, dependence on key suppliers, and challenges related to international expansion and acquisitions Risks Related to Business and Industry - The COVID-19 pandemic may negatively affect business through supply chain disruptions, reduced demand, and restrictions on service providers, with the company anticipating lower hardware revenue and potentially slower SaaS growth for the remainder of 2020[267][268] - The company faces intense competition from large technology companies (Google, Amazon, Apple), broadband providers, and other managed service providers, which have greater resources and brand recognition[304][309][310] - A substantial portion of revenue comes from a limited number of service provider partners, with the top 10 partners accounting for 52% of revenue in 2019, and ADT LLC representing over 15%[329] - The business is subject to significant risks from system failures, security breaches, and cyber-attacks, which could lead to liability, reputational damage, and financial loss[286][314][319] Risks Related to Intellectual Property - The company is subject to costly and time-consuming litigation from third parties asserting intellectual property infringement, such as the ongoing cases with Vivint and EcoFactor[428][429][430] - Failure to adequately protect proprietary technology through patents, copyrights, and trade secrets could harm the company's competitive position[425] - The use of open-source software in the company's platforms may expose it to risks, including requirements to disclose proprietary source code or face infringement claims[436][437] Risks Related to Ownership of Our Common Stock - The market price of the company's common stock has been and is expected to remain volatile[439] - A significant percentage of outstanding stock is owned by directors, executive officers, and their affiliates, allowing them substantial influence over corporate decisions[453] - Anti-takeover provisions in the company's charter and Delaware law could make an acquisition more difficult and limit the market price of the common stock[454][455] Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's stock repurchase activity, noting that during the quarter ended March 31, 2020, the company repurchased 147,153 shares of its common stock for approximately $5.1 million under its publicly announced repurchase program Issuer Purchases of Equity Securities (Q1 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2020 | — | $— | | Feb 2020 | — | $— | | Mar 2020 | 147,153 | $34.99 | | Total | 147,153 | $34.99 | - As of March 31, 2020, approximately $69.9 million remained available for future repurchases under the authorized stock repurchase program[462] Other Items (Items 3, 4, 5, 6) This section confirms there were no defaults upon senior securities, no mine safety disclosures required, and no other material information to report under Item 5, and lists the exhibits filed with the Form 10-Q - There were no defaults upon senior securities (Item 3), no mine safety disclosures (Item 4), and no other information to report (Item 5)[461]