Alarm.com(US:ALRM)2020-08-05 21:24PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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 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 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 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 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 thousand28 - 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 acquisition6264 - 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 time111114115 - 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 revenue133141 - 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, 2020105107 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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 partners156 - 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 periods169188 - 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 company171 Results of Operations 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 sold208209 - 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 headcount218 - 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 2020216 Liquidity and Capital Resources 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, 2020236237 - 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 liabilities239241 Non-GAAP Measures 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 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, 2020262 - Foreign currency exchange risk is considered immaterial as substantially all revenue and expenses are in U.S. dollars263 Item 4. Controls and Procedures 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, 2020267 - 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 controls268269 PART II. OTHER INFORMATION Item 1. Legal Proceedings 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 - 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 patents274275276 - The company is a defendant in two putative class action lawsuits alleging violations of the Telephone Consumer Protection Act (TCPA)278279 - 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 Portus280281283 Item 1A. Risk Factors 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 demand288289 - 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 - 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 - 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 damage334338339 - 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 attrition370373 - 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 litigation393394395 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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, 2020469 - 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, 2020469 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported470 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable470 Item 5. Other Information No other material information was reported - No other information was reported470 Item 6. Exhibits 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 Act472