Alarm.com(US:ALRM)2020-11-05 22:21PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements show significant year-over-year growth in revenue and net income for the third quarter and first nine months of 2020. Total assets increased to $698.0 million from $557.8 million at year-end 2019, primarily driven by a rise in cash and cash equivalents. Cash flow from operations saw a substantial increase to $66.7 million for the nine-month period, compared to $23.8 million in the prior year, reflecting higher net income and favorable changes in operating assets and liabilities Condensed Consolidated Financial Statements Key Financial Metrics | Financial Metric | Three Months Ended Sep 30, 2020 ($) | Three Months Ended Sep 30, 2019 ($) | Nine Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2019 ($) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $158.9M | $127.9M | $452.4M | $361.9M | | Operating Income | $18.1M | $12.2M | $42.9M | $35.5M | | Net Income | $35.8M | $17.7M | $61.0M | $40.5M | | Diluted EPS | $0.71 | $0.35 | $1.22 | $0.81 | Condensed Consolidated Balance Sheet Data | Balance Sheet Item | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | $247.2M | $119.6M | | Total current assets | $387.1M | $243.7M | | Total assets | $698.0M | $557.8M | | Long-term debt | $111.0M | $63.0M | | Total liabilities | $248.6M | $190.9M | | Total stockholders' equity | $438.7M | $355.7M | Condensed Consolidated Cash Flow Data | Cash Flow Item (Nine Months Ended Sep 30) | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Net cash from operating activities | $66.7M | $23.8M | | Net cash from / (used in) investing activities | $12.2M | $(5.9M) | | Net cash from financing activities | $48.6M | $304 | | Net increase in cash | $127.5M | $18.3M | Notes to the Condensed Consolidated Financial Statements - The company adopted ASU 2016-13 (Topic 326) regarding credit losses on January 1, 2020, resulting in a cumulative-effect adjustment that increased the accumulated deficit by $0.8 million2829 - On October 21, 2019, the company acquired 85% of OpenEye, a provider of cloud-managed video surveillance solutions, for $61.2 million in cash plus potential earn-outs. The acquisition is intended to enhance the company's commercial enterprise offerings5354 - The company operates in two reportable segments: 'Alarm.com' and 'Other'. The Alarm.com segment represents the core platform and solutions, contributing 94% of total revenue for the first nine months of 2020144145 - One service provider partner in the Alarm.com segment accounted for between 15% and 20% of total revenue for the first nine months of 2020 and 2019, indicating significant customer concentration137 - Subsequent to the quarter end, on November 4, 2020, the company amended its master service agreement with ADT, extending the term through January 1, 2023, and entered into a related patent license agreement157 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 24% YoY revenue growth in Q3 2020 to a 18% increase in SaaS and license revenue from a growing subscriber base and a 37% increase in hardware revenue, partly driven by the OpenEye acquisition. The company discusses the ongoing, but so far manageable, impact of the COVID-19 pandemic on its supply chain and sales channels. Liquidity remains strong, bolstered by a $42.9 million YoY increase in cash from operations for the nine-month period and a precautionary $50.0 million draw on its credit facility in March 2020 Overview and Key Metrics Overview and Key Metrics | Metric | Q3 2020 ($) | Q3 2019 ($) | 9M 2020 ($) | 9M 2019 ($) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $158.9M | $127.9M | $452.4M | $361.9M | | SaaS & License Revenue | $100.1M | $84.9M | $287.8M | $247.3M | | Net Income | $35.8M | $17.7M | $61.0M | $40.5M | | Adjusted EBITDA | $34.5M | $26.3M | $92.9M | $78.3M | - The company's SaaS and license revenue renewal rate remained stable at 94% for the twelve months ended September 30, 2020, consistent with the prior year176182 - The COVID-19 pandemic has caused disruptions to the company's supply chain and sales channels. While business showed resiliency in Q3, management anticipates that a failure of the economy to fully recover could lower future SaaS and license revenue growth rates174175 Results of Operations Revenue Growth Analysis | Revenue Stream | Q3 2020 vs Q3 2019 Growth (%) | 9M 2020 vs 9M 2019 Growth (%) | | :--- | :--- | :--- | | SaaS and license revenue | +18% | +16% | | Hardware and other revenue | +37% | +44% | | Total revenue | +24% | +25% | - The increase in hardware and other revenue was driven by a higher volume of video cameras sold and revenue from the OpenEye acquisition in October 2019212213 - Cost of hardware and other revenue as a percentage of hardware revenue decreased from 82% to 80% in Q3 YoY, reflecting a favorable shift in product mix215 - Operating expenses increased across the board, primarily due to higher personnel-related costs from increased headcount in Sales & Marketing (+27% YoY in Q3), R&D (+25% YoY in Q3), and General & Administrative functions217219222 - Other income, net, increased by $18.4 million in Q3 2020, primarily due to a $24.7 million gain on the sale of an investment in a platform partner, partially offset by the non-recurrence of a $6.9 million gain on a promissory note recorded in Q3 2019229 Liquidity and Capital Resources - As of September 30, 2020, the company had $247.2 million in cash and cash equivalents, an increase from $119.6 million at the end of 2019239240 - Cash flow from operations increased significantly to $66.7 million for the nine months ended Sep 30, 2020, up from $23.8 million in the prior-year period. The increase was driven by higher net income and favorable changes in operating assets and liabilities248251 - In March 2020, the company borrowed $50.0 million under its 2017 Facility as a precautionary measure due to COVID-19 uncertainty. As of September 30, 2020, $111.0 million was outstanding under the facility244257 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations related to its 2017 credit facility, which has a variable interest rate. A 100 basis point change in interest rates would impact annual interest expense by approximately $1.1 million. Foreign currency and inflation risks are considered not material - The company's main market risk is interest rate risk associated with its 2017 senior secured revolving credit facility. A 100 basis point change in interest rates would affect annual interest expense by approximately $1.1 million as of September 30, 2020268 - Exposure to foreign currency exchange risk and inflation risk is considered not material to the business, as substantially all revenue and expenses are denominated in U.S. dollars269270 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of September 30, 2020. No material changes to internal control over financial reporting were identified during the quarter, and the shift to remote work due to COVID-19 has not had a material impact - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020271 - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls. The integration of OpenEye is ongoing and not expected to have a material effect272 PART II. OTHER INFORMATION This section covers legal proceedings, key risk factors, equity security sales, and other material information Item 1. Legal Proceedings The company is involved in several significant legal proceedings, primarily patent infringement lawsuits. Key cases include ongoing litigation with Vivint, Inc. over six patents, and multiple actions by EcoFactor, Inc. before the U.S. International Trade Commission (ITC) and in district court concerning smart thermostat patents. The company is also incurring costs to indemnify its service provider, ADT, in separate patent infringement suits. While the company believes it has valid defenses, it notes that outcomes are uncertain and could have a material adverse effect - The company is engaged in a patent infringement lawsuit filed by Vivint, Inc. in 2015. The case involves multiple patents and has undergone reviews by the U.S. Patent Trial and Appeal Board (PTAB) and appeals, with some claims invalidated and others still in dispute275276 - EcoFactor, Inc. has filed complaints against the company with the U.S. International Trade Commission (ITC) and in U.S. District Court, alleging infringement of several patents related to smart thermostats. EcoFactor is seeking exclusion orders, injunctions, and damages277278279 - The company is incurring costs to indemnify its service provider partner, ADT, LLC, in ongoing patent infringement suits brought by Applied Capital, Inc. and Portus Singapore Pte. Ltd283284285 Item 1A. Risk Factors The company identifies numerous risks, with significant emphasis on the potential negative impacts of the COVID-19 pandemic on its business, supply chain, and demand. Other key risks include intense competition from large technology and service providers; reliance on a network of service provider partners for sales and significant customer concentration with partners like ADT; potential liability from security solution failures, cyber-attacks, and data breaches; and the risk of technological obsolescence, such as the upcoming shutdown of 3G/CDMA networks which will require subscriber upgrades - The COVID-19 pandemic poses a significant risk, potentially disrupting the hardware supply chain, restricting service providers' ability to meet with customers, and reducing consumer and business spending, which could lower future SaaS and license revenue growth289290 - The company faces intense competition from technology platform providers, large cable and broadband companies (AT&T, Comcast), and providers of point products (Google's Nest, Amazon's Ring), many of whom have greater resources322325326 - A substantial portion of revenue comes from a limited number of service provider partners. The top 10 partners accounted for 52% of revenue in 2019, with ADT LLC representing over 15% of revenue, creating significant customer concentration risk344345 - The business is exposed to significant liability risks from the failure of its security and life safety solutions, as well as from cyber-attacks and data breaches that could compromise sensitive subscriber information303332335 - Technological obsolescence is a key risk. For example, the planned shutdown of 3G and CDMA wireless networks by the end of 2022 will require subscribers using that technology to upgrade their equipment to avoid service termination366370 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase program, which was authorized by the board on November 29, 2018, for up to $75.0 million of common stock. No shares were repurchased during the three-month period ending September 30, 2020. As of the end of the quarter, approximately $69.9 million remained available for repurchase under the program Stock Repurchase Program Summary | Period | Total Shares Purchased | Average Price Paid ($) | Approx. Dollar Value Remaining Under Program ($) | | :--- | :--- | :--- | :--- | | Q3 2020 | 0 | $0.00 | $69,850,586 | Item 5. Other Information On November 4, 2020, subsequent to the quarter's end, the company and ADT LLC amended their master service agreement. The amendment extends the initial term through January 1, 2023, and establishes terms for integrating certain Google Nest products into the ADT platform operated by Alarm.com. Concurrently, a patent license agreement was executed, granting ADT a license to use certain Alarm.com intellectual property post-term in exchange for a monthly royalty on applicable subscribers - On November 4, 2020, the company amended its master service agreement with ADT to extend the term to January 1, 2023, and facilitate the integration of certain Google Nest products473 - A concurrent patent license agreement was signed, granting ADT a license to use certain Alarm.com intellectual property after the master agreement's term expires, in exchange for a monthly royalty per subscriber473