Alarm.com(ALRM) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements and related disclosures Item 1. Financial Statements (Unaudited) This section presents Alarm.com Holdings, Inc.'s unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and equity, along with detailed notes explaining significant accounting policies, revenue recognition, asset and liability changes, acquisitions, debt, and other financial details for the periods ended September 30, 2021 and December 31, 2020 Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net income for the specified periods Financial Performance (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :----- | :------------------ | :------------------ | :--------- | | Total Revenue | $192,324 | $158,851 | 21.1% | | Operating Income | $19,084 | $18,056 | 5.7% | | Net Income | $13,294 | $35,825 | -62.9% | | Net Income Attributable to Common Stockholders | $13,538 | $36,084 | -62.5% | | Basic EPS | $0.27 | $0.74 | -63.5% | | Diluted EPS | $0.26 | $0.71 | -63.4% | Financial Performance (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :----- | :------------------ | :------------------ | :--------- | | Total Revenue | $553,679 | $452,427 | 22.4% | | Operating Income | $50,812 | $42,917 | 18.4% | | Net Income | $42,334 | $61,021 | -30.6% | | Net Income Attributable to Common Stockholders | $43,113 | $61,886 | -30.4% | | Basic EPS | $0.87 | $1.27 | -31.5% | | Diluted EPS | $0.83 | $1.22 | -31.9% | Condensed Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and equity at specific points in time Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | Change (%) | | :----- | :----------- | :----------- | :----- | :--------- | | Cash and cash equivalents | $700,307 | $253,459 | $446,848 | 176.3% | | Total current assets | $870,767 | $397,414 | $473,353 | 119.1% | | Total assets | $1,181,754 | $731,687 | $450,067 | 61.5% | | Convertible senior notes, net | $421,112 | — | $421,112 | N/A | | Long-term debt | — | $110,000 | -$110,000 | -100.0% | | Total liabilities | $572,691 | $253,244 | $319,447 | 126.1% | | Total stockholders' equity | $597,174 | $467,752 | $129,422 | 27.7% | Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary (Nine Months Ended September 30, in thousands) | Activity | 2021 | 2020 | Change | Change (%) | | :------- | :--- | :--- | :----- | :--------- | | Net cash from operating activities | $83,194 | $66,670 | $16,524 | 24.8% | | Net cash (used in) / from investing activities | $(13,897) | $12,236 | $(26,133) | -213.6% | | Net cash from financing activities | $377,551 | $48,641 | $328,910 | 676.2% | | Net increase in cash and cash equivalents | $446,848 | $127,547 | $319,301 | 250.3% | | Cash and cash equivalents at end of period | $700,307 | $247,176 | $453,131 | 183.3% | Condensed Consolidated Statements of Equity Outlines changes in the company's equity accounts over the reporting period Equity Changes (Nine Months Ended September 30, 2021 vs. Dec 31, 2020, in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | | :----- | :----------- | :----------- | :----- | | Common Stock Amount | $501 | $496 | $5 | | Additional Paid-In Capital | $492,135 | $405,831 | $86,304 | | Retained Earnings | $109,687 | $66,574 | $43,113 | | Total Stockholders' Equity | $597,174 | $467,752 | $129,422 | - Equity component of convertible senior notes, net: $56,515 (in thousands) for the nine months ended September 30, 2021[16] - Stock-based compensation expense: $27,362 (in thousands) for the nine months ended September 30, 2021[16] - Net income attributable to common stockholders: $43,113 (in thousands) for the nine months ended September 30, 2021[16] Notes to the Condensed Consolidated Financial Statements Provides detailed explanations and additional information supporting the condensed consolidated financial statements Note 1. Organization Describes Alarm.com's business, operations, and service delivery model - Alarm.com is a leading platform for intelligently connected properties, providing cloud-based solutions for interactive security, video monitoring, intelligent automation, and energy management[22] - Solutions are delivered through a network of over 10,000 trusted service provider partners[22] - Revenue sources include SaaS services, license fees, software, hardware, and activation fees[22] Note 2. Basis of Presentation and Summary of Significant Accounting Policies Explains the accounting principles and presentation methods used in the financial statements - Financial statements are unaudited and prepared under GAAP for interim periods, including all normal recurring adjustments[24] - COVID-19 pandemic continues to disrupt supply chains, sales channels, and global economic activity, making future results uncertain[25] - Adopted ASU 2019-12 (Income Taxes) on January 1, 2021, with no material impact[31] - ASU 2020-06 (Convertible Instruments) is expected to have a material impact upon adoption on January 1, 2022, leading to a reclassification from equity to debt and a reduction in interest expense[33] Note 3. Revenue from Contracts with Customers Details the company's policies for recognizing revenue from various customer contracts - Revenue sources include cloud-based SaaS services, non-hosted software platform licenses, and hardware products[35] - Hardware returns are reserved against revenue based on historical data (approximately 1% for the twelve months ended September 30, 2021 and 2020)[36] - Activation fees are deferred and recognized ratably over an estimated ten-year subscriber account term[38] Contract Assets (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Beginning balance | $4,771 | $4,718 | $4,306 | $4,578 | | Capitalized costs | $540 | $607 | $2,697 | $2,429 | | Amortization | $(899) | $(1,046) | $(2,591) | $(2,728) | | End balance | $4,412 | $4,279 | $4,412 | $4,279 | Contract Liabilities (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Beginning balance | $15,019 | $11,537 | $12,529 | $10,498 | | Revenue deferred | $3,682 | $3,425 | $11,131 | $9,118 | | Revenue recognized | $(2,624) | $(2,090) | $(7,583) | $(6,744) | | End balance | $16,077 | $12,872 | $16,077 | $12,872 | Note 4. Accounts Receivable, Net Presents the composition of accounts receivable and related allowances for credit losses and product returns Accounts Receivable, Net (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | Change (%) | | :----- | :----------- | :----------- | :----- | :--------- | | Accounts receivable | $94,807 | $89,502 | $5,305 | 5.9% | | Allowance for credit losses | $(3,158) | $(4,696) | $1,538 | -32.7% | | Allowance for product returns | $(1,025) | $(1,480) | $455 | -30.7% | | Accounts receivable, net | $90,624 | $83,326 | $7,298 | 8.8% | - Reduction to provision for credit losses on accounts receivable: $0.4 million (3 months ended Sep 30, 2021) and $0.2 million (9 months ended Sep 30, 2021)[48] - Reserve for product returns: $0.5 million (3 months ended Sep 30, 2021) and $1.6 million (9 months ended Sep 30, 2021)[49] Changes in Allowance for Credit Losses for Accounts Receivable (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Beginning balance | $(3,443) | $(3,550) | $(4,442) | $(2,500) | | Recovery of / (provision for) expected credit losses | $415 | $1,146 | $268 | $195 | | Write-offs | $25 | $170 | $1,171 | $283 | | End balance | $(3,003) | $(2,234) | $(3,003) | $(2,234) | Note 5. Inventory Details the breakdown of the company's inventory into raw materials and finished goods Inventory Components (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | Change (%) | | :----- | :----------- | :----------- | :----- | :--------- | | Raw materials | $11,127 | $9,475 | $1,652 | 17.4% | | Finished goods | $45,399 | $34,806 | $10,593 | 30.4% | | Total inventory | $56,526 | $44,281 | $12,245 | 27.7% | Note 6. Acquisitions Summarizes recent business acquisitions and their financial impact on the company - Asset acquisitions in March 2020 for in-process research and development (IPR&D) totaled $4.4 million, expensed as research and development[56][57] - Acquired 100% of Shooter Detection Systems (SDS) on December 14, 2020, for $26.6 million cash, expanding commercial solutions with indoor gunshot detection[58][60] SDS Acquisition: Purchase Consideration and Net Assets Acquired (in thousands) | Metric | Amount | | :----- | :----- | | Total consideration | $26,577 | | Goodwill | $7,239 | | Customer relationships | $2,362 | | Developed technology | $13,522 | | Trade name | $512 | - Goodwill of $7.2 million reflects the value of acquired workforce and expected synergies from expanding commercial solutions[61] Note 7. Goodwill and Intangible Assets, Net Provides information on the company's goodwill and other intangible assets, including amortization Goodwill (in thousands) | Metric | Jan 1, 2021 | Sep 30, 2021 | Change | | :----- | :---------- | :----------- | :----- | | Balance | $112,838 | $112,901 | $63 | - No goodwill impairments were recorded during the three and nine months ended September 30, 2021 and 2020[67] Net Carrying Amount of Intangible Assets (in thousands) | Metric | Jan 1, 2021 | Sep 30, 2021 | Change | | :----- | :---------- | :----------- | :----- | | Customer Relationships | $72,670 | $62,801 | $(9,869) | | Developed Technology | $28,223 | $25,716 | $(2,507) | | Trade Name | $2,366 | $1,959 | $(407) | | Total Intangible Assets | $103,259 | $90,476 | $(12,783) | - Amortization of intangible assets totaled $4.3 million for the three months and $12.8 million for the nine months ended September 30, 2021[68] Note 8. Other Assets Details various non-current assets, including patents, loans, and strategic investments - Net carrying value of purchased patents and patent licenses was $2.4 million as of September 30, 2021, down from $2.9 million at December 31, 2020[72] - Subordinated credit agreement balance with a distribution partner was $4.5 million as of September 30, 2021[77] - Outstanding principal from a service provider partner loan was $1.2 million as of September 30, 2021[78] - Investment in a hardware supplier remained at $5.6 million as of September 30, 2021[79] - Investment in a technology partner increased to $5.7 million as of September 30, 2021, from $0.7 million at December 31, 2020, following a $5.0 million purchase of Series B-2 Preferred Stock[81] Changes in Allowance for Credit Losses for Notes Receivable (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Beginning balance | $(74) | $(46) | $(73) | $0 | | (Provision for) / recovery of expected credit losses | $(3) | $(20) | $(4) | $368 | | Write-offs | $0 | $1 | $0 | $1 | | End balance | $(77) | $(65) | $(77) | $(65) | Note 9. Fair Value Measurements Discusses the valuation methods and balances of assets measured at fair value Assets Measured at Fair Value (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Money market accounts | $671,598 | $221,407 | | Total | $671,598 | $221,407 | - The contingent consideration liability related to the OpenEye acquisition decreased to zero by December 31, 2020, as the 2020 revenue targets were not met[95] - No transfers in or out of Level 3 fair value hierarchy occurred during the three and nine months ended September 30, 2021 and 2020[96] Note 10. Leases Presents information on the company's operating lease liabilities and related terms Lease Metrics | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Weighted-average remaining lease term | 4.3 years | 4.9 years | | Weighted-average discount rate | 3.6% | 3.6% | Maturities of Lease Liabilities (in thousands) | Year Ended Dec 31, | Operating Leases | | :----------------- | :--------------- | | Remainder of 2021 | $3,064 | | 2022 | $11,229 | | 2023 | $10,512 | | 2024 | $8,906 | | 2025 | $7,535 | | 2026 and thereafter | $4,769 | | Total lease payments | $46,015 | | Present value of lease liabilities | $42,564 | Note 11. Liabilities Details the company's current and other non-current liabilities Current Liabilities (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | Change (%) | | :----- | :----------- | :----------- | :----- | :--------- | | Accounts payable | $40,519 | $38,163 | $2,356 | 6.2% | | Accrued expenses | $17,819 | $11,449 | $6,370 | 55.6% | | Other current liabilities | $4,628 | $4,315 | $313 | 7.3% | | Total | $62,966 | $53,927 | $9,039 | 16.8% | Other Liabilities (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | Change (%) | | :----- | :----------- | :----------- | :----- | :--------- | | Holdback liability from acquisitions | $1,500 | $1,500 | $0 | 0.0% | | Other liabilities | $7,030 | $5,311 | $1,719 | 32.4% | | Total | $8,530 | $6,811 | $1,719 | 25.2% | Note 12. Debt, Commitments and Contingencies Describes the company's debt instruments, particularly convertible senior notes, and potential contingent liabilities - Issued $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, on January 20, 2021, with net proceeds of $484.3 million[102] - Used proceeds from convertible notes to repay and terminate the $110.0 million outstanding principal balance under the 2017 credit facility[108][117] 2026 Convertible Senior Notes: Net Carrying Amount (in thousands) | Component | Sep 30, 2021 | | :-------- | :----------- | | Principal | $500,000 | | Unamortized debt discount | $(67,172) | | Unamortized debt issuance costs | $(11,716) | | Net carrying amount (liability) | $421,112 | | Net carrying amount (equity) | $74,775 | - The liability component of the 2026 Notes is amortized to interest expense at an effective interest rate of 4.0%[109] - Interest expense from amortization of debt discount and issuance costs was $4.2 million for the three months and $11.6 million for the nine months ended September 30, 2021[116] - The fair value of the 2026 Notes was $450.0 million as of September 30, 2021[111] - The contingent consideration liability from the OpenEye acquisition was reduced to zero by December 31, 2020, due to unmet revenue targets[122] Note 13. Stockholders' Equity Summarizes the components of stockholders' equity and details the stock repurchase program - A stock repurchase program authorized in December 2020 allows for purchases up to $100.0 million of common stock, expiring December 3, 2023[141] - No shares were repurchased under this program during the three and nine months ended September 30, 2021[141] Note 14. Stock-Based Compensation Provides a breakdown of stock-based compensation expense by functional area and award type Stock-Based Compensation Expense (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Sales and marketing | $1,189 | $734 | $3,232 | $2,263 | | General and administrative | $1,974 | $2,154 | $7,217 | $6,033 | | Research and development | $6,255 | $4,560 | $16,913 | $12,605 | | Total | $9,418 | $7,448 | $27,362 | $20,901 | Components of Non-Cash Stock-Based Compensation Expense (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Stock options and assumed options | $1,042 | $879 | $2,818 | $2,695 | | Restricted stock units | $8,331 | $6,531 | $24,404 | $18,089 | | Employee stock purchase plan | $45 | $38 | $140 | $117 | | Total | $9,418 | $7,448 | $27,362 | $20,901 | - Granted 728,415 restricted stock units (including 120,314 performance-based awards) during the nine months ended September 30, 2021[145] Note 15. Earnings Per Share Presents the calculation of basic and diluted earnings per share Net Income Per Share (in thousands, except per share amounts) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net income attributable to common stockholders | $13,538 | $36,084 | $43,113 | $61,886 | | Basic EPS | $0.27 | $0.74 | $0.87 | $1.27 | | Diluted EPS | $0.26 | $0.71 | $0.83 | $1.22 | - The 2026 Convertible Senior Notes had no dilutive effect on EPS for the three and nine months ended September 30, 2021, as the average market price of common stock ($78.19) was below the conversion price ($147.19)[111][148] Note 16. Significant Service Providers Highlights the company's reliance on its key service provider partners for revenue generation - The top 10 service provider partners accounted for 48% of consolidated revenue for the three months and 49% for the nine months ended September 30, 2021[149] - One service provider partner within the Alarm.com segment individually represented greater than 15% but not more than 20% of revenue for both the three and nine months ended September 30, 2021 and 2020[149] Note 17. Income Taxes Details the company's income tax provision, effective tax rates, and unrecognized tax benefits Income Tax Provision / (Benefit) and Effective Tax Rate | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Provision for / (benefit from) income taxes | $1,787 | $6,546 | $(2,864) | $5,471 | | Effective income tax rate | 11.8% | 15.4% | (7.3)% | 8.2% | - Effective tax rates were below statutory rates primarily due to research and development tax credits, tax windfall benefits from employee stock-based payment transactions, and foreign derived intangible income deductions[151] - Increased unrecognized tax benefits by $2.1 million primarily for research and development tax credits claimed during the nine months ended September 30, 2021[153] Note 18. Segment Information Provides financial performance data disaggregated by the company's operating segments - The company operates in two reportable segments: Alarm.com (cloud-based and Software platforms) and Other (residential and commercial automation solutions and energy management products in adjacent markets)[157][158] - The Alarm.com segment contributed 94% of total revenue for the three months and 95% for the nine months ended September 30, 2021[158] Segment Revenue (Three Months Ended September 30, 2021, in thousands) | Metric | Alarm.com | Other | Intersegment | Total | | :----- | :-------- | :---- | :----------- | :---- | | SaaS and license revenue | $109,170 | $8,889 | $0 | $118,059 | | Hardware and other revenue | $73,310 | $2,445 | $(1,490) | $74,265 | | Total revenue | $182,480 | $11,334 | $(1,490) | $192,324 | | Operating income / (loss) | $19,968 | $(1,021) | $137 | $19,084 | Segment Revenue (Nine Months Ended September 30, 2021, in thousands) | Metric | Alarm.com | Other | Intersegment | Total | | :----- | :-------- | :---- | :----------- | :---- | | SaaS and license revenue | $315,329 | $23,299 | $0 | $338,628 | | Hardware and other revenue | $212,194 | $7,368 | $(4,511) | $215,051 | | Total revenue | $527,523 | $30,667 | $(4,511) | $553,679 | | Operating income / (loss) | $57,130 | $(6,717) | $399 | $50,812 | - SaaS and license revenue for the Alarm.com segment included software license revenue of $7.9 million for the three months and $24.9 million for the nine months ended September 30, 2021, a decrease due to the continuing transition of customers from non-hosted software to the cloud-based hosted platform[162][233] Note 19. Related Party Transactions Details transactions and relationships with entities considered related parties - The company holds a 48.2% ownership interest in an installation partner, accounted for using the equity method[165] - Cost of hardware and other revenue in connection with this installation partner was $0.1 million for the three months and $0.2 million for the nine months ended September 30, 2021[165] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Alarm.com's financial condition and operating results, highlighting revenue growth driven by SaaS and hardware sales, but also noting a decrease in net income due to increased expenses and the absence of a prior-year investment gain. It discusses the ongoing impact of the COVID-19 pandemic, key business metrics, and critical accounting policies, emphasizing the company's strong liquidity position following the issuance of convertible senior notes Overview Provides a high-level description of Alarm.com's business model, solutions, and revenue generation - Alarm.com is the leading platform for intelligently connected properties, providing cloud-based solutions for residential and commercial use, including interactive security, video monitoring, intelligent automation, energy management, and wellness solutions[168] - Solutions are delivered through an established network of over 10,000 trusted service provider partners[169] - Revenue is primarily generated from monthly SaaS and license fees and hardware sales (e.g., video cameras, recorders, gunshot detection sensors, smart thermostats)[169] Highlights of Third Quarter Results Summarizes key financial performance metrics for the third quarter and year-to-date Revenue Growth (YoY Change) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Total revenue | +21% ($192.3M) | +22% ($553.7M) | | SaaS and license revenue | +18% ($118.1M) | +18% ($338.6M) | | Hardware and other revenue | 39% of total revenue | 39% of total revenue | Profitability (YoY Change) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Net income | -62.9% ($13.3M) | -30.6% ($42.3M) | | Net income attributable to common stockholders | -62.5% ($13.5M) | -30.4% ($43.1M) | | Adjusted EBITDA | +9.0% ($37.6M) | +19.7% ($111.2M) | Recent Developments Discusses recent events and their potential impact on the company's operations and financial performance - The COVID-19 pandemic continues to disrupt the company's supply chain (manufacturing, production, global transportation) and sales channels (service provider meetings)[178] - Prolonged uncertainty from COVID-19 could lead to lower SaaS and license revenue growth and reduced hardware revenue[179] - SaaS and license revenue renewal rate was 96% for the trailing 12 months ended September 30, 2021, up from 94% in the prior year[179] Other Business Metrics Presents key operational and financial metrics used by management to assess performance Key Business Metrics (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | SaaS and license revenue | $118,059 | $100,126 | $338,628 | $287,780 | | Adjusted EBITDA | $37,578 | $34,496 | $111,190 | $92,895 | - SaaS and license revenue renewal rate was 96% for the trailing 12 months ended September 30, 2021, indicating strong retention and growth in SaaS and license revenue[179][184][185] - Adjusted EBITDA is a non-GAAP measure used by management to evaluate core operating performance by excluding non-cash and non-ordinary course items[182][183] Components of Operating Results Explains the primary drivers and composition of the company's revenue and operating expenses - Revenue is primarily derived from cloud-based SaaS services, non-hosted software platform licenses (expected to decline), and hardware sales (e.g., video cameras, sensors, gunshot detection systems)[187][189][190][191] - Cost of SaaS and license revenue includes wireless network provider fees and network operations center costs, while cost of hardware and other revenue includes raw materials, production, and procurement costs[194] - Operating expenses (sales & marketing, general & administrative, R&D, amortization & depreciation) are significantly driven by personnel-related costs, with tariffs on Chinese imports modestly impacting hardware revenue margins[196][197] Results of Operations Provides a detailed analysis of the company's financial performance, including revenue, costs, and expenses Revenue Performance (YoY Change) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Total Revenue | +21% ($33.5M increase) | +22% ($101.3M increase) | | SaaS and license revenue | +18% ($17.9M increase) | +18% ($50.9M increase) | | Hardware and other revenue | +26% ($15.6M increase) | +31% ($50.4M increase) | Cost of Revenue Performance (YoY Change) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Total cost of revenue | +31% ($19.2M increase) | +33% ($55.3M increase) | | Cost of hardware and other revenue | +34% ($16.1M increase) | +35% ($45.2M increase) | | Cost of SaaS and license revenue | +21% ($3.1M increase) | +25% ($10.1M increase) | Operating Expenses (YoY Change) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Sales and marketing | +23% ($4.1M increase) | +18% ($9.7M increase) | | General and administrative | +7% ($1.3M increase) | +17% ($9.2M increase) | | Research and development | +20% ($7.2M increase) | +15% ($16.8M increase) | | Amortization and depreciation | +9% ($0.6M increase) | +12% ($2.3M increase) | Other Financial Items (YoY Change) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Interest expense | +655% ($3.6M increase) | +466% ($9.6M increase) | | Other income / (expense), net | -100% ($24.7M decrease) | -100% ($25.0M change) | | Provision for / (benefit from) income taxes | -73% ($4.8M decrease) | -152% ($8.3M change) | Segment Information Discusses the financial performance and operational aspects of the company's reportable segments - The Alarm.com segment remains the primary revenue driver, contributing 94% (3 months) and 95% (9 months) of total revenue for September 30, 2021[230] - Alarm.com segment employees increased by 7.6% (from 1,257 to 1,353) and Other segment employees increased by 24.0% (from 104 to 129) year-over-year as of September 30, 2021[231] - Software license revenue within the Alarm.com segment decreased due to the ongoing transition of customers from non-hosted software to cloud-based platforms[233] Critical Accounting Policies and Significant Judgments and Estimates Outlines the accounting policies requiring significant management judgment and estimation - The preparation of financial statements requires significant estimates and assumptions, particularly for revenue recognition, stock-based compensation, business combinations, and income taxes[26][235] - Accounting for convertible senior notes involves separating liability and equity components based on fair value estimates, which could materially impact financial statements if underlying assumptions change[236][237] Liquidity and Capital Resources Discusses the company's cash position, working capital, and ability to meet its financial obligations Cash and Working Capital (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | Change (%) | | :----- | :----------- | :----------- | :----- | :--------- | | Cash and cash equivalents | $700,307 | $253,459 | $446,848 | 176.3% | | Working capital | $769,080 | $307,170 | $461,910 | 150.4% | - Issued $500.0 million (net $484.3 million) in 0% convertible senior notes in January 2021, significantly boosting liquidity[241] - Used proceeds from convertible notes to repay and terminate the $110.0 million 2017 credit facility[241] - The company believes existing cash and future operating cash flows will be sufficient to meet anticipated operating cash needs for at least the next 12 months[242] - Cash flows from operating activities increased by $16.5 million to $83.2 million for the nine months ended September 30, 2021[249] - Cash flows from financing activities increased by $329.0 million to $377.6 million for the nine months ended September 30, 2021, primarily due to the convertible senior notes issuance[255] Non-GAAP Measures Defines and reconciles non-GAAP financial measures used by management to evaluate performance - Adjusted EBITDA is a non-GAAP measure used by management to evaluate core operating performance and trends, excluding items such as interest, taxes, amortization, depreciation, stock-based compensation, and certain legal costs[268][269] Adjusted EBITDA (in thousands) | Metric | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :----- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net income | $13,294 | $35,825 | $42,334 | $61,021 | | Total adjustments | $24,284 | $(1,329) | $68,856 | $31,874 | | Adjusted EBITDA | $37,578 | $34,496 | $111,190 | $92,895 | - Adjusted EBITDA has limitations as an analytical tool, as it does not reflect cash capital expenditure requirements, changes in working capital, or the dilutive impact of equity-based compensation[270] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is foreign currency exchange rates, which is not considered material due to most transactions being in U.S. dollars. The fair value of the 2026 Convertible Senior Notes is subject to fluctuations based on the common stock market price, and the COVID-19 pandemic continues to contribute to significant volatility in financial markets - The company's primary market risk exposure is foreign currency exchange rates, but it is not considered material as substantially all revenue and operating expenses are denominated in U.S. dollars[274] - The fair value of the 2026 Convertible Senior Notes fluctuates with the market price of the company's common stock[273] - The COVID-19 pandemic continues to create significant volatility in the financial markets[272] Item 4. 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 September 30, 2021. There were no material changes in internal control over financial reporting during the quarter, and the integration of Shooter Detection Systems (SDS) is ongoing without expected material impact. Remote work arrangements due to COVID-19 have also not materially impacted internal controls - Disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021[275] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2021[276] - The integration of Shooter Detection Systems (SDS) into internal control over financial reporting is ongoing and not expected to materially affect it[276] - Remote work arrangements due to the COVID-19 pandemic have not materially impacted internal control over financial reporting[277] PART II. OTHER INFORMATION Contains additional non-financial and legal disclosures required for the reporting period Item 1. Legal Proceedings Alarm.com is involved in several ongoing patent infringement lawsuits with Vivint, EcoFactor, and Causam, primarily concerning smart home and thermostat technologies. While the company asserts valid defenses, adverse outcomes could lead to significant damages, royalties, or injunctions, potentially harming its business. An ITC investigation against Alarm.com by EcoFactor was affirmed in Alarm.com's favor but is under appeal, and a new ITC investigation by Causam is ongoing - Ongoing patent infringement lawsuit with Vivint, Inc. (filed June 2015) alleging infringement of six patents; discovery closed October 29, 2021, no trial date set[279] - Multiple lawsuits with EcoFactor, Inc. (filed October 2019, November 2019, May 2020) alleging infringement of smart thermostat patents; an ITC investigation affirmed in Alarm.com's favor, but EcoFactor appealed[281][282][284] - Lawsuit and ITC complaint filed by Causam Enterprises, Inc. (July 2021) alleging infringement of smart thermostat patents; ITC investigation instituted August 2021 with an evidentiary hearing scheduled for June 2022[286][287] - Adverse outcomes in these legal proceedings could result in damages, reasonable royalties, or injunctions, which could materially affect the company's business[280][285][288] - The company provides indemnification to certain service provider partners, such as ADT LLC, in ongoing patent infringement suits[289][290] Item 1A. Risk Factors Alarm.com faces significant risks including ongoing supply chain and sales channel disruptions from the COVID-19 pandemic, intense competition in the connected property market, and reliance on its service provider network. Other key risks involve managing rapid growth, potential liabilities from product failures or legal disputes, technological obsolescence, dependence on suppliers, and evolving regulatory landscapes concerning data privacy and international trade policies. Financial risks include securing future financing, potential goodwill impairment, and increased tax liabilities - The COVID-19 pandemic continues to negatively impact global supply chains (limited inventory, increased lead times, shipping delays) and sales channels, potentially leading to lower revenue growth[297][298][299] - The markets for home automation, security monitoring, video monitoring, and energy management are highly competitive, with many large technology companies and service providers actively targeting these areas, potentially leading to price reductions and loss of market share[324][327][328][329][330] - The company relies heavily on its service provider network for subscriber acquisition and retention; the inability of these partners to attract or retain subscribers, or the loss of major partners, could adversely affect operating results[340][341][346][347][348][349][350][360] - Risks include the inability to adapt to rapid technological change, maintain compatibility with diverse devices, or develop new solutions, as well as the obsolescence of existing technology (e.g., 3G/CDMA network shutdown)[367][368][369] - Operating in a regulated industry, the company is subject to various consumer protection, licensing, data privacy (e.g., CCPA, GDPR), and trade laws; non-compliance or changes in these laws could increase costs, limit offerings, or result in fines and litigation[323][381][382][383][384][385][386][387][388][389][390][391][392][393][410][411][412][413][414][416][417][422][423][424][425] - Ongoing legal proceedings, particularly patent infringement lawsuits, could lead to costly litigation, significant damages, or injunctions, materially harming the business[322][431][432][433][434][435][436][437][438][439] - Financial risks include the potential inability to secure additional financing on favorable terms, the significant portion of goodwill and intangible assets being subject to impairment, and potential increases in tax liabilities due to legislative changes or audits[404][405][406][407] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended September 30, 2021, Alarm.com Holdings, Inc. did not engage in any unregistered sales of equity securities or issuer repurchases of its common stock. The company maintains an authorized stock repurchase program with $100.0 million remaining - No unregistered sales of equity securities occurred during the three months ended September 30, 2021[465] - No issuer repurchases of common stock were made under the stock repurchase program during the three months ended September 30, 2021[467] - The company has an approximate dollar value of $100.0 million remaining that may yet be purchased under its stock repurchase program[468] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - No defaults upon senior securities were reported[468] Item 4. Mine Safety Disclosures This item is not applicable to Alarm.com Holdings, Inc.'s operations - This item is not applicable[469] Item 5. Other Information No other information was reported for this period - No other information was reported[469] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, a key master services agreement amendment, and various certifications required by SEC regulations, along with XBRL-related documents - Includes Amended and Restated Certificate of Incorporation and Bylaws[471] - A Third Amendment to Reformed Master Services Agreement by and between Alarm.com Incorporated and ADT LLC, effective July 1, 2021, is filed[471] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Act Sections 302 and 906 are included[471] - Inline XBRL Instance Document and Taxonomy Extension Documents are provided[471]