Alarm.com(ALRM) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents unaudited condensed consolidated financial statements for Q1 2022, including operations, balance sheets, cash flows, and equity, with detailed notes Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements for Q1 2022, including operations, balance sheets, cash flows, and equity, with detailed notes Condensed Consolidated Statements of Operations Net income and net income attributable to common stockholders decreased in Q1 2022 despite increased total revenue | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | SaaS and license revenue | $123,225 | $107,383 | | Hardware and other revenue | $82,212 | $65,115 | | Total revenue | $205,437 | $172,498 | | Total cost of revenue | $90,087 | $65,762 | | Operating income | $8,913 | $15,003 | | Net income | $8,903 | $14,550 | | Net income attributable to common stockholders | $9,079 | $14,830 | | Basic Net income per share | $0.18 | $0.30 | | Diluted Net income per share | $0.18 | $0.29 | Condensed Consolidated Balance Sheets Total assets and stockholders' equity slightly decreased in Q1 2022, while convertible senior notes increased | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------------- | :---------------------------- | :------------------------------- | | Cash and cash equivalents | $671,753 | $710,621 | | Total current assets | $888,578 | $917,620 | | Total assets | $1,224,790 | $1,232,015 | | Total current liabilities | $107,469 | $129,339 | | Convertible senior notes, net | $488,024 | $425,345 | | Total liabilities | $646,516 | $605,960 | | Total stockholders' equity | $562,993 | $613,167 | Condensed Consolidated Statements of Cash Flows Cash flow from operations shifted to negative in Q1 2022, decreasing overall cash and equivalents | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Cash flows (used in) / from operating activities | $(13,961) | $21,232 | | Cash flows used in investing activities | $(2,155) | $(9,067) | | Cash flows (used in) / from financing activities | $(22,251) | $376,548 | | Net (decrease) / increase in cash, cash equivalents and restricted cash | $(38,367) | $388,713 | | Cash, cash equivalents and restricted cash at end of the period | $672,254 | $642,172 | Condensed Consolidated Statements of Equity Total stockholders' equity decreased in Q1 2022 due to new accounting standard adoption and treasury stock purchases | Metric | December 31, 2021 (in thousands) | March 31, 2022 (in thousands) | | :------------------------------------------------------------------ | :------------------------------- | :---------------------------- | | Redeemable Noncontrolling Interest | $12,888 | $15,281 | | Common Stock (Shares) | 50,407 | 50,492 | | Common Stock (Amount) | $504 | $505 | | Additional Paid-In Capital | $498,979 | $453,084 | | Treasury Stock (Shares) | 147 | 501 | | Treasury Stock (Amount) | $(5,149) | $(28,480) | | Retained Earnings | $118,833 | $137,884 | | Total Stockholders' Equity | $613,167 | $562,993 | | Key Changes (Three Months Ended March 31, 2022): | | | | Adoption of accounting standard on debt with conversion and other options (impact on APIC) | $(56,515) | | | Adoption of accounting standard on debt with conversion and other options (impact on Retained Earnings) | $9,972 | | | Purchase of treasury stock | | $(23,331) | | Stock-based compensation expense | | $12,110 | | Net income attributable to common stockholders | | $9,079 | Notes to the Condensed Consolidated Financial Statements Provides detailed explanations for financial statements, covering business, accounting policies, revenue, assets, liabilities, debt, and segments Note 1. Organization Alarm.com is a leading platform for intelligently connected properties, offering cloud-based solutions through service provider partners - Alarm.com is a leading platform for intelligently connected properties, providing cloud-based solutions for interactive security, video monitoring, intelligent automation, and energy management[20] - The company's solutions are delivered through a network of over 10,900 trusted service provider partners[20] - Revenue is derived from SaaS services, license fees, software, hardware, activation fees, and other sources[20] Note 2. Basis of Presentation and Summary of Significant Accounting Policies Financial statements prepared under GAAP; ASU 2020-06 adoption impacted convertible notes, balance sheet, and net income - The COVID-19 pandemic continues to disrupt the company's supply chain and sales channels, leading to economic uncertainty, inflation, and potential adverse effects on business and financial condition[23] - The company adopted ASU 2020-06 effective January 1, 2022, using a modified retrospective method, simplifying accounting for convertible instruments[29] Impact of ASU 2020-06 Adoption on Balance Sheet (as of January 1, 2022, in thousands) | Balance Sheet Caption | Increase / (Decrease) (in thousands) | | :---------------------------- | :-------------------- | | Deferred tax assets | $15,356 | | Additional paid-in capital | $(56,515) | | Convertible senior notes, net | $61,899 | | Retained earnings | $9,972 | - Net income attributable to common stockholders increased $2.0 million for Q1 2022 due to ASU 2020-06 adoption, eliminating non-cash interest expense from debt discount amortization[30] - Diluted weighted average common shares outstanding increased by 3,396,950 shares for Q1 2022 due to the if-converted method for convertible senior notes[30] Note 3. Revenue from Contracts with Customers Revenue from SaaS, licenses, and hardware to partners; activation fees deferred, contract assets and liabilities detailed - Revenue is derived from cloud-based SaaS services, licenses on non-hosted software platforms, and hardware products, sold through service provider partners[34] - A reserve of approximately 1% of hardware and other revenue is recorded for hardware returns based on historical data[35] - Activation fees are deferred and recognized ratably over an estimated ten-year expected term of the subscriber's account[37] Changes in Contract Assets (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Beginning of period balance | $4,520 | $4,306 | | Commission costs and upfront payments to a customer capitalized in period | $806 | $1,106 | | Amortization of contract assets | $(846) | $(809) | | End of period balance | $4,480 | $4,603 | Changes in Contract Liabilities (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Beginning of period balance | $14,837 | $12,529 | | Revenue deferred in period | $3,990 | $3,801 | | Revenue recognized from amounts included in contract liabilities | $(3,208) | $(2,674) | | End of period balance | $15,619 | $13,656 | Note 4. Accounts Receivable, Net Accounts receivable, net, decreased slightly in Q1 2022, with provisions for credit losses and product returns detailed Components of Accounts Receivable, Net (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------------------ | :------------- | :---------------- | | Accounts receivable | $106,382 | $108,897 | | Allowance for credit losses | $(2,153) | $(2,168) | | Allowance for product returns | $(1,162) | $(1,181) | | Accounts receivable, net | $103,067 | $105,548 | - Provision for credit losses on accounts receivable was $0.1 million for Q1 2022, compared to less than $0.1 million in Q1 2021[47] - Reserve for product returns was $0.8 million for Q1 2022, compared to $0.6 million in Q1 2021[48] Changes in Allowance for Credit Losses for Accounts Receivable (in thousands) | Metric | Three Months Ended March 31, 2022 (Alarm.com & Certain Subsidiaries) (in thousands) | Three Months Ended March 31, 2022 (All Other Subsidiaries) (in thousands) | Three Months Ended March 31, 2021 (Alarm.com & Certain Subsidiaries) (in thousands) | Three Months Ended March 31, 2021 (All Other Subsidiaries) (in thousands) | | :------------------------------------------ | :----------------------------------------------------------------- | :--------------------------------------------------------- | :----------------------------------------------------------------- | :--------------------------------------------------------- | | Beginning of period balance | $(2,035) | $(133) | $(4,442) | $(254) | | (Provision for) / recovery of expected credit losses | $(155) | $101 | $(36) | $4 | | Write-offs | $68 | $1 | $808 | $8 | | End of period balance | $(2,122) | $(31) | $(3,670) | $(242) | Note 5. Inventory Total inventory increased in Q1 2022, driven by higher finished goods and raw materials Components of Inventory (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------- | :------------- | :---------------- | | Raw materials | $17,412 | $15,823 | | Finished goods | $69,024 | $59,453 | | Total inventory | $86,436 | $75,276 | Note 6. Acquisitions EnergyHub acquired developed technology for $5.1 million in December 2021, recorded as an amortized intangible asset - EnergyHub, Inc. acquired developed technology for $5.1 million in December 2021, with $4.2 million paid in cash and $0.9 million deferred[59][60] - The acquired technology was recorded as an intangible asset and will be amortized on a straight-line basis over an estimated useful life of seven years[60] Note 7. Goodwill and Intangible Assets, Net Goodwill remained stable, while net intangible assets decreased due to amortization and write-offs in Q1 2022 Goodwill by Reportable Segment (in thousands) | Segment | Balance as of January 1, 2022 (in thousands) | Goodwill acquired (in thousands) | Balance as of March 31, 2022 (in thousands) | | :-------- | :---------------------------- | :---------------- | :--------------------------- | | Alarm.com | $112,901 | — | $112,901 | | Other | — | — | — | | Total | $112,901 | — | $112,901 | Changes in Net Carrying Amount of Intangible Assets (in thousands) | Intangible Asset | Balance as of January 1, 2022 (in thousands) | Amortization (in thousands) | Balance as of March 31, 2022 (in thousands) | | :------------------- | :---------------------------- | :----------- | :--------------------------- | | Customer Relationships | $59,426 | $(2,976) | $56,450 | | Developed Technology | $30,157 | $(1,446) | $28,711 | | Trade Name | $1,823 | $(153) | $1,670 | | Total | $91,406 | $(4,575) | $86,831 | - Amortization related to intangible assets was $4.6 million for Q1 2022, up from $4.3 million in Q1 2021[62] - The company wrote off $0.7 million in fully amortized intangible assets in the Alarm.com segment during Q1 2022[62] Note 8. Other Assets Other assets include patents, loans to partners, and equity investments, with notes receivable managed by delinquency - Net carrying value of purchased patents and patent licenses was $2.0 million as of March 31, 2022[66] - A subordinated credit agreement with a distribution partner had $4.7 million outstanding as of March 31, 2022, accruing interest at 9.0% per annum[68] - A loan agreement with a service provider partner had $1.1 million principal outstanding as of March 31, 2022, accruing interest at 9.0% per annum[70] - Investments in a hardware supplier and a technology partner were $5.6 million and $5.7 million, respectively, as of March 31, 2022[71][73] Changes in Allowance for Credit Losses for Notes Receivable (in thousands) | Metric | Three Months Ended March 31, 2022 (Loan Receivables) (in thousands) | Three Months Ended March 31, 2022 (Hardware Financing Receivables) (in thousands) | Three Months Ended March 31, 2021 (Loan Receivables) (in thousands) | Three Months Ended March 31, 2021 (Hardware Financing Receivables) (in thousands) | | :------------------------------------------ | :--------------------------------------------------- | :----------------------------------------------------------------- | :--------------------------------------------------- | :----------------------------------------------------------------- | | Beginning of period balance | $(79) | $(1) | $(73) | $(16) | | Recovery of expected credit losses | $78 | — | — | $11 | | Write-offs | — | — | — | — | | End of period balance | $(1) | $(1) | $(73) | $(5) | Note 9. Fair Value Measurements Assets measured at fair value include money market accounts; liabilities include a subsidiary long-term incentive plan Fair Value Measurements on a Recurring Basis (in thousands) | Asset/Liability | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------------------- | :------------- | :---------------- | | Money market accounts (Level 1) | $639,990 | $679,278 | | Subsidiary long-term incentive plan (Level 3) | $3,104 | $3,351 | - The subsidiary long-term incentive plan liability is remeasured at each reporting date using a Monte Carlo simulation model, with changes recorded in operating expense[88][89] Note 10. Leases The company leases office space and equipment; operating lease costs were $2.5 million in Q1 2022 Supplemental Lease Information (in thousands, except years/rate) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Operating lease cost | $2,473 | $2,338 | | Cash paid for amounts included in the measurement of operating lease liabilities | $2,975 | $2,772 | | Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | $1,782 | $224 | | Weighted-average remaining lease term — operating leases (years) | 4.1 | 4.2 | | Weighted-average discount rate — operating leases (%) | 3.6 | 3.6 | Maturities of Lease Liabilities (in thousands) | Year Ended December 31, | Operating Leases (in thousands) | | :---------------------- | :--------------- | | Remainder of 2022 | $8,815 | | 2023 | $11,662 | | 2024 | $10,107 | | 2025 | $8,771 | | 2026 | $5,112 | | 2027 and thereafter | $1,017 | | Total lease payments | $45,484 | | Less: imputed interest | $3,266 | | Present value of lease liabilities | $42,218 | Note 11. Liabilities Current liabilities decreased in Q1 2022 due to lower accounts payable and accrued expenses; other liabilities remained stable Components of Accounts Payable, Accrued Expenses and Other Current Liabilities (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------------------------------- | :------------- | :---------------- | | Accounts payable | $47,700 | $64,751 | | Accrued expenses | $13,179 | $19,894 | | Income taxes payable | $7,794 | — | | Other current liabilities | $4,942 | $5,171 | | Accounts payable, accrued expenses and other current liabilities | $73,615 | $89,816 | Components of Other Liabilities (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------------- | :------------- | :---------------- | | Holdback liability from asset acquisition | $850 | $850 | | Subsidiary long-term incentive plan | $3,104 | $3,351 | | Other liabilities | $5,526 | $5,344 | | Other liabilities | $9,480 | $9,545 | Note 12. Debt, Commitments and Contingencies Details 0% convertible senior notes due 2026, impact of ASU 2020-06, terminated credit facility, and ongoing legal proceedings - Issued $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, in January 2021, with net proceeds of $484.3 million[101] - The 2026 Notes are convertible under specific conditions, with the company intending to settle the principal amount in cash upon conversion[103][104] - Adoption of ASU 2020-06 on January 1, 2022, recombined liability and equity components of the 2026 Notes, amortizing issuance costs to interest expense at a 0.6% rate[109] Net Carrying Amount of 2026 Notes Liability Component (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :------------- | :---------------- | | Principal | $500,000 | $500,000 | | Unamortized debt discount | — | $(63,520) | | Unamortized debt issuance costs | $(11,976) | $(11,135) | | Net carrying amount | $488,024 | $425,345 | Interest Expense Related to 2026 Notes (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Amortization of debt discount | $— | $2,812 | | Amortization of debt issuance costs | $780 | $432 | | Total interest expense | $780 | $3,244 | - The $125.0 million 2017 credit facility was repaid and terminated on January 20, 2021, using proceeds from the 2026 Notes, resulting in a $0.2 million extinguishment loss[113][114] - The company is involved in ongoing patent infringement lawsuits with Vivint, EcoFactor, and Causam, and may be required to indemnify service provider partners like ADT for similar claims[117][119][121][123][125][126] Note 13. Stockholders' Equity Board authorized a $100.0 million stock repurchase program, under which $23.3 million of common stock was repurchased in Q1 2022 - The company repurchased 354,123 shares of common stock for $23.3 million during the three months ended March 31, 2022, under a $100.0 million stock repurchase program authorized until December 3, 2023[129] Note 14. Stock-Based Compensation Total stock-based compensation expense increased to $12.1 million in Q1 2022, primarily from restricted stock units Total Stock-Based Compensation Expense (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Sales and marketing | $1,058 | $808 | | General and administrative | $3,235 | $2,080 | | Research and development | $7,817 | $5,000 | | Total stock-based compensation expense | $12,110 | $7,888 | Stock-Based Compensation Expense by Type (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------- | :-------------------------------- | :-------------------------------- | | Stock options and assumed options | $778 | $617 | | Restricted stock units | $11,284 | $7,224 | | Employee stock purchase plan | $48 | $47 | | Total stock-based compensation expense | $12,110 | $7,888 | - 156,543 restricted stock units without performance conditions and 71,934 with performance conditions were granted in Q1 2022[132] Note 15. Earnings Per Share Basic and diluted EPS decreased in Q1 2022; ASU 2020-06 adoption impacted diluted EPS calculation Basic and Diluted Earnings Per Share (in thousands, except per share amounts) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income attributable to common stockholders - basic (A) | $9,079 | $14,830 | | Net income attributable to common stockholders - diluted (B) | $9,665 | $14,830 | | Weighted average common shares outstanding — basic (C) | 50,206,179 | 49,561,887 | | Weighted average common shares outstanding — diluted (D) | 55,170,781 | 51,739,461 | | Net income per share: Basic (A/C) | $0.18 | $0.30 | | Net income per share: Diluted (B/D) | $0.18 | $0.29 | - ASU 2020-06 adoption on January 1, 2022, led to using the if-converted method for convertible senior notes, increasing diluted weighted average common shares outstanding by 3,396,950 shares for Q1 2022[138] Note 16. Significant Service Providers Top 10 service providers accounted for 50% of revenue; one partner represented 15-20% of revenue and over 10% of receivables - The 10 largest revenue service provider partners accounted for 50% of consolidated revenue for both Q1 2022 and Q1 2021[140] - One service provider partner in the Alarm.com segment individually represented greater than 15% but not more than 20% of revenue for Q1 2022 and Q1 2021, and more than 10% of accounts receivable[140] Note 17. Income Taxes Recorded a $0.6 million benefit from income taxes in Q1 2022, with a (7.5)% effective tax rate Benefit from Income Taxes and Effective Tax Rate | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Benefit from income taxes | $(618) | $(2,913) | | Effective income tax rate | (7.5)% | (25.0)% | - Effective tax rates were below the statutory rate primarily due to research and development tax credits, tax windfall benefits from employee stock-based payment transactions, and foreign derived intangible income deductions[141] - The company recorded an increase of $0.6 million to the unrecognized tax benefits liability in Q1 2022, primarily for R&D tax credits[143] Note 18. Segment Information Alarm.com segment is the primary revenue driver, contributing 95% of total revenue, while the Other segment focuses on adjacent markets and is in the investment stage - The Alarm.com segment contributed 95% of total revenue for both Q1 2022 and Q1 2021[145] Segment Operational Data (in thousands) | Metric (Three Months Ended March 31, 2022) | Alarm.com (in thousands) | Other (in thousands) | Intersegment Alarm.com (in thousands) | Intersegment Other (in thousands) | Total (in thousands) | | :----------------------------------------- | :-------- | :------ | :--------------------- | :----------------- | :------- | | SaaS and license revenue | $115,348 | $7,877 | $— | $— | $123,225 | | Hardware and other revenue | $81,221 | $2,304 | $(899) | $(414) | $82,212 | | Total revenue | $196,569 | $10,181 | $(899) | $(414) | $205,437 | | Operating income / (loss) | $12,754 | $(4,004) | $185 | $(22) | $8,913 | | Metric (Three Months Ended March 31, 2021) | Alarm.com (in thousands) | Other (in thousands) | Intersegment Alarm.com (in thousands) | Intersegment Other (in thousands) | Total (in thousands) | | SaaS and license revenue | $101,263 | $6,120 | $— | $— | $107,383 | | Hardware and other revenue | $64,269 | $2,017 | $(905) | $(266) | $65,115 | | Total revenue | $165,532 | $8,137 | $(905) | $(266) | $172,498 | | Operating income / (loss) | $17,707 | $(2,853) | $153 | $(4) | $15,003 | - Alarm.com segment employees increased from 1,294 to 1,418, and Other segment employees increased from 120 to 147, from March 31, 2021, to March 31, 2022[217] Note 19. Related Party Transactions Equity method investment in an installation partner, with revenue from this partner less than $0.1 million in Q1 2022 - The company has a 48.2% ownership interest in an installation partner, accounted for using the equity method[149] - Revenue from the installation partner was less than $0.1 million for Q1 2022, compared to $0.1 million for Q1 2021[149] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial condition, results, revenue drivers, costs, expenses, accounting changes, liquidity, and capital resources Overview Alarm.com is a leading platform for intelligently connected properties, offering cloud-based solutions through service providers - Alarm.com is the leading platform for intelligently connected properties, offering comprehensive cloud-based solutions including interactive security, video monitoring, intelligent automation, access control, energy management, and wellness solutions[151] - The company's solutions are delivered through an established network of over 10,900 trusted service providers[152] - Platforms processed over 200 billion data points from more than 100 million connected devices in the last year[151] Highlights of First Quarter Results Total revenue increased 19% to $205.4 million in Q1 2022, but net income and Adjusted EBITDA decreased - SaaS and license revenue increased 15% to $123.2 million in Q1 2022 from $107.4 million in Q1 2021[157] - Total revenue increased 19% to $205.4 million in Q1 2022 from $172.5 million in Q1 2021[157] - Net income decreased to $8.9 million in Q1 2022 from $14.6 million in Q1 2021[157] - Adjusted EBITDA decreased to $29.9 million in Q1 2022 from $35.6 million in Q1 2021[158] Recent Developments COVID-19 and geopolitical tensions cause uncertainty, disrupting supply chains, sales, and potentially affecting financial results - The COVID-19 pandemic continues to disrupt the supply chain (manufacturing, production, global transportation) and sales channels (restrictions on service providers meeting customers)[159] - Global economic slowdown, inflation, and geopolitical tensions (Russia's incursion into Ukraine) contribute to extreme uncertainty, potentially affecting business, results of operations, or financial condition[159] - Prolonged uncertainty could lead to lower SaaS and license revenue growth and corresponding reductions in hardware revenue if consumers defer or cancel purchases[160] Other Business Metrics Monitors SaaS revenue, Adjusted EBITDA, and renewal rate; SaaS revenue increased, Adjusted EBITDA decreased in Q1 2022 Key Business Metrics (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------- | :-------------------------------- | :-------------------------------- | | SaaS and license revenue | $123,225 | $107,383 | | Adjusted EBITDA | $29,919 | $35,606 | - SaaS and license revenue renewal rate was 94% for the trailing 12 months ended March 31, 2022, compared to 95% for the same period in 2021[161] - Adjusted EBITDA is a non-GAAP measure used by management to evaluate core operating performance, excluding interest, taxes, amortization, depreciation, stock-based compensation, acquisition-related, and non-ordinary course litigation expenses[163][170] Adoption of Recent Accounting Pronouncements ASU 2020-06 adoption in Q1 2022 recombined convertible notes components, impacting balance sheet and net income - ASU 2020-06 was adopted on January 1, 2022, simplifying accounting for convertible instruments by eliminating the separation of embedded conversion features[172][173] Impact of ASU 2020-06 Adoption on Balance Sheet (as of January 1, 2022, in thousands) | Balance Sheet Caption | Increase / (Decrease) (in thousands) | | :---------------------------- | :-------------------- | | Deferred tax assets | $15,356 | | Additional paid-in capital | $(56,515) | | Convertible senior notes, net | $61,899 | | Retained earnings | $9,972 | - Net income attributable to common stockholders increased $2.0 million, and basic and diluted EPS increased by $0.04 per share for Q1 2022 due to ASU 2020-06 adoption[175] Components of Operating Results Details revenue sources, cost of revenue, and operating expenses, discussing external factors and drivers of changes Revenue Revenue from SaaS, licenses, and hardware; software license revenue declining; hardware revenue impacted by supply chain - SaaS and license revenue is primarily from monthly fees charged to service provider partners for cloud-based platform access and intellectual property licensing[177][178] - Software license revenue, included in SaaS and license revenue, is expected to decline as subscribers transition to the cloud-based hosted platform[179] - Hardware and other revenue comes from sales of video cameras, recorders, cellular radio modules, and other devices, including perpetual licenses for video surveillance and gunshot detection software[180][181] - The COVID-19 pandemic has caused and may continue to cause disruptions to the hardware supply chain (limited inventory, increased lead times, shipping delays) and sales channels, impacting hardware revenue[182] Cost of Revenue Cost of SaaS includes network fees; hardware costs include materials and production; margins impacted by freight and component costs - Cost of SaaS and license revenue primarily includes amounts paid to wireless network providers, network operations center costs, and patent/royalty costs[183] - Cost of hardware and other revenue primarily includes raw materials, tooling, production, procurement costs for devices, and royalty costs[183] - U.S. tariffs on Chinese imports have increased cost of hardware revenue, with approximately one-fifth to one-half of hardware products imported from China[185] - Hardware revenue margins are expected to increase in 2022 due to implemented price increases, offsetting higher freight shipments and inventory component costs experienced in late 2021 and early 2022[186] Operating Expenses Operating expenses driven by personnel costs; headcount increased to 1,565; continued investment in growth areas planned - Total employees increased from 1,414 as of March 31, 2021, to 1,565 as of March 31, 2022[187] - Sales and marketing expense is expected to increase with investments in sales force expansion and service provider support, both domestically and internationally[189] - General and administrative costs are expected to increase with business growth, including human resources, accounting, finance, legal personnel, and external fees, alongside ongoing intellectual property litigation costs[191] - Research and development efforts focus on innovating new features, enhancing platforms, and expanding into adjacent and international markets, with continued investment expected[193] Interest Expense Interest expense expected to decrease in 2022 due to ASU 2020-06 eliminating non-cash debt discount amortization - Interest expense is expected to decrease in 2022 compared to 2021 due to the adoption of ASU 2020-06, which eliminated non-cash interest expense from debt discount amortization for the 2026 Notes[195] Interest Income Interest income is generated from cash and cash equivalents and notes receivable - Interest income consists of earnings on cash and cash equivalents and notes receivable[196] Other Income / (Expense), Net Primarily includes non-operating and miscellaneous items, such as the 2017 Facility extinguishment loss in Q1 2021 - Other income / (expense), net, primarily includes non-operating and miscellaneous items, such as the $0.2 million loss on the early extinguishment of the 2017 Facility in Q1 2021[197] Benefit from Income Taxes Benefit from income taxes influenced by R&D credits, stock-based compensation windfall, and foreign derived intangible income deductions - Effective tax rates are below the statutory rate due to R&D tax credits, tax windfall benefits from employee stock-based payment transactions, and foreign derived intangible income deductions[198] - The effective tax rate is expected to vary quarterly based on stock price, and the vesting and exercise of equity compensation[198] Results of Operations Compares Q1 2022 and Q1 2021 financial performance across revenue, cost of revenue, and operating expenses Unaudited Selected Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | % of Total Revenue (2022) | Three Months Ended March 31, 2021 (in thousands) | % of Total Revenue (2021) | | :----------------------------------------- | :-------------------------------- | :------------------------ | :-------------------------------- | :------------------------ | | SaaS and license revenue | $123,225 | 60% | $107,383 | 62% | | Hardware and other revenue | $82,212 | 40% | $65,115 | 38% | | Total revenue | $205,437 | 100% | $172,498 | 100% | | Cost of SaaS and license revenue | $16,894 | 8% | $15,156 | 9% | | Cost of hardware and other revenue | $73,193 | 36% | $50,606 | 29% | | Total cost of revenue | $90,087 | 44% | $65,762 | 38% | | Sales and marketing | $23,192 | 11% | $18,999 | 11% | | General and administrative | $23,994 | 12% | $22,882 | 13% | | Research and development | $51,490 | 25% | $42,467 | 25% | | Amortization and depreciation | $7,761 | 4% | $7,385 | 4% | | Total operating expenses | $106,437 | 52% | $91,733 | 53% | | Operating income | $8,913 | 4% | $15,003 | 9% | | Interest expense | $(784) | 0% | $(3,368) | (2)% | | Interest income | $143 | 0% | $157 | 0% | | Other income / (expense), net | $13 | 0% | $(155) | 0% | | Income before income taxes | $8,285 | 4% | $11,637 | 7% | | Benefit from income taxes | $(618) | 0% | $(2,913) | (1)% | | Net income | $8,903 | 4% | $14,550 | 8% | Comparison of the Three Months Ended March 31, 2022 to March 31, 2021 Compares Q1 2022 and Q1 2021 financial performance across revenue, cost of revenue, and operating expenses Revenue_Comparison Total revenue increased 19% to $205.4 million in Q1 2022, driven by hardware and SaaS growth, despite software license decline Revenue Comparison (in thousands) | Revenue Type | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :------------------------- | :-------------------------------- | :-------------------------------- | :------- | | SaaS and license revenue | $123,225 | $107,383 | 15% | | Hardware and other revenue | $82,212 | $65,115 | 26% | | Total revenue | $205,437 | $172,498 | 19% | - Software license revenue decreased $1.6 million to $7.1 million in Q1 2022, primarily due to the continuing transition of customers from non-hosted software to the cloud-based hosted platform[203] - Hardware and other revenue increased by $17.0 million in the Alarm.com segment due to higher volume of video cameras and recorders sold[203] Cost of Revenue_Comparison Total cost of revenue increased 37% to $90.1 million in Q1 2022, driven by higher hardware costs and unit shipments Cost of Revenue Comparison (in thousands) | Cost of Revenue Type | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Cost of SaaS and license revenue | $16,894 | $15,156 | 11% | | Cost of hardware and other revenue | $73,193 | $50,606 | 45% | | Total cost of revenue | $90,087 | $65,762 | 37% | | % of total revenue | 44% | 38% | | - Cost of hardware and other revenue increased by $22.6 million in the Alarm.com segment due to increased hardware unit shipments, freight costs, and inventory component costs[204] - Cost of hardware and other revenue as a percentage of hardware and other revenue increased from 78% in Q1 2021 to 89% in Q1 2022[205] Sales and Marketing Expense_Comparison Sales and marketing expense increased 22% in Q1 2022 due to higher personnel costs and marketing conference expenses Sales and Marketing Expense Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :------------------------ | :-------------------------------- | :-------------------------------- | :------- | | Sales and marketing | $23,192 | $18,999 | 22% | | % of total revenue | 11% | 11% | | - Increase driven by $2.4 million in personnel and related costs (salary, benefits, stock-based compensation, travel) and $1.1 million in marketing conference costs for the Alarm.com segment[207] - Sales and marketing headcount increased from 457 to 478 from March 31, 2021, to March 31, 2022[207] General and Administrative Expense_Comparison General and administrative expense increased 5% in Q1 2022 due to personnel and recruiting costs, offset by lower litigation General and Administrative Expense Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------- | | General and administrative | $23,994 | $22,882 | 5% | | % of total revenue | 12% | 13% | | - Increase primarily due to $2.0 million in personnel and related costs and $0.3 million in recruiting costs for the Alarm.com segment, partially offset by a $1.9 million decrease in legal costs related to intellectual property litigation[208] - General and administrative headcount increased from 160 to 195 from March 31, 2021, to March 31, 2022[208] Research and Development Expense_Comparison Research and development expense increased 21% in Q1 2022, driven by higher personnel costs and external consultants Research and Development Expense Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Research and development | $51,490 | $42,467 | 21% | | % of total revenue | 25% | 25% | | - Increase primarily due to $7.1 million in personnel and related costs and $0.5 million in external consultants for the Alarm.com segment[210] - Research and development headcount increased from 797 to 892 from March 31, 2021, to March 31, 2022[210] Amortization and Depreciation_Comparison Amortization and depreciation increased 5% in Q1 2022, mainly due to intangible assets from the EnergyHub acquisition Amortization and Depreciation Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :------------------------------ | :-------------------------------- | :-------------------------------- | :------- | | Amortization and depreciation | $7,761 | $7,385 | 5% | | % of total revenue | 4% | 4% | | - Increase primarily due to intangible assets acquired in connection with the EnergyHub, Inc. acquisition in December 2021[211] Interest Expense_Comparison Interest expense decreased 77% in Q1 2022 due to ASU 2020-06 eliminating non-cash debt discount amortization Interest Expense Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :--------------- | :-------------------------------- | :-------------------------------- | :------- | | Interest expense | $(784) | $(3,368) | (77)% | | % of total revenue | 0% | (2)% | | - Decrease primarily due to the adoption of ASU 2020-06, which eliminated non-cash interest expense related to the amortization of the debt discount for the 2026 Notes[212] Interest Income_Comparison Interest income decreased slightly in Q1 2022, primarily due to a decrease in cash and cash equivalents Interest Income Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :------------- | :-------------------------------- | :-------------------------------- | :------- | | Interest income | $143 | $157 | (9)% | | % of total revenue | 0% | 0% | | - Decrease primarily due to a decrease in cash and cash equivalents during Q1 2022[213] Other Income / (Expense), Net_Comparison Other income / (expense), net, increased in Q1 2022 due to the absence of the 2017 Facility extinguishment loss Other Income / (Expense), Net Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :---------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Other income / (expense), net | $13 | $(155) | (108)% | | % of total revenue | 0% | 0% | | - Increase primarily due to the absence of the $0.2 million loss on the early extinguishment of the 2017 Facility during Q1 2022[214] Benefit from Income Taxes_Comparison Benefit from income taxes decreased 79% in Q1 2022 due to reduced tax windfall benefits from stock-based compensation Benefit from Income Taxes Comparison (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Benefit from income taxes | $(618) | $(2,913) | (79)% | | % of total revenue | 0% | (1)% | | - Decrease primarily due to decreased tax windfall benefits from employee stock-based payment transactions during Q1 2022[215] Segment Information Alarm.com segment is the primary revenue driver (95%), while the 'Other' segment incurred operating losses, both growing headcount - The Alarm.com segment contributed 95% of total revenue for both Q1 2022 and Q1 2021[216] - Alarm.com segment operating income decreased from $17.7 million in Q1 2021 to $12.8 million in Q1 2022, while the Other segment's operating loss increased from $(2.9) million to $(4.0) million[146][147] - Employee headcount increased in both segments: Alarm.com from 1,294 to 1,418, and Other from 120 to 147, from March 31, 2021, to March 31, 2022[217] Critical Accounting Estimates ASU 2020-06 adoption removed convertible senior notes as a critical accounting policy due to simplified accounting - Convertible Senior Notes are no longer considered a critical accounting policy due to the adoption of ASU 2020-06, which removed significant judgments involved in their initial accounting assessment[220] Recent Accounting Pronouncements_MD&A Refers to Note 2 for information regarding recently issued accounting standards Liquidity and Capital Resources Company had $671.8 million cash in Q1 2022, expects sufficient liquidity, but faces land purchase and TCJA R&D tax impacts Working Capital Working capital slightly decreased to $781.1 million in Q1 2022, with cash and cash equivalents as the main component Working Capital Summary (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $671,753 | $710,621 | | Accounts receivable, net | $103,067 | $105,548 | | Working capital | $781,109 | $788,281 | Liquidity and Capital Resources_Details Company had $671.8 million cash in Q1 2022, expects sufficient liquidity, but faces land purchase and TCJA R&D tax impacts - As of March 31, 2022, the company had $671.8 million in cash and cash equivalents[224] - The company expects to pay $21.4 million for a land purchase in Q2 2022, following initial deposits[225] - The TCJA's elimination of immediate R&D expenditure deduction is estimated to significantly increase cash taxes payable and reduce cash flow from operating activities in 2022[226] - Anticipated capital expenditures for the final nine months of fiscal year 2022 are between $29.0 million and $32.0 million[227] Material Cash Requirements No material changes in the company's cash requirements from those disclosed in its Annual Report on Form 10-K - No material changes in cash requirements from those disclosed in the Annual Report[230] Convertible Senior Notes_Liquidity Issued $500.0 million of 0% convertible senior notes due 2026, convertible under conditions, with cash settlement intent - Issued $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, in January 2021, with net proceeds of $484.3 million[231] - The notes are redeemable by the company on or after January 20, 2024, if common stock price meets 130% of conversion price[232] - Holders can convert notes under specific conditions, and the company intends to settle the principal amount in cash upon conversion[233][234] 2017 Facility The $125.0 million senior secured revolving credit facility (2017 Facility) was fully repaid and terminated on January 20, 2021, using proceeds from the 2026 Notes, resulting in a $0.2 million extinguishment loss - The $125.0 million senior secured revolving credit facility (2017 Facility) was repaid with $110.0 million and terminated on January 20, 2021, using proceeds from the 2026 Notes[237] - A $0.2 million extinguishment loss was recognized in Q1 2021 for unamortized debt issuance costs related to the terminated facility[237] Sources of Liquidity The company's primary sources of liquidity have been cash generated by operating activities and equity/debt financings, including the issuance of the 2026 Notes and the termination of the 2017 Facility - The 2017 Facility was terminated on January 20, 2021, after its outstanding balance was repaid with proceeds from the 2026 Notes[239] - The issuance of $500.0 million in 2026 Convertible Senior Notes in January 2021 provided $484.3 million in net proceeds[239] Dividends The company did not declare or pay dividends in Q1 2022 or Q1 2021 and anticipates retaining all future earnings for business operations and expansion - No cash dividends were declared or paid during Q1 2022 or Q1 2021[240] - The company anticipates retaining all future earnings for business operation and expansion, with no plans for cash dividends in the foreseeable future[240] Stock Repurchase Program Under a $100.0 million stock repurchase program authorized until December 2023, the company repurchased 354,123 shares of common stock for $23.3 million during Q1 2022 - The board authorized a $100.0 million stock repurchase program on December 3, 2020, valid until December 3, 2023[241] - During Q1 2022, 354,123 shares of common stock were repurchased for $23.3 million[241] Historical Cash Flows Cash flows from operating activities shifted from positive in Q1 2021 to negative in Q1 2022, while cash flows from investing activities decreased. Cash flows from financing activities saw a significant decrease due to the prior year's convertible notes issuance and Q1 2022 stock repurchases Cash Flows Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Cash flows (used in) / from operating activities | $(13,961) | $21,232 | | Cash flows used in investing activities | $(2,155) | $(9,067) | | Cash flows (used in) / from financing activities | $(22,251) | $376,548 | Operating Activities Cash flows used in operating activities were $14.0 million in Q1 2022, a $35.2 million decrease from Q1 2021, primarily due to changes in operating assets and liabilities, increased deferred income taxes, and reduced debt discount amortization, partially offset by higher stock-based compensation - Cash flows used in operating activities were $14.0 million in Q1 2022, a $35.2 million decrease from Q1 2021[243] - Decrease driven by a $24.4 million decrease in cash from operating assets and liabilities (including an $8.2 million change in inventory) and a $5.2 million decrease in non-cash reconciling items[244] - Non-cash item decrease was due to a $7.5 million change in deferred income taxes (Section 174 impact) and a $2.5 million decrease in debt discount amortization (ASU 2020-06), partially offset by a $4.2 million increase in stock-based compensation[244] Investing Activities Cash flows used in investing activities decreased by $6.9 million to $2.2 million in Q1 2022, mainly due to the absence of a $5.0 million investment in a technology partner made in Q1 2021 and a reduction in property and equipment purchases - Cash flows used in investing activities were $2.2 million in Q1 2022, a $6.9 million decrease from Q1 2021[246] - Decrease primarily due to the absence of a $5.0 million purchase of Series B-2 Preferred Stock from a technology partner in Q1 2021[246] - Also contributed by a $1.9 million reduction in purchases of property and equipment in Q1 2022[246] Financing Activities Cash flows used in financing activities were $22.3 million in Q1 2022, a significant decrease from $376.5 million generated in Q1 2021. This change was primarily due to the prior year's proceeds from the 2026 Notes issuance and Q1 2022 stock repurchases, partially offset by the prior year's repayment of the 2017 Facility - Cash flows used in financing activities were $22.3 million in Q1 2022, compared to $376.5 million generated in Q1 2021, a $398.8 million decrease[248] - Decrease primarily due to $484.7 million in proceeds from the 2026 Notes issuance in Q1 2021 not recurring in Q1 2022[248] - Also contributed by $23.3 million in treasury stock purchases in Q1 2022, offset by the $110.0 million repayment of the 2017 Facility in Q1 2021[248] Non-GAAP Measures Defines Adjusted EBITDA, explaining its calculation, management's use for performance evaluation, and its analytical limitations - Adjusted EBITDA is defined as net income before interest expense, interest income, other income/(expense), net, benefit from income taxes, amortization and depreciation expense, stock-based compensation expense, acquisition-related expense, and legal costs and settlement fees incurred in non-ordinary course litigation[249] - Adjusted EBITDA is used by management to understand core operating performance, generate future plans, make strategic capital allocation decisions, and evaluate investments[250] - Limitations of Adjusted EBITDA include not reflecting capital expenditure requirements, changes in working capital, dilutive impact of equity-based compensation, or tax payments[251] Adjusted EBITDA Reconciliation (in thousands) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :-------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $8,903 | $14,550 | | Adjustments: | | | | Interest expense, interest income and other income / (expense), net | $628 | $3,366 | | Benefit from income taxes | $(618) | $(2,913) | | Amortization and depreciation expense | $7,761 | $7,385 | | Stock-based compensation expense | $12,110 | $7,888 | | Acquisition-related expense | $— | $29 | | Litigation expense | $1,135 | $5,301 | | Total adjustments | $21,016 | $21,056 | | Adjusted EBITDA | $29,919 | $35,606 | Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses market risks from inflation and foreign exchange, noting volatility from COVID-19 and geopolitical tensions Market Risk Market risk exposure primarily from inflation and foreign exchange rates, with volatility from COVID-19 and geopolitical tensions - Market risk exposure is primarily due to inflation and foreign exchange rates[253] - Significant volatility in financial markets exists due to the economic impact of the COVID-19 pandemic and geopolitical tensions[253] - The fair value of the 2026 Notes fluctuates with the market price of the company's common stock[254] Inflation Risk Experienced inflationary pressures on inventory and freight costs, addressed by price increases, but no material business effect - Inflation has not had a material effect on the business, financial condition, or results of operations[255] - Inflationary pressures on inventory component and freight costs have been experienced, leading to price increases on some products in 2022[255] Foreign Currency Exchange Risk Exposure to foreign currency exchange risk is immaterial as most revenue and expenses are in U.S. dollars - Exposure to foreign currency exchange risk is not material, as substantially all revenue and operating expenses are denominated in U.S. dollars[256] Item 4. Controls and Procedures Management concluded disclosure controls were effective; no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were evaluated as effective at a reasonable assurance level as of March 31, 2022 - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of March 31, 2022[258] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting during Q1 2022, and temporary remote work measures due to COVID-19 did not materially impact these controls - No material changes in internal control over financial reporting occurred during Q1 2022[259] - Temporary remote work measures due to the COVID-19 pandemic did not materially impact internal control over financial reporting[259] Inherent Limitations on Effectiveness of Controls Control systems provide reasonable, not absolute, assurance, subject to inherent limitations like human error and management override - Disclosure controls and internal control over financial reporting are designed to provide reasonable, not absolute, assurance[260] - Inherent limitations include faulty judgments, simple errors, circumvention by individual acts or collusion, and management override[260] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, defaults, mine safety, and exhibits Item 1. Legal Proceedings Alarm.com is involved in ongoing patent infringement lawsuits and has indemnification obligations to service provider partners - Vivint, Inc. filed a lawsuit in 2015 alleging infringement of six patents; discovery closed in October 2021, and summary judgment motions are pending[264] - EcoFactor, Inc. filed a lawsuit in January 2022 alleging infringement of five patents; the district court stayed the case pending other proceedings, after the ITC previously found in favor of Alarm.com[266] - Causam Enterprises, Inc. filed a lawsuit in July 2021 alleging infringement of four patents related to smart thermostats, and an ITC investigation was instituted in August 2021, with a hearing scheduled for June 2022[268][269] - The company is incurring costs to indemnify ADT, LLC in an ongoing patent infringement suit filed by Vivint in February 2021[271][272] Item 1A. Risk Factors Outlines numerous risks affecting business, financial condition, results of operations, and stock price, including IP and debt Summary of Risks Affecting Our Business Key risks include fluctuating operating results, CO