Alarm.com [ALRM] Conference call transcript for 2023 q1
2023-05-10 23:06:08
Fiscal: 2023 q1
Operator: Good day and thank you for standing by. Welcome to the Alarm.com First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Zartman. Please go ahead.
Matt Zartman: Good afternoon, everyone and welcome to Alarm.com’s first quarter 2023 earnings conference call. Please note that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, our CEO; Steve Valenzuela, our CFO; and Jeff Bedell, President of our Ventures Business and Corporate Strategy. During today’s call, we will be making forward-looking statements, which are predictions, projections, estimates or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly after this call with the SEC, along with the associated press release. This call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. In addition, several non-GAAP financial measures will be used in this call. A reconciliation of the GAAP and non-GAAP measures can be found in today’s press release on our Investor Relations website. I will now turn the call over to Steve Trundle. You may begin.
Steve Trundle: Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report first quarter results that exceeded our expectations. SaaS and license revenue in the first quarter was $135.4 million, resulting in a non-GAAP growth rate of 14.9% over the last year, excluding Vivint. Our adjusted EBITDA in the first quarter was $30.6 million. I am going to touch on a couple of things in the core Alarm.com business and then I am excited to have Jeff Bedell, the President of our Ventures Business and Corporate Strategy, joining the call today. I will be looking to include Jeff or Dan Kerzner, the President of our Platforms business, in future quarterly updates so that we can provide a deeper review of some areas of the business. I’ll start things off with a few takeaways from our recent presence at ISC West, the largest trade show for the physical security industry. Alarm.com’s presence this year reflected our increasingly diversified business profile with Alarm.com, OpenEye and Shooter Detection Systems each having a dedicated presence. Overall, attendance at the show returned to pre-pandemic levels. The commercial market was a significant theme during ISC West. Most of the Alarm.com service provider partners that I met were expanding their use of our commercial services. Recently released products have also helped our partners become better at targeting our platform as specific verticals where they are developing expertise. One of the things we highlighted was our expanded range of third-party camera support. Our video solution will be able to support 80% to 90% of third-party cameras that have been installed in midsized and large commercial settings since 2018. With a more flexible video solution, our service providers can support businesses that want the benefits of our integrated video solution without the cost of replacing existing installed video cameras. As we have expanded and enhanced our access control solution, it continues to gain momentum. During the first quarter, access control door installations increased 45% over the first quarter of last year. At ISC, we introduced a new access control product called Cell Connector. Cell Connector is a door controller that leverages our work with 4G LTE cellular networks to connect directly to the Alarm.com platform, where system data is aggregated. Bypassing the customer’s local network reduces installation complexity and enables an affordable and effective access control system. For example, larger, more sophisticated commercial customers and corporate accounts typically have rigorous approval processes for third-party devices to connect to their local area network. Cell Connector significantly streamlines the sales and installation process and makes it easier for these customers to acquire an Alarm.com system. In the residential market, our service providers continue to report steady demand. Despite the macro environment, we’ve also continued to expand our partnerships with builders. New RMR creation from our homebuilder program increased 14% during the first quarter as compared to last year. We also continue to expand our services to fully address the long-term opportunity we see in the residential market. A recent report by Strategy Analytics estimated that about 40% of households with an active, professionally monitored security system are still limited to traditional system capabilities that do not include any smart home capabilities like those that Alarm.com service providers offer. Our goal is to maintain and build on our service providers’ strong competitive position so they can steadily expand their account base as the market continues shifting to smart home systems. Shifting to our operations, during the first quarter, we continued to focus on driving increased efficiency and focus, which will allow us to perform against our corporate EBITDA objectives for the year. We did this without undermining the R&D investments that drive future opportunities and feel like we have struck the right balance overall. We will continue to invest in innovation to continue to build the company for the future while also maintaining discipline through profitability. Overall, I am pleased with our first quarter results. Our performance reflects our continuing momentum and the significant and diverse opportunities that we are addressing. I want to thank our service provider partners and our team for their hard work and our investors for their continued trust in our business. Now, I will hand things over to Jeff to provide a little more detail on two of the areas he oversees. Jeff?
Jeff Bedell: Thanks, Steve. It’s great to speak with everyone today, and I look forward to getting to know many of you. I’ll start with an update on OpenEye and their cloud managed video surveillance solution for the commercial market. Video surveillance is a critical system for commercial businesses. Today, many businesses have deployed video systems, but using legacy analog devices. A major technology shift is underway, moving from these older on-premises analog systems to digital devices at the edge, coupled with cloud-based solutions that form the foundation for delivering robust AI-powered video analytics. We continue to invest in the expansion of OpenEye’s platform and business to capture share as this technology shift unfolds. Our recent acquisition of Vintra expands our AI program and will accelerate the development of video analytics capabilities across our platforms, beginning with delivering innovative models to the OpenEye platform. This quarter, OpenEye launched a few new solutions enabled through its open ecosystem architecture. The OpenEye platform allows data from third-party devices to be married to OpenEye video data to generate alerts and enable forensic search capabilities. This allows users to find video content based on external data inputs. The first new offering is OpenEye’s point-of-sale solution called Sales Connect, which integrates transaction data from leading suppliers of point-of-sale systems. Sales Connect triggers real-time alerts for point-of-sales exceptions such as voids, refunds and overrides, and retrieves the corresponding video of the transaction. Sales Connect is sold as an additional SaaS module and significantly strengthens OpenEye’s position in the retail, grocery, and quick serve restaurant verticals. Next, OpenEye launched an integration with third-party environmental sensors, which detects smoke from cigarettes and vapes, monitor temperature, humidity and air quality, and detect sound anomalies. This integration enables OpenEye to associate video with more environmental events, generating as an example vape alerts and providing valuable capabilities that have been heavily requested by secondary schools. Shifting to EnergyHub, I want to touch on a recent milestone. Recall that EnergyHub provides a SaaS platform for electric utilities that is known as a Distributed Energy Resource Management System or DERMS. The EnergyHub solution allows utilities to manage grid load by controlling demand side management, leveraging smart thermostats, EVs, connected EV chargers, and other grid edge devices. EnergyHub’s proprietary artificial intelligence and machine learning models allow utilities to fine-tune load shape on the grid and to balance energy demand with supply. EnergyHub recently announced that it is the first DERMS platform to exceed 1 million devices under management. Collectively, these devices provide 1.35 gigawatts of flexibility to North America’s electrical grid, which is greater than the generation capacity of a medium-sized nuclear power plant. Extreme weather events like heatwaves, the rising adoption of EVs, and the intermittent nature of many renewable energy sources are making grid stability increasingly challenging and complex. Utilities around the country are actively developing load flexibility strategies and investing in DERMS technology. EnergyHub’s platform is directly addressing these macro trends. To sum up, we have made continued progress with OpenEye and EnergyHub’s businesses. They are important to the expansion of our addressable markets and are 2 key components of our overall growth strategy. Steve Valenzuela will now cover our financials. Steve?
Steve Valenzuela: Thanks, Jeff. I’ll begin with a review of our first quarter 2023 financial results and then provide our updated guidance before opening the call for questions. First quarter SaaS and license revenue of $135.4 million grew 9.9% from the same quarter last year. Excluding Vivint license revenue, first quarter 2023 non-GAAP SaaS and license revenue grew 14.9% year-over-year on a comparable basis. SaaS and license revenue includes Connect software license revenue of approximately $6.2 million for the first quarter, down as expected from $7.1 million in the year ago quarter. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 93% in the first quarter, in the middle of our long-term range. Hardware and other revenue in the first quarter was $74.3 million, down from $82.2 million in Q1 2022, mainly due to fewer cellular module sales from the end of the 3G upgrade cycle and fewer camera sales as service providers work down their inventory levels. Total revenue of $209.7 million for the first quarter grew 2.1% year-over-year. SaaS and license gross margin for the first quarter was 85.5%, down slightly from 86.3% in the year ago quarter. Hardware gross margin was 23.9% for the first quarter, consistent with historical trends and up from 11% in Q1 2022, mainly due to improving supply chain dynamics and favorable product mix with more commercial offerings. Total gross margin was 63.7% for the first quarter, up from 56.1% for Q1 2022, mainly due to the improvement in hardware margins and a mix shift to SaaS revenue. Turning to operating expenses, R&D expenses in the first quarter were $61.9 million compared to $51.5 million for the first quarter of 2022, mainly due to an increase in headcount and related compensation expenses and reflecting the cost of acquired teams. We ended the first quarter with 1,042 employees in R&D, up from 892 employees in Q1 2022. Total headcount increased to 1,858 employees for the first quarter compared to 1,565 employees in the year ago quarter. Sales and marketing expenses in the first quarter were $26.6 million or 12.7% of total revenue compared to $23.2 million or 11.3% of revenue in the same quarter last year, mainly due to increased headcount and more employees traveling with the easing of COVID restrictions. Our G&A expenses in the first quarter were $28.5 million compared to $24 million in the year ago quarter, mainly due to acquisition costs, increased personnel costs, and accounting fees. G&A expense in the first quarter includes non-ordinary course litigation expense of $800,000 and acquisition-related costs of $800,000. Non-ordinary course litigation and acquisition expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance. In the first quarter, GAAP net income was $14.4 million compared to GAAP net income of $9.1 million for Q1 2022. Non-GAAP adjusted EBITDA in the first quarter was $30.6 million compared to $29.9 million in Q1 2022. Non-GAAP adjusted net income was $22 million or $0.41 per diluted share in the first quarter compared to $21.3 million or $0.39 per share for the first quarter of 2022. Turning to our balance sheet, we ended the first quarter with $606.4 million of cash and cash equivalents, down from $622.2 million at December 31, 2022, mainly due to payments for estimated federal tax, acquisition costs, and employee annual bonus payments. Turning to our financial outlook, for the second quarter of 2023, we expect SaaS and license revenue of $137.2 million to $137.4 million. For the full year of 2023, we now expect SaaS and license revenue to be between $555.9 million to $556.5 million, up from our prior guidance of $551.5 million to $552.5 million. We are projecting total revenue for 2023 of $855.9 million to $881.5 million increased from our prior guidance of $851.5 million to $877.5 million, which includes estimated hardware and other revenue of $300 million to $325 million. We estimate that adjusted EBITDA for 2023 will be between $120 million to $125 million compared to our prior guidance of $115 million to $125 million. We expect adjusted EBITDA for the second quarter of 2023 to represent approximately 23% to 24% of our annual guide. Non-GAAP net income for 2023 is projected to be $84.6 million to $87.5 million or $1.55 to $1.60 per diluted share, up from our prior guidance of $79.7 million to $86.5 million or $1.44 to $1.57 per diluted share. EPS is based on an estimate of 54.7 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2023 to remain at 21% under current tax rules. We expect full year 2023 stock-based compensation expense of $54 million to $56 million. In summary, we are focused on executing on our strategic business plan and investing in our long-term strategy while continuing to deliver profitable growth. And with that, Operator, please open the call for Q&A.
Operator: Thank you. [Operator Instructions] Our first question comes from Michael Funk with Bank of America. Your line is open.
Operator: Thank you. Our next question comes from Saket Kalia from Barclays. Your line is open.
Operator: Our next question comes from Matthew Pfau with William Blair. Your line is open.
[27:23]CellConnect:
Operator: Thank you. One moment, our next question comes from Mark Cash with Raymond James. Your line is open.
Operator: Thank you. Our next question looks like it comes from Darren Aftahi with ROTH. Your line is open.
Operator: Our next question comes from Jack Codera from Maxim Group. Your line is open.
Operator: [Operator Instructions] I am showing no other questions in the queue. This does conclude today’s conference call. Thank you for participating. You may now disconnect.
Steve Trundle: Thank you.
