Alarm.com Holdings, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Alarm.com Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I would now like to hand the conference over to your speaker today, David Trone, Vice President of Investor Relations. Thank you. Please go ahead, sir.

[David Trone:]

[Stephen Trundle:]

Thank you, David. Good afternoon and welcome to everyone. We are pleased to report fourth quarter results that exceeded our expectations. Our SaaS and licensed revenue in the fourth quarter was $105.5 million, up 17.1% over the last year. Our adjusted EBITDA in the fourth quarter was $32.4 million. Despite the challenging global environment, the fourth quarter closes out a strong 2020 with total revenue growing 23% year-over-year. I want to thank our service provider partners and our employees for their resilience and contribution to our performance. We closed the year with more than 10,000 service provider partners who sell and service our technology in more than 7.6 million customer properties in over 40 countries around the world. On today's call, I will review some of the key elements of our long-term strategy and highlight a few examples of the many new products and capabilities that we introduced to our markets in 2020. When we think about our strategy, our first goal is to be the defining security-oriented IoT platform for four different market segments; residential, multifamily, small business, and enterprise commercial. For each of these market segments, our vision is to provide fully integrated, best-in-class applications that span security and surveillance, automation, energy management, water management and health. We're developing these applications for multiple geographies, such that we can leverage our platform investments around the globe. We made solid progress on this vision in 2020. In the commercial market, for example, we recently released CloudConnect. This is a two-way integration between the OpenEye Cloud Video Platform and the Alarm.com for Business platform. CloudConnect directly associates event data from intrusion sensors and access control readers with OpenEye’s Video Surveillance-as-a-Service product. Based on this rich set of event data, subscribers can easily customize intelligent video recording rules, set alerts to keep track of important events and easily find video footage associated with specific activity.

[Steve Valenzuela:]

[Operator:]

. Our first question comes from the line of Jeff Kessler from Imperial Capital. Your line is now open.

[Jeff Kessler:]

I'd like to ask a question regarding the growth of, let's say, the several areas that are in other, but have been out there for a while, EnergyHub, PointCentral. Is there a larger plan to essentially bring analytics up and perhaps at some point bring OpenEye down, if needed, to provide both video analytics and perhaps someday even at your -- improved access to all of those areas, including energy management, because obviously utilities at some point in time beyond their grid needs are going to need operational and then physical security as well. And the same thing applies to multifamily, even though they're in different segments, but talking about general commercial use. And I'm just wondering, with that growing segment, how much can you get out of it?

[Stephen Trundle:]

Yes. Good question, Jeff. This is Steve. So starting with the electric utilities, and there is a -- it's not video analytics, but there is an AI engine there at work already today to render a capability that we call smart chip that allows us to really level the load on the grid by anticipating how quickly a consumer will opt to change their thermostat once we began to downshift the thermostat. So there's a lot going on in the background there that is AI. We haven't, to be candid with you, the focus at EnergyHub has really been on what we think is a strong market for distributed energy resource management. And the race right now is to incorporate as many of the edge consuming devices or edge producing devices into the platform as you possibly can. So that's why I talked about EV as an example, batteries as an example, solar will be an example. The better picture we can give there, the stronger the platform becomes. Now, you're correct though that over time, if we have a nice position in a number of those customers, then certainly leveraging in our enterprise grade security apparatus for managing substations, managing production facilities, whatnot, would make a lot of sense. But it's not currently the focus. The EnergyHub teams got enough sort of right in front of them that that's not right now a focus there. Contrast that with PointCentral where there's sort of more immediate synergy, I would say, when you get to the multifamily housing market. The goal starts with sort of an access and a tenant friendly apparatus to let people in and out. But pretty quickly, the property manager does ask, and this is where our service providers are very, very helpful, does ask for all of that kind of convenience to also be integrated with an industrial strength sort of security and surveillance mechanism. And there the video analytics, you can imagine, we want to get data gathering where video itself is data, data gathering devices as many places as we possibly can, including some of the actual entry portal devices, readers and otherwise. So there I think, absolutely leveraging the full sort of video analytics platform back into multifamily will make a lot of sense and will help us drive growth and also just drive better service for both the consumer and the property manager.

[Jeff Kessler:]

Okay, great. And one quick question for Steve. With the recent converted offering, can you give us some idea of what your interest expense should be -- is expected to be for 2021?

[Steve Valenzuela:]

Hi, Jeff. This is Steve Valenzuela. So the good news is interest expense, the convertible has a zero coupon. So one of the benefits, of course, of the convertible is we retired our senior debt, which carried an interest rate of about 2% to 2.5%. Now there is some GAAP imputed interest cost that gets adjusted out of non-GAAP. That's really more of an accounting adjustment that has to be booked, but it's not a cash expense. So effectively our cash expense will be zero. Cash expense will be zero.

[Jeff Kessler:]

All right, great. Okay. Thank you very much. I appreciate it.

[Steve Valenzuela:]

Thanks, Jeff.

[Stephen Trundle:]

Thanks, Jeff.

[Operator:]

Thank you. Our next question comes from the line of Adam Tindle from Raymond James. Your line is now open.

[Adam Tindle:]

Okay, thanks. Good afternoon. Steve Trundle, you outlined the vision to be the platform in four different areas and just curious to touch base on ways to accelerate that vision. So commercial and international specifically have had a few years to develop under the dealer base and still not quite at escape velocity at this point. I'm wondering if it makes sense to perhaps revisit the go to market, perhaps add a direct sales force in conjunction to dealers to add fuel to the fire, or other ideas you're contemplating on how to accelerate that broader platform vision?

[Stephen Trundle:]

Yes. So I almost have to break them into two, commercial and then international, starting with commercial. I think we probably missed some acceleration in 2020 that we might have otherwise seen there just because the commercial market, not just for us, but I think for anyone playing in the commercial market was a little soft with the pandemic. There were a lot of folks that froze up capital expense budgets. It was hard to get into facilities. Retail kind of backed off entirely. And it just wasn't quite as frothy as we would have expected. That said, commercial is growing at a meaningful rate and contributing ever more of our SaaS and licensed. I think the things we can do to accelerate it, we're not going to go with the direct sales force. We're happy with our service providers. We’ll continue to recruit additional integrators, continue to train. But I do think we have places where we can continue to build out the platform to become even more broadly relevant. And one example of that we did in Q4 was the SDS acquisition, which gets us into another type of customer that has a real concern about protecting their employees in a larger institutional setting. So we’ll do that. We also did some things on OpenEye. So our focus will be more on the product and technology side in terms of, we always sort of live by a mantra that if we can get to the best product, the most capable product, then good things will happen downstream. And we trust our service providers to sort of adopt what we produce. On the international side, I think we're in a pretty good spot going into this year. Last year it was soft, as I mentioned in the prepared remarks, much more impact from COVID than we saw in the U.S. But again, kind of having some trust in partners. I do think we have -- we've got a good set of base service providers there already. We've got a few more in the works. And even though production was still up last year, we ended the year producing 50% more accounts per month than we were producing at the beginning of the year. So production was up, but it will I think go up even more this year as folks are coming back online. And there are still things Adam honestly on the product side that continue to need to be addressed for various markets globally that will also help.

[Adam Tindle:]

Okay, thanks. And maybe as a follow up, I think if I factor in the convert, the cash, the debt pay down, you're somewhere in the $0.5 billion range in liquidity, I think it's more than ever in the company. So with that as the backdrop, maybe you could touch on the framework and important points that you look for in potential acquisition targets. And are there any internal limitations from a systems or platform standpoint that would preclude a sizable $0.5 billion plus type of a deal?

[Stephen Trundle:]

Yes. So we're pretty optimistic with what we do. We felt like the market was in kind of a very favorable state towards the end of the year and it was an unusually right time to add some dry powder to the balance sheet, and also actually lift some of the constraints that were associated with our prior debt instrument in terms of covenants and otherwise. So we wanted to get ourselves in a place where we really have the opportunity to be optimistic when the right opportunity comes along. In terms of how we evaluate things, first and foremost will be the team. At a potential acquisition target, our belief that they can continue to grow their business with our help, whether we can work with them effectively, all of those types of basic human issues actually in my experience turn out to be the most important issues over time. So that's most important. After that, strong technology stack is -- or an ability for us to make the technology stack, tech stack particularly strong becomes number two. And then number three becomes sort of the market we address, our feelings about that market, the synergies with our distribution channel and really the ability to contribute to our SaaS portfolio. So those are the few things we look at. In terms of size, I'd say we're less constrained now in terms of size than where we were six months ago. So we have an ability. There's nothing really that would prevent us from deploying that capital if we saw the right opportunity to use it. And we'll see how the markets look here for the next year or two.

[Adam Tindle:]

Sounds good. Thanks for the details and congrats on 2020.

[Stephen Trundle:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of David Robinson from William Blair. Your line is now open.

[David Robinson:]

Hi. Thanks for taking my questions. First question I had just on the Shooter Detection Systems acquisition. I guess how large do you expect that opportunity to be? And then I’m just curious if there is any differences and perhaps the selling motion for a system like this compared to your other commercial offerings, and if there are any differences in terms of, I guess the type of target customer that might purchase the gunshot detection system versus your other offerings?

[Stephen Trundle:]

All good questions. So I’m trying to remember if we disclose the SDS size or is it --

[Steve Valenzuela:]

No. You can see it in the 10-K. It’s broken out there.

[Stephen Trundle:]

It will be there. But it's a relatively small company at the moment with a marquee track record and a marquee customer base in terms of the -- it's not sort of fantasy. It's real with top flight Fortune 100 names that are deploying the technology in sort of areas where they have . We think -- in terms of how big it can be, that's kind of a -- I would call that a pleasant unknown. We don't know how big it can be. We have a hypothesis that it can grow substantially, that there's a need for that technology, and that with enhanced focus on marketing and distribution that we can drive meaningful growth there. But I don't think we -- we haven't owned it. And we haven't worked with the team quite long enough to really say, well, we think it's going to be 10x bigger than it is today. The type of customer is a little bit of a different customer than who we currently deal with. It's going to be a headquarters for a large tech company, for example. One of the things it will be super large oil and gas companies, those type of entities, institutions, governments, schools that are particularly focused on being able to protect a large number of people when there's an unfortunate event that's unfolding. The technology we believe will be tied into the rest of our commercial platform and enable us to do artful things with video and with access control that relate to the data coming from the SDS systems. So we have a tech roadmap that we're working. But the short answer is I don't really know how big it can be. I think there's a lot of upside there. I think the company’s solid, the management team’s solid and we’ll be trying to figure that out over the next three to six months.

[David Robinson:]

Okay. I guess just a follow up since you kind of mentioned the synergies with the distribution channel as one of the focuses with regards to acquisitions. I guess are there dealers in your base now that are kind of familiar with this or will this take some I guess additional ramp up time?

[Stephen Trundle:]

This will take some ramp up time. And really when you get into this particular domain, there's some engineering involved in actual configuration of the sensors and a headquarters facility or in a sports facility or whatever. So in this case, the company itself, SDS will retain a lot of that engineering and sort of pre-sales type of responsibility. We’ll work directly with these larger institutions to spec in what they need, and then certain set of integrators that are servicing that type of market will be pulled in. But not many of our existing, I should say, partners are in that sort of niche arena today.

[David Robinson:]

Great, thanks.

[Operator:]

Thank you. Our next question comes from the line of Darren Aftahi from ROTH Capital Partners. Your line is now open.

[Darren Aftahi:]

Hi, guys. Thanks for taking my questions. Nice quarter. Can I ask a question? I know you guys don't focus on hardware, but it looks like the midpoint of the hardware is flat year-on-year. So in that context, I'm curious. How much do you think on the residential side, because of COVID, maybe – and the house market being so hot, that demand has been pulled forward, if anything? And then how much of that hardware kind of assumption assumes there may be some problems with chip shortages, like the rest of the industry is experiencing? And then second question, just on your SaaS growth, what's sort of the implied assumption with sort of attach rate of newer products or additional products versus organic, just new subs? Thanks.

[Stephen Trundle:]

Sure. Okay. On the hardware -- so I think the question is regarding sort of the assumptions we made in the hardware projection and the guide, and a couple of things there. First, as we said in years past, we don't really like to over guide the hardware. We don't see a lot of merit in getting ahead of ourselves there. It's not helpful for the business. I do think we at least are working on an assumption that there was some demand pull forward in the residential market. We don't know for sure that that's true. But we think it's a reasonable assumption to take on 2020, and that was something we factored in a bit. At the same time, 2020 on the commercial side was significantly less productive on hardware revenue than really what we expected. So I think we anticipate that some of that will be unlocked in 2021 and will offset any potential changes on the residential side. And that's kind of a little bit of color of how we look at it. In terms of the implied growth on SaaS and whether that's coming from additional services or coming from just sort of new subs, I think that we have seen this year that the average new customer is taking more, not less of the Alarm.com services. We've also seen that -- even in a tough year, that commercial adoption which is a higher ARPU component of our service revenue is increasing and that's becoming a more meaningful chunk of our SaaS and license. So we expect that trend to continue, which means you're getting a little bit more per sub. And then we have seen -- our service providers have a lot of success as they go back and do 3G upgrades, but really even market to their existing base. There's been a fair amount of success last year. It was the best year yet of upgrading existing subscribers to additional services, particularly those around video. So I would say we're expecting all of those three things to contribute, which means the growth in sub counts in theory could be slightly -- could be less and still achieve the same SaaS growth level.

[Darren Aftahi:]

Great. Thanks for the color.

[Operator:]

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital. Your line is now open.

[Aditya Dagaonkar:]

Hi. This is Aditya on behalf of Mike Latimore. I was wondering about the ARPU. How much -- by what percentage did the ARPU change in 2020?

[Steve Valenzuela:]

So the ARPU -- we don't really break out the ARPU in detail, but we have seen, as Steve Trundle talked about, with the adoption of both video and video analytics, because we do charge more for those, and the trend of new subscribers adding more services and even existing subscribers upgrading, that certainly does help. But when you've got 7.6 million subscribers, you can imagine it's like a big ship moving. It takes a while for that ARPU to move and that's really not the main driver. It's really the addition of new subs, additional services that are really contributing. So I would say -- we've said in the past that ARPU inches up over time. Of course, it varies dealer by dealer. There's incentives for various dealers. But I would say it does increase incrementally. But that's not the major driver of SaaS growth. It's really the addition of new subscribers and upgrading existing subscribers.

[Aditya Dagaonkar:]

All right, that’s fine. And how much would you expect OpenEye to contribute in this year, 2021?

[Steve Valenzuela:]

So we don't break out OpenEye. We did talk about how commercial was impacted in 2020 more, and so OpenEye certainly was part of that. And certainly in Q2, they were impacted more than they were and they saw some recovery in Q3 and a good recovery in Q4. So they did come in below the plan for 2020 we initially set as pre-COVID, but they actually grew year-over-year. So we're very encouraged with the performance by OpenEye. And we think as things open up, and as Steve said, as we round third, which I love that analogy --

[Stephen Trundle:]

Yes, I was hoping third, exactly.

[Steve Valenzuela:]

I’ll give a little more color there. When we acquired OpenEye, I think we had to adjust expectations on what we produce. And we said, we thought in the next 12 months, we’ll get around $40 million for OpenEye. I think based on my comments about the commercial market, you can assume we didn't get that. Last year, even though the company grew nicely year-over-year, we had a nice target for them. I think they're tracking to more than -- to perform at or above that target this year.

[Aditya Dagaonkar:]

All right, that’s fine. That’s it. I’ll pass. Thank you.

[Steve Valenzuela:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jack Vander Aarde from Maxim Group. Your line is now open.

[Jack Vander Aarde:]

Great, thanks. Hi, Steve. Hi, Steve V. Excellent quarter. Thanks for taking my questions. I'll start with a two-part question for Steve Trundle. Then I have a few for Steve Valenzuela. So Steve T, first, hoping you can provide your thoughts on key factors driving new subscriber activations in North America, which continue to obviously grow at healthy rates with that updated total you gave us, 7.6 million. I know it's not all North America, but I know the bulk are. Are you seeing anything new or unique maybe that's driving your recent subscriber growth just given COVID made people leaving cities and moving homes, just anything new that’s interesting worth noting?

[Stephen Trundle:]

Actually, almost all of what you just stated would be -- so in the end, COVID led people home and we’re interested in taking care of things that had been on our to-do list I think. So actually it was easier in many ways to get their time and attention to have them choose what system they want. That's what we're hearing from our service providers. The customer got very comfortable with the sort of COVID precautions that our service providers were taking, for installation and for sales. Second, there has been a sort of a suburbanization move at some level, also a second home move. So we’ll see lots of transition there which drives demand. And then I think third is the actual technology continues to get better. And the value prop to the customer is improving all the time. And that's not just us. That's the entire industry. But I think the value prop is continuing to improve. And more people that might have said in the past, hey, I don't need a security system or an alarm system are now saying, hey, with what you're doing with video analytics, with the things you're doing on automation, with the ability to monitor for low grade leaks; toilet valves, it's busted, those type of things. There's just more sort of purpose for these systems. And I think that's kind of slowly moving the demand curve. And then lastly, I think we saw some confirmation last year that the market wants a service provider. And we probably worked through some of the DIY chunk of the market, some of those folks began to move upstream and more and more people seem to be wanting to acquire the technology with service and support. So I think those are the four trends we saw in North America, all supported by just a much more resilient economy than what we saw elsewhere in the world.

[Jack Vander Aarde:]

Great, it's really helpful. And actually that's a nice segue to the third point you mentioned there, technology improvement and all these like helpful just point solutions outside of just security also driving interest. So my next question is in terms of the competitive environment and Alarm’s positioning, has anything kind of changed in your perspective regarding the key competitive factors for me, like, this kind of theme that was playing out more so a few years ago from the DIY focused competitors versus the alarms/pro install channel, anything changing there, because some of the DIY guys are public are having good numbers as well. And just wondering if it's all benefiting everyone or anything you have to share?

[Stephen Trundle:]

Yes. I would say the thing that's going on competitively is it's just taking more -- everything is taking much more scale, probably the barriers to entry to really deliver a full solution are arising. The scale requirements are higher. The range of -- when you talk about video analytics, it wasn't even something we were talking about three years ago. And now we're in an arms race in that category with some large players. And you have to be able to resource and staff that effort accordingly to remain competitive. So probably the main competitive dynamic I think is that there's starting to be a little bit more of a technology shakeout evolving as the technology gets more sophisticated. And those who have scale are likely to be able to sort of persist. And those that don't are going to struggle some with this shakeout I think. We couldn't -- that sort of the size we were at 10 years ago, we couldn't be competitive today. So we're fortunate to be in the spot we're in given the range of capabilities that the consumer expects, that a small business expects, and that's probably the biggest thing going on.

[Jack Vander Aarde:]

Okay, that's helpful. And then for Steve Valenzuela, can you maybe provide some more color, maybe quantify whatever you can on the status of the international business maybe in terms of percentage of your overall 7.6 million plus subscribers? How many of those are international? And how many of your 10,000 plus channel partners are international, anything around that?

[Steve Valenzuela:]

So we haven't broken that up. But what we have broken out is the international revenue was 3% of our total revenue. And we have added -- we've said we have about 40 different -- we're in about 40 different countries internationally. And we have added new service providers internationally this past year as well. So hopefully, that gives you some color.

[Jack Vander Aarde:]

That does. And I'm still going to try to ask this next question regardless. So with the international markets in still early stage, still growing, maybe more impacted by COVID than your domestic markets, are there any kind of – I don’t know, what does it take to drive subscriber growth internationally from maybe a channel partner perspective? Is it similar to North America? It sounds like you're adding more of these -- more channel partners all the time and they're helping you really scale the business in North America. Is it similar internationally? Is the growth – how dependent is growth of subscriber activations on adding new channel partners, or is it just expanding within your large existing international channel partners?

[Steve Valenzuela:]

Yes, so a little more color. I think we started the year last year at around 10,000 units per month and we ended the year at around 15,000. We're happy with that, given the dynamics. Then we had regions, particularly like Latin America, that kind of just went dark almost for a long period of the year. So we expect -- we didn't lose any partners in that process. We kept our partners. We worked together to improve. I'd say from where we sit, the number one thing is bulletproofing the customer experience for each of these different markets with the full range of the capabilities that we deliver in the U.S. And it sounds easy, but it's 40 countries, lots of different networks, lots of different sort of consumer preferences on how things are done. But there's still a fair amount of technology and product work that we're doing in concert with our partners to get to the point that we fulfill everything we say we're going to do. We think we will continue to add partners. For example, demo houses in some markets, things of this nature, but it's going in the right direction. The number one thing is I said technology. It's really persistence. Keep trying, keep working, be a good partner, and eventually good things will come. We saw that in the U.S. It's actually -- I haven't looked at the data recently, but it took us -- at some point when we looked at it, our ramp rate in the U.S. was slower than what we're ramping in U.S. But at some point, you get sort of critical mass and it takes off. I'm sorry, the ramp rate U.S. was slower in earlier days than international. So we'll see.

[Jack Vander Aarde:]

Okay, sounds good. Well, again, great quarter and look forward to following up next quarter. Thanks, guys.

[Stephen Trundle:]

Thank you.

[Steve Valenzuela:]

Thanks, Jack. I appreciate it.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.