Alarm.com Holdings, Inc. (ALRM) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Alarm.com's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 first speaker today to Mr. David Trone, Vice President of Investor Relations. Thank you. Please go ahead, sir.
David Trone: Thank you. Good afternoon, everyone, and welcome to Alarm.com's first quarter 2021 earnings conference call. As a reminder, this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO; and Steve Valenzuela, CFO.
Stephen Trundle: Thank you, David. Good afternoon, and welcome to everyone. We're pleased to report solid Q1 results to begin the year. Our SaaS and license revenue in the first quarter was $107.4 million, up 16.8% over last year. Our adjusted EBITDA in the first quarter was $35.6 million. I want to thank our service provider partners and the Alarm.com team for their contributions to our results and for their ongoing performance during these challenging times. The favorable conditions that we saw in the U.S. and Canadian residential markets in late 2020 carried into the first quarter of 2021. This momentum was driven by new account creation and the growing adoption of advanced services, such as video and video analytics. Commercial sales opportunities in the large scale enterprise segment also improved, but remained somewhat below pre-pandemic levels. Our international business remains more impacted by the pandemic than our U.S. and Canadian business. As we monitor conditions in our international markets, our team continues to add new service providers to better position for the growth we expect once more robust recoveries are underway in these markets. During the quarter, we continue to build on our growth initiatives and invest in new product development programs. I want to update you on some of the technology we released and other key developments over the period. I'll begin with our residential services. I discussed the launch of the Alarm.com touchless video doorbell last quarter, and we saw encouraging adoption during its initial rollout. In the first quarter, nearly 1,200 service providers installed the new product. This shows the level of confidence that our service providers have in our ability to deploy innovative, market-leading products that also meet the dependability and performance expectations associated with life safety solutions. To expand on our success in the video doorbell category, we are establishing a diverse product lineup with a range of price points. We continue to offer our traditional doorbell products, and we saw strong sells across the value spectrum of our lineup in the U.S. and Canadian residential markets. Shifting to our commercial solutions. We recently launched Smarter Business Temperature Monitoring for restaurants, grocery stores, pharmacies, and other commercial verticals with temperature sensitive inventory or areas. The solution uses temperature sensors, which are integrated with our supported security control panels. It provides comprehensive monitoring, real-time alerts, historical reporting, and multi-location awareness to ensure health, safety and inspection compliance.
Steve Valenzuela: Thanks, Steve. I will begin with the review of our strong first quarter of 2021 financial results, and then discuss guidance before opening the call for questions. SaaS and license revenue in the first quarter grew 16.8% from the same quarter last year to $107.4 million. This includes connect software license revenue of approximately $8.7 million for the first quarter, down as expected from $9.7 million in the year ago quarter. SaaS and license revenue for our Alarm.com segment grew 15.8% year-over-year and our other segment grew 34.9% over the same period. Our SaaS and license revenue visibility remains high, with a revenue renewal rate of 95% in the first quarter, which is above our historical range of 92% to 94%. This slightly higher revenue renewal rate we believe is likely the result of fewer people moving homes at the start of the pandemic, and we could see return to the historic range in the next quarter or two
Operator: Thank you, sir. I show our first question comes from the line of Sterling Auty from JPMorgan. Please go ahead.
Sterling Auty: Yeah. Thanks. Hi, guys. So, you mentioned that on the international side, the continuing pandemic, I'm just kind of curious with U.K. set to kind of open up more fully, what's the visibility that you have and improvement that we might see out of the international region in the June and then September quarters.
Stephen Trundle: This is Steve Trundle speaking. So, I don't expect to see a lot of movement between now and June. Meaning we're running at sort of the level we probably ran at maybe a little better than Q1. As we get it -- I mean, England obviously is a little ahead of other parts of Europe and certainly ahead of Latin America right now. And I would also say we're seeing a little bit more of a supply chain stress globally or internationally with some of the more esoteric parts than what we see here in North America. So, I think when we get probably into the third quarter, maybe even the fourth, we start to see that that clear would be my guess. And then what we're trying to do right now is really work with service providers and position for those markets to be more robust next year. And we're thankful that North American was remained pretty strong.
Sterling Auty: That makes sense. And then maybe one quick follow-up. You talked about the renewal rates, perhaps returning to historical norms. Just what have you baked into the guidance for the rest of the year?
Steve Valenzuela: Yeah. I think our -- people basically stopped moving this time last year. So, you didn't have -- we didn't have -- we had a higher than expected revenue renewal rate, I think, came in at 95%. I think, what we baked in for the remainder of the year is the midpoint of our traditional range, which is 92% to 94%.
Stephen Trundle: That's right.
Sterling Auty: All right. That's fair. Thank you so much. I really appreciate it.
Steve Valenzuela: Sure.
David Trone: Thank you.
Operator: Thank you. Our next question comes from the line of Adam Tindle from Raymond James. Please go ahead.
Adam Tindle: Okay. Thanks. Good afternoon. I wanted to start on the SaaS and license revenue guidance. For the full year 2021, it was raised by a few million more than the Q1 beat, and I'm wondering what you're seeing to imply that continued strength in the outer quarters versus just raising by the $2.5 million or so that you'd beat by. This gives a context -- I know it's splitting hairs a little bit, but we typically view you as conservative on guidance. I'm less focused on the numbers, more on the qualitative statement you're making. So, maybe just unpack the areas you're seeing momentum. What got you comfortable to carry through some additional upside, given as you just mentioned, retention rate is expected to come down. I'm not sure what the offsets were.
Steve Valenzuela: Right. No, good question. The things that give us confidence are a good chunk of the Q1 beat came from an accelerated creation rate and those subscribers we don't anticipate -- not all of it, but a good chunk, we don't anticipate them going anywhere. So that's a positive. The -- we don't want to get out of control though and extrapolate for the entire year that the current creation rates, and kind of sort of slightly above expectation performance will continue forever. We do have some headwinds with regard to activities, which thus far we've managed effectively, but in the supply chain -- global markets are still somewhat uncertain. We are seeing, as I said, in my prepared remarks commercial beginning to pick back up, so that could give us a nice potential tailwind. So, those are -- and then the EnergyHub businesses is also a strong right now as I noted in my prepared remarks. So, there are plenty of things that look solid at this juncture in the year. If you have experience with us, you know that we're not going to go crazy on raising guidance, but the guide we provide as the foundation for our operating budget. So, we absorbed some of it, some of the Q1 and then pushed some of that into the rest of the year. And those are some of the things that we're seeing, what I just commented on.
Stephen Trundle: I would say too, we are seeing good video, video analytics picked up as Steve talked -- ARPU a little bit as well. Of course, most of it is really coming from new subscribers being added, but it nice to see the strong video and video analytics continued attachment rates increasing
Adam Tindle: Got it. Yeah. That makes sense. And just as a follow-up. I mean, cash continues to increase. Your business is so predictable and durable, particularly on the SaaS and license side. So, Steve V, maybe you could touch on your view of optimal capital structure and timing to get to that level. And Steve T, if you could follow up with priorities for use of cash as you move to that optimal capital structure.
Steve Valenzuela: Well, yeah. Good question. So, certainly on the optimal cash, we like to have cash. And we couldn't pass up the great terms, the 0% coupon bonds, we were able to raise $500 million growth. And so we have run the company on a cash flow positive basis. If you look at this quarter, we generated a very good amount of free cash flow and can -- more than almost double last year's cash flow. So, I think we have quite a bit of dry powder here. Feel very good about our balance sheet, our cash position. I would say that, we like to run with a net cash position without getting into too many details, but I think we certainly have a very strong balance sheet. We've continued to have a strong balance sheet over the years. And with this raise, it gives us even more, if you will, dry powder.
Stephen Trundle: Yeah. In terms of use of the proceeds, I think it's, or what we're looking to do. I think we're -- we just want to be postured for when the right opportunity comes along to act upon it. And we have an active corporate development team that's sourcing various opportunities. We also have at least two initiatives internally that we may decide to deploy capital into. We haven't made that decision yet. But we're watching the market. Right now, we're watching as everyone is valuations pretty carefully. And trying to sort of -- in a way I think hope that some of the stack activity diminishes, but when we see the right thing come along, we're well-positioned. We're well-positioned for the next two or three years to be smart and judicious about continuing to build the business through the occasional acquisition.
Adam Tindle: If you had to rank consolidating more core residential opportunities versus expanding in these growth areas like EnergyHub, would one rank higher than the other.
Stephen Trundle: I think that our internal engine is really strong on the residential side. Already we're scaling R&D, they're at a level that no one else is. So, I would expect us to consolidate residential activity organically for the most part through time. And so, I think when we look at -- we're not going to say no to any single category. The category is only one part of the equation. Management is a big part of the equation, the health of the business and other attributes. But I'd say generally our bias is probably to look at active -- opportunities that are in areas where we may not be as strong organically.
Adam Tindle: Makes sense. Thank you, both.
David Trone: Thanks.
Operator: Thank you. Our next question comes from the line of Matt Pfau from William Blair. Please go ahead.
Matt Pfau: Hey, guys. Thanks for taking my questions and nice job on the results. Wanted to ask about the better than expected creation rate that you guys have seen over the past several quarters. How do you expect that to be impacted as U.S. economies continue to reopen? And I guess, what I'm wondering is, is that sort of a creation rate of factor of people being stuck at home and thus doing home improvement projects, or there's some other dynamics there that's creating that creation rate?
Stephen Trundle: Yeah. Matt, I don't know that we have a crystal ball on that to be honest with you. We have seen ongoing momentum in the last couple of quarters. We think some of that is actually a positive contribution from COVID people being at home, able to take five months doing projects, the shift to the suburbs. Some of those trends are going to be ongoing. I know that when we model things, though, we don't -- at the moment, we're not modeling in that trajectory as a permanent kind of -- permanent trajectory, a permanent level of momentum. So, we're looking at where we were sort of pre-COVID trajectories at that point in terms of sales velocity in North America and anticipating some regression to that what we'd call more normal trajectory. So, that's kind of the way we view it. We could be wrong and it may be that we're on -- that we -- I wouldn't even say that's our belief. That's just how we'd model it. It could be that the shift to a more homeownership and to -- some shift out of the urban centers is going to be an ongoing trend for the next five, six years. And we're early days in it. We just don't know for sure.
Matt Pfau: Okay. Got it. That makes sense. And just to follow-up on the retention rate was -- just sort of wondering how increased uptake of video and video analytics and I guess, smart home features as well, impact the retention rate. Is there any impact there from customers perhaps making more investment in their security system and being more engaged?
Stephen Trundle: Yeah. That's a very good question. So, I think there definitely is. We've been at the high side of our anticipated range for some time, a range that we established 92% to 94% potential. That's been pretty strong for some period of time. I think particularly video analytics. I mean, in the first quarter, the attach rate of analytics on new video installations was over 70%. So customers are getting a much better experience when they're getting that type of intelligence in their video alerts and in what they're viewing. If you're having a good experience, if you're impressed with the technology, if it's making your life easier, I'd like to believe that you're more durable as a customer. And then I do think your point as well, which is, as customers see more areas of benefits from the smart home and as they deploy more types of technology, whether it be video or the smart water valve or some of the energy management attributes, I think there becomes a bit more of a dependency and the likelihood of that customer not being satisfied with their experience and therefore, potentially . I do think there's a -- an ongoing sort of slight positive trend there that that will help us.
Matt Pfau: Great. Thanks guys. Appreciate you taking my questions.
Stephen Trundle: Sure.
David Trone: Thank you.
Operator: Thank you. Our next question comes from the line of Darren Aftahi from ROTH Capital Partners. Please go ahead.
Unidentified Analyst: Hey, this is Terry on for Darren. Thanks for taking the questions. You talked a little bit about commercial certainly pick back up. Could you provide any color on maybe what percent or that is like a new inquiry versus someone who might have you spoken to maybe pre-COVID and had been caused due to just sort of the shutdown?
Stephen Trundle: Off the top of my head, I don't know that I have good data on whether the new customers or ones we had spoken to. I guess, I go off of an anecdotal belief, which is, I think it's a mix of both. When I talked to our sales people and especially in the larger enterprise segment, there were a lot of opportunities that were brewing and then, various entities just sort of shutdown in terms of access to their facilities during COVID and at least especially the early parts of COVID until really towards the end of the year. And now they're opened back up. So, I would imagine, a decent amount of the uptick is coming from -- especially on the larger enterprise side, coming from places where we already knew about the opportunity. That said the number of sites that we're adding as an example on the OpenEye side of the business, I believe they've added, if I remember correctly, probably 9,000 new sites in the last 12 months. And that's a pretty meaningful jump. Maybe more it's more than that, I've looked at the data point. But my recollection is we probably added 30% growth to the number of sites that are installed. So, I think that's coming, not just from people that we already in discussions with beforehand, but from some smaller enterprises that saw an opportunity, while their business was potentially closed. If it's a restaurant or otherwise to make some modifications and act a little bit more like a homeowner do that during COVID. I think that will -- that activity should continue.
Unidentified Analyst: Got it. Thank you. And as a follow-up. I guess it's sort of similar, but with the residential market, and then some of the housing market trends, were you seeing a mix of more like new accounts or sort of people who are used Alarm.com for maybe like a primary home and now we're adding it to maybe a secondary home?
Stephen Trundle: No. The latter is always occurring, but it's a much smaller slice of the business then people that are moving into new homes. So, I think the majority is coming from new homes. We're aided by new home construction and then by people who are getting a first system for their home, and doing that during -- for the first time. So, a very small fraction, I would definitely say less than 10% of new customer adds are coming in the residential side from people with multiple properties. On the commercial side, if you locked down a business that has multiple sites and you get a few sites and you do a decent job on those sites, then that can become the gift that keeps on giving. And you probably see a higher preponderance of the commercial installs being follow on work for businesses that are already have used your technology in one location. So, there would be a higher percentage, but still not over -- certainly not over half and my guess would be not over 35%.
Unidentified Analyst: Great. Thank you.
David Trone: Thank you.
Operator: Thank you. Our next question comes from the line of Mike Latimore from Northland Capital. Please go ahead.
Unidentified Analyst: Hi, this is Aditya on behalf of Mike Latimore. Could you talk about how much did the other SaaS contribute in 4Q?
Steve Valenzuela: Sure. Do you mean in Q1 when you're saying 4Q. In Q1 is the other segment …
Unidentified Analyst: 1Q. Yeah.
Steve Valenzuela: … $6.1 million of SaaS revenue for Q1, which was up 35% year-over-year.
Unidentified Analyst: All right. All right. And do you expect it to continue at the same rate, or you expect it to accelerate in 2021?
Steve Valenzuela: Well, what we talked about really is with the energy of doing very well and with the EV programs, the longer term certainly is very positive for the other segment. We also have PointCentral and we have the Smart Water Valve+Meter. But if you look at the other segments, there are seasonality points there. There's timing differences. Typically Q4 is the stronger quarter. For example, in Q4, the other segment contributed $7.8 million in SaaS revenue. Because in Q4 we do get a benefit from the energy savings in the summer programs, and typically Q1 that's a seasonably slower quarter. And so, it's -- but we do see positive trends here with the other segments, a lot of new programs there with energy up, with the Smart Water Valve+Meter, which is a great product. I mean, it really is a lifesaver as some cases for homeowners and businesses as possibly as well, if you had to protect your home from leaks and water breaks. And so, we see quite a bit of opportunity there. And again, it is -- there's different quarters and different seasonality points there. Typically Q1 again, being the seasonally slower quarter.
Unidentified Analyst: All right. And maybe any estimate on how much OpenEye might contribute for this year?
Steve Valenzuela: So, we haven't broken out OpenEye. In the past, I would say that we did talk last year that OpenEye was more impacted by COVID as you would think with commercial. Now, we did see improvement in the fourth quarter and we saw again improvement in the first quarter. So, it's trending quite well. We're also encouraged with the growth of SaaS revenue broken out, which is still fairly small, but we have a program now since we acquired OpenEye to really grow the SaaS, it'll take some time, but it's growing at a very good rate and it's a small number still. But we're learning curves to see the growth of OpenEye in the difficult environment with commercial and we're excited about the future for OpenEye, as things open up and of course, commercial businesses go back. So, we're seeing good positive trends there.
Unidentified Analyst: All right. All right. Fine. Thank you.
Steve Valenzuela: Thank you.
David Trone: Thank you.
Operator: Thank you. Our next question comes from the line of Brian Ruttenbur from Imperial Capital. Please go ahead.
Brian Ruttenbur: Yes. Thank you very much. Great quarter. So, a couple of quick questions. First of all, on Shooter Detection, their indoor GSL. Can you talk a little bit about what kind of traction you're seeing so far? You just acquired them recently. I know you don't break out specific acquisitions that are they on track. Are they growing with the total group? Can you talk about any trends that you're seeing in that area?
Stephen Trundle: Yeah. So, with Shooter Detection, I think, we completed that acquisition in December, right in the midst of kind of -- some of the COVID period. I actually didn't get a chance to visit them until the last, probably five, six weeks. And the trend lines there are -- we have seen that there -- I think have been a little more exposed to some of the enterprise commercial customers that at the moment, I mean, very, very large customers, entities that have massive office complexes, for example, and that are trying to determine what percentage of their workforce will be coming back to work. How much of those facilities to sort of -- to keep that sort of thing. So, that's been a bit of a soft point. The positives that on the institutional side, there's traction and the pipeline is very good. I think they've signed some marquee names that they've added. So, I would say, it's slightly below where I would ideally like to see a tracking in the first quarter, that's one quarter in. But the pipeline of activity is probably at or above, what I would expect. And we think that -- unfortunately, every time we have one of these horrible instances of violence in society, their pipeline just gets bigger. There are more people interested in how do I protect my employees and how do I keep my employees safe and what can I do to as much as possible mitigate workplace violence. So, we expect over time that that business will be -- you have to remember, it's a pretty small business. So, we're investing in a pretty heavily, have made some -- a couple of good hires in the first quarter. And we'll really be working, I think, to help them turn the crank on increasing the distribute ability of the technology they've created.
Brian Ruttenbur: Has there been anything at the school level, from the federal agencies and all the stimulus that has gone, or that you see adding to their pipeline?
Stephen Trundle: I've not -- the answer there is, I don't actually -- not -- if I've been told, I don't remember whether the feds have simulated that. I think we've discussed it. I am aware of my last discussion with them that -- in their business institutional side, a lot of the times the state approves a technology for adoption by all of the schools, or by all of the courts in a given state. So, we are seeing various states having to approve the technology for use in certain circumstances, whether that be schools, high schools, elementary courts, et cetera, and whether there will be stimulus with that or not, I'm not positive, but there is activity.
Brian Ruttenbur: Great. And last question real quick, just timing on the commercial recovery. Just from your gut, do you see it happening in 2021 in terms of that recovery?
Stephen Trundle: Yeah. From my gut feel would be that we're going to continue to see commercial gain strength throughout this year. And by the end of the year, we would see more than likely commercial performing about where we expected to be. That's my gut feel. Maybe even a little above if there's some pent-up demand out there.
Brian Ruttenbur: Great. Thank you.
Operator: Thank you. Our next question comes from the line of Jack Vander Aarde from Maxim Group. Please go ahead.
Jack Vander Aarde: Great. Hey, guys. Nice results. Thanks for taking my questions. So, maybe a question for either Steve T or Steve V, either of you can probably answer this. But maybe on the recent trends you're seeing in terms of recent residential subscriber installations within the United States. Are there any particular states or regional areas that have maybe surprised you, whether in terms of outperforming or underperforming relative to what you expected, and then also maybe relative to where those states were performing last year?
Stephen Trundle: Yeah. I would say generally that it's been less about probably any particular state. Traditionally we've always been, and our service providers in the Southern parts of the United States have been bigger. Typically, there's just a higher market penetration. And in places like Florida, Georgia, Tennessee, Texas, all of the Southern markets, then there is typically up North. That's not to say you don't have penetration everywhere. What's probably more normal or what we've seen has been less about state by state, but more about tier two cities versus urban centers and the level of installs that are going into suburbs and what some might refer to as K2 cities as we've seen some DIY urbanization. So, our service providers who service those markets have been -- particularly strong and that's been not really unique to any given state, but kind of broad. And I will say one example that just sort of pops up in terms of the state, I should say, is our service providers in Florida are indicating they're way, way, way too busy that it's really popping and they can't keep up with demand. So, that's one that I know of where they're particularly busy. I think there is some migration to Florida right now, but generally it's been more about urban versus suburban or tier two.
Jack Vander Aarde: Okay. Great. And that's helpful. And then maybe a question for Steve Valenzuela. Regarding the other segment, revenue growth is strong again, I think it was up nearly 35% if I heard that correctly year-over-year. Can you talk about maybe the underlying drivers of that business strength in terms of the actual specific businesses or subsidiaries that contribute to that? Maybe name a couple other than just EnergyHub?
Steve Valenzuela: Well, certainly EnergyHub is a big driver and we've talked about PointCentral being impacted a little bit more by the COVID, although the vacation rental has picked up a bit. But we also have the Smart Water Valve+Meter, which is a new product. We think there's a lot of opportunity there as well. But within the other segment EnergyHub is really a main driver, of course, the growth, supported by the other businesses as well. But they are the largest -- I would say the fastest grower in the other segment.
Jack Vander Aarde: Okay. Cool. And then maybe as a follow-up. Just sticking to the subsidiaries then, you mentioned PointCentral. I saw recently they rolled out this new offering that caters to the short-term rental managers with under 25 properties, which is the first I believe to that business. Can you maybe just talk about what that does is expand the TAM opportunity from what you guys initially anticipated, or was this always kind of part of the plan, but it was just starting with their larger property managers first and now you're working your way down the ladder?
Stephen Trundle: Well, it definitely expense the TAM. I -- the percentage level, I'm not certain enough, but it hasn't made sense economically from a cost of sales standpoint, spend a lot of time up until now on property managers that are managing 10 vacation units, when you have property managers out there that are managing hundreds or thousands. So, in partnership with home, we're going to target some of the smaller ones. In terms of the exact impact on TAM, I really don't know. I just would say that vacation -- the vacation rental market has been -- PointCentral serves multi-family and vacation rental. I'd say vacation rental has been the stronger segment of the two over the last six months and a place where we add a lot of values. So, we're trying to just drive deeper into that segment with that new partnership.
Jack Vander Aarde: Okay. Great. Thank you. That's it for me guys.
Stephen Trundle: Thank you.
Operator: Thank you. This concludes today's Q&A session and the conference call. Thank you for participating. You may all disconnect.
Stephen Trundle: All right. Thank you.
Steve Valenzuela: Thank you.
