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Good day, and thank you for standing by. Welcome to the Alarm.com third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. Then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew

Thanks, Kevin. Good afternoon, everyone, and welcome to Alarm.com's third quarter 2024 earnings conference call. Please note the call is being recorded. Joining us today are Steve Trundle, our CEO, and Steve Valenzuela, our CFO. 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, 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-Ks, which will be filed shortly with the SEC along with the associated press release. The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or other information which speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of GAAP to 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.

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report financial results for the third quarter that exceeded our expectations. SaaS and license revenue in the third quarter grew to $159.3 million, and adjusted EBITDA was $50 million. Our performance in the quarter resulted from continued momentum across our growth initiatives. Sales of our video and access control products outperformed and contributed to hardware revenue that was above our expectations. We also saw a revenue retention rate increase to 95%, which is above our historical range. We believe two things are driving the revenue retention metric. First, our service providers have been increasingly putting in fully featured and more robust systems that provide value to the consumer or business owner every day. Second, the slower US housing market has reduced subscriber moves, which can be a leading cause of account churn. I want to thank our service provider partners and our employees for their contributions to our results. On today's call, I want to update you on a few new capabilities introduced to our commercial and residential video offerings before handing it over to Steve Valenzuela to cover our financials in more detail. In October, we hosted our annual customer conference, which we call Partner Summit, here in Washington, DC. The event again attracted a sold-out audience that represented a nice cross-section of our service provider partner community. We were able to feature several recently released products in our presentations during the summit. One of the products we demonstrated is a consumer-facing capability we call AI Deterrence, or AID. It can identify and engage a potential trespasser on a property and deter them from causing further problems. AID is integrated into our remote video monitoring solution and is essentially an AI bot that replaces some of the workload that a live operator monitoring the video camera would otherwise need to perform. It can discern clothing and location and deliver verbal warnings that are dynamically adapted to the intruder and the scene. Our goal with AID is to make our remote video monitoring solution as cost-effective as possible for our service providers. By augmenting human intervention and focusing humans on only the most critical events, we believe our partners can adopt our solution more aggressively and introduce it to a larger segment of the commercial and residential markets. Our advancements in applying AI to video streams in both residential and commercial settings benefit from our scale. In August alone, our AI-enabled video cameras identified and sent 1.2 billion events for further classification and verification via the cloud. Of these 1.2 billion events of interest, 700 million were verified by the cloud AI engine, triggering additional rules which can include archival or push notifications to alert subscribers of important activity. In September, our OpenEye business also launched a new line of cloud cameras designed for flexible, streamlined enterprise video surveillance installations. The new cameras are entirely self-contained with onboard storage and AI processing. They connect directly to the cloud and are provided as a subscription-based solution that leverages the full suite platform of management analytics, learning, and reporting tools offered by OpenEye. Cloud cameras provide a cost-effective way for our partners to land, and we are pleased with OpenEye's continued momentum and growth. OpenEye is on the cusp of surpassing one million active channels, or video cameras, on its software platform. We expect continued strong contributions to Alarm.com's growth as OpenEye leads the transformation of the enterprise security video management market from standalone on-premise devices to cloud-enabled AI-powered video solutions. As most of you know, we typically conclude our quarter with Steve Valenzuela providing an initial look at the following fiscal year. It is early, and we will continue to refine our plans and forecast before providing our more calibrated and official 2025 guidance on our fourth quarter call early next year. But I want to give a little context for how we are looking at 2025 at this point. As we think about 2025 revenue, a meaningful variable is the rate of ADT rolls out the ADT Google software. This forecasting dependency makes visibility into 2025 a bit more opaque than in prior years. Our first look numbers assume that ADT's corporate residential account production will fully transition to the ADT Google software and impact SaaS revenue growth for the entirety of 2025. Fortunately, we have built a diverse organic growth engine that will allow us to continue growing our business despite this long-anticipated headwind. We expect our EnergyHub business, our OpenEye business, our International business, and our Alarm.com commercial business, including our access control solution, to contribute to our consolidated growth rate at roughly the same levels in 2025 as in 2024. Meanwhile, we have moved EBITDA margins up some in the second half of 2024, and we expect current levels to hold as we move through 2025. In summary, I am pleased with our Q3 results and the continued growth we see across the business. I want to thank our service provider partners, our team for their hard work, and our investors for their continued trust in our business. And with that, let me turn things over to Steve Valenzuela to review our financials.

I will begin with a review of our third quarter 2024 financial results, then provide our guidance for Q4 and full year 2024, and conclude with our initial thoughts on 2025 before opening the call for questions. Third quarter SaaS and license revenue of $159.3 million grew 9.8% from the same quarter last year. Our SaaS and license revenue visibility remained high, with a revenue renewal rate of 95% in the third quarter, above our historical trend and higher than our long-term target range of 92% to 94%. Hardware and other revenue in the third quarter was $81.2 million, up 5.7% from Q3 2023, mainly due to increased sales of access control devices and video cameras. Total revenue of $240.5 million for the third quarter grew 8.4% year over year. SaaS and license gross margin for the third quarter was 85.5%, up slightly from 84.9% in the year-ago quarter. Hardware gross margin was 24.1% for the third quarter, up from 22.6% in Q3 2023, mainly due to favorable product mix. Total gross margin was 64.8% for the third quarter, up from 63.3% in the prior year quarter. Turning to operating expenses, R&D expenses in the third quarter were $62.2 million compared to $61 million in Q3 2023. We ended the third quarter with 1,164 employees in R&D, up from 1,116 employees in Q3 2023. Total headcount increased to 2,055 employees for the third quarter, compared to 1,986 employees in the year-ago quarter. Sales and marketing expenses in the third quarter were $27 million, or 11.2% of total revenue, compared to $23.9 million, or 10.8% of revenue, in the same quarter last year, mainly due to a modest increase in marketing program investment. Our G&A expenses in the third quarter were $25.7 million, down from $31.5 million in the year-ago quarter, mainly due to lower legal-related costs. G&A expense in the third quarter includes negligible non-ordinary court litigation compared to $5.9 million in the year-ago quarter. Non-ordinary court litigation expenses are part of our adjusted measures and are excluded from a measurement of our non-GAAP financial performance. In the third quarter, GAAP net income was $36.7 million, up 88% from GAAP net income of $19.5 million in the year-ago quarter. Non-GAAP adjusted EBITDA in the third quarter was $50 million, up 20.6% from $41.4 million in Q3 2023. Non-GAAP adjusted net income increased to $35.2 million, or $0.62 per diluted share in the third quarter, up from $30.6 million, or $0.56 per share for the third quarter of 2023. Turning to our balance sheet, we ended the third quarter with $1.17 billion of cash and cash equivalents, up from $697 million on December 31, 2023, with much of the increase due to the convertible offering we closed in May this year and, to a lesser extent, our positive cash flow. Our non-GAAP free cash flow for the three and nine months ended September 2024 of $74.5 million and $142.3 million, respectively, increased from $60.9 million and $90.7 million for the same periods in 2023, mainly due to higher profitability levels and improvements in working capital with declines in inventory and a reduction in accounts receivable days sales outstanding to 45 days. Turning to our financial outlook, for the fourth quarter of 2024, we expect SaaS and license revenue of $163.2 to $163.4 million. For the full year of 2024, we are raising our expectations for SaaS and license revenue to $628.7 to $628.9 million, up from our prior guidance of $626.8 to $627.2 million. We are now projecting total revenue for 2024 of $933.7 to $935.9 million, up from our prior guidance of $920.8 to $931.2 million, which includes estimated hardware and other revenue of $305 to $307 million. We are raising our estimate for non-GAAP adjusted EBITDA for 2024 to $174 to $176 million, up from our prior guidance of $165 to $167 million. Adjusted non-GAAP net income for 2024 is projected to be $125.5 to $126.5 million, or $2.25 to $2.27 per diluted share, up from our prior guidance of $119.5 to $120.5 million, or $2.06 to $2.07 per diluted share. EPS is based on an estimate of 57.9 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2024 to remain at 21% under current tax rules. We expect full-year 2024 stock-based compensation expense of $42 to $43 million. Finally, I will provide some early thoughts on 2025, noting that these are preliminary. We currently estimate our SaaS and license revenue for 2025 to be between $668 to $671 million. Total revenue for 2025 could range between $975 to $980 million. As Steve noted, we are modeling the ADT ramps up to ADT Google rollout. We currently project our non-GAAP adjusted EBITDA for 2025 to be in the range of $188 to $192 million. We will provide our annual guidance for 2025 when we report our fourth quarter 2024 financial results early next year. In summary, we are focused on executing our 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.

At this time, please press star one one on your telephone. We will pause for a moment while we compile our Q&A roster. Our first question comes from Adam Tindle with Raymond James. Your line is open.

Okay. Thanks. Good afternoon. Bear with me. I am just crunching the numbers as best as I can here, Steve. But I wanted to ask on the SaaS guidance for fiscal 2025. Understand there are a lot of variables here, and congrats on a strong Q3 that you are coming off of. If I am doing the math right here, I think you are going to finish this year at about 10.5% SaaS growth for 2024. And the initial look for 2025, I think, is closer to 6.5%. If you could maybe just walk through some of the building blocks on the delta between those two. I think, you know, ADT in particular, you know, I think a lot of us had thought about somewhere in the neighborhood of 1.5% to 2% headwind related to that. But I wonder if, you know, now that you have a little bit more visibility, you have got some clarity on that. So just some of the bridges from the strong finish in 2024 and the initial 2025 outlook would be helpful.

Hey, Adam. This is Steve Trundle speaking. Yeah. Keep in mind, we are not yet calling it guidance. We are going to do our full guidance after the fourth quarter, but in the initial look numbers, you are doing the math correct. And there are really a couple of things there to point out. First is, as we have said in the past, we are anticipating about a 200 basis point headwind to growth on the ADT Google transition. So expect that to really start next year. And that is what we have modeled. The second one is that if you remember this year, we got a meaningful bump when we closed out some litigation. We had essentially no license revenue coming from IP licenses in 2023. And then we closed out litigation. We had a pretty meaningful bump off of that resolution this year. That IP license revenue is sort of straight-lined into the early 2030s. So we are not getting a bump there again this year, and that by itself is sort of another 200 basis points in that in the math. So if you add those two up, it sort of reconciles with the 10.5% that we are showing right now. Got it. That is helpful.

And maybe just a follow-up. You mentioned, I think, EBITDA margins. You expect current levels to hold. One quick clarification and also a question on that. The clarification would be, I think, you did about 21% EBITDA margin this quarter. The guidance, I think, implies 19%. So when you say current levels, I am assuming it would be off the kind of 19% of guidance, not the 21% you just did, but just clarifying that, number one. And then secondly, Steve Trundle, as you think about holding those very, very healthy EBITDA margins, maybe you can speak about, you know, how you thought about the internal balance between growth and profitability. You know, on one hand, you know, we could say you have got a lot of room to potentially invest even more on that line. So just wonder how you thought about potentially balancing, you know, maybe investing a little bit more to bump up the growth versus holding EBITDA margins that current up. Thanks.

Yeah. Good question again. So yes, the number we are guiding on and the initial look is the 19%. And I think what I said is we are going to hold things there. It might be a little above that if you do the exact math, a couple of 20 basis points or so above. And that is up from sort of where we have been the last couple of years. So that is a meaningful transition for us. But the plan at the moment is we are sort of constantly scrutinizing the way that we allocate capital, what things make sense, what things have nice return characteristics. Through time, those things evolve. Some businesses have grown nicely and are now reaching a scale where we see them, actually, as we look into the future, beginning to contribute, shift a bit more from sort of pure investment mode to a mode where, again, there is sort of more mature contributing cash back to the parent. So we talked for a while about our various growth businesses or growth initiatives. Specifically, we reference EnergyHub, we reference the commercial business, and we reference the international business. And each of those now is a bit larger than it has been in the past. Beginning to contribute more. So that left us comfortable that with their increased scale, we could shift a bit more of the cash production capacity of the company into the EBITDA line, and we expect that to be the case. You know, go forward. Very helpful. Thank you.

One moment for our next question. Our next question comes from Mason Marion with Jefferies. Your line is open.

Hi. Thanks for taking the questions today. So your NRR is really strong at 95%. Can you talk about some of the drivers there? So you alluded to the lower churn, but are you also seeing better cross-selling within your base?

Yeah. I think it is a combination of fewer moves. Churn is really good there a lot by moves. But also, we think that the video is very compelling with the analytics. And I think we are starting to see the benefit of that. We came out with video a number of years ago, analytics a couple of years ago as well, and we think that is really enabling the users to really interact with the system every single day. And so we think that is driving up the usage and driving up the retention quite nicely. And you could almost think of that at times as a cross-sell. We sometimes refer to it as an upsell. So if we have the same subscriber that moves from an account without video to one with video, obviously, that creates a benefit, and that would be a cross-sell. Or if they already have a video subscription and then they opt into a more advanced video analytics package, that also would help us on that revenue retention metric. So there is a little bit of all of that going on. It probably is true that the reduction in subscriber moves is the main driver, but as Steve just said, the account characteristics are also looking more positive.

Gotcha. Understood. And then I believe your EBS integration, I think you are largely complete with that now. Can you talk us through that? What has early feedback been? Are you seeing benefits from that acquisition?

Yeah. Good memory. We are right on the cusp of beginning to see the rollout of the technology and the capabilities that we went after when we did the EBS acquisition. As sort of a refresher, EBS is a business based in Europe that has a history of being able to support a wide range of various intrusion panels. We wanted to be able to attack a different part of the market than just the new that Alarm.com typically gets. So we are beginning that rollout now. The EBS low-cost communication product works with the Alarm.com back end at this moment. And our belief at the moment is that we will probably be successful in adding another 40,000 to 50,000 subscribers in the rest of world markets next year using the low-cost communication technology from EBS, and those would be subscribers we otherwise would not get. So it is beginning to contribute to the growth story on the international side of the business.

Great. Thank you.

One moment for our next question. Our next question comes from Adam Oshkis with Goldman Sachs. Your line is open.

Great. Thanks so much for taking the questions. It is nice speaking with you both. Just curious on how you are viewing pricing opportunities here, particularly around some of the cost augmentation that some of these AI initiatives are potentially providing for your customer base. How do you balance the ability to take price by allowing customers to manage cost more effectively versus this just being a bit of a customer success tool to increase retention?

Yeah. Good question. So AI provides some ability for cost augmentation. I spoke a bit about that in my prepared remarks. If we are using what we call AI Deterrence or an AI bot to replace some of the previously expensive human monitoring activity that would be required to offer that same service, then we are helping our partners, our service provider partners, with their cost to serve. And that does correctly give us some ability to price that capability in a way that is beneficial to us. So we work with our partners. We try to figure out sort of what is the right pricing that works for them. We are careful not to price things at a level that we sort of corner ourselves in a niche market. We prefer to be broad and we prefer to be broadly applicable, and that is really probably the primary focus with what we are doing with AI, and that necessitates keeping the costing at a level that our partners can afford to bring it to a broad swath of the market. Otherwise, with pricing, it is sort of normal course. We look at pricing, and there are pricing increases that are sort of part of the plan. But you are correct. The AI piece is particularly interesting to us right now.

Okay. Great. That is really helpful. And then could you just refresh us on sort of the top of funnel opportunity on the commercial side? I guess, in your view, where is the rest of the market behind there, and then how does OpenEye and some of these other investments on the technology side you are making open up for conversion opportunities for you over time?

Yeah. The top of funnel opportunity, I am trying to... What do you mean by that when you say are we seeing in the top of funnel opportunity?

Yeah. More just in terms of commercial prospects and being able to convert those commercial prospects into customers. You know, what is driving or I guess, how are you viewing the demand for security products on the commercial side and your ability to convert?

Yep. Okay. I understand. Demand to us looks fairly constant, maybe picking up a tad if we are trying to read the tea leaves of the fourth quarter. There was increased demand, particularly on the access control side. We had a meaningful beat on the hardware number. Sorry. I said fourth quarter. I meant third quarter. Had a meaningful beat on the hardware number, and I think Steve indicated some of that was driven by access control hardware. So that is a good indicator. Oftentimes, those solutions are sold and pull through video. We also saw pretty good behavior on the video side. So I feel like we feel like the market is pretty healthy on the commercial side right now. We attack it a couple of different ways through integrators on the very high enterprise side of the market, through our regular service provider partners in the mid-market, and then we do run some demand generation activity there as well on the commercial side. And everything I am hearing and seeing is setting is sort of slightly better than maybe it was in the first half of the year.

Okay. Incredibly helpful color. Thanks so much.

Thank you. Again, ladies and gentlemen, if you have a question or comment, our next question comes from Matt Treleck with William Blair. Your line is open.

Hey, everyone. You have Matt Fleuk on for Steven Sheldon. Thank you for taking my questions. Starting with one on hardware, given the strong performance there this quarter, curious on what you think it would take to see hardware revenue return to growth in 2025 as I think the early look expectations imply more flat growth in 2025.

Alright. Hey, Matt. Yeah. I think at this moment, we are sticking with our sort of initial look estimates on hardware revenue. I think that if we saw sort of unexpected strength on the commercial side, we saw... I talked about sort of the headwind, a couple of headwinds, but one being the ADT Google rollout. If we saw that sort of dampen, then obviously that might result in more hardware sales as well. But I would say the biggest one that would be nice to see, but no, we are not... I think the model we have run and the one we present with their forecast is, to the best of our knowledge, the right model. But we could see upside if we saw, in particular, more takeoff on the commercial side of the business.

Got it. That is helpful color. Thank you. And then had one on R&D. Just thinking about priorities in the R&D department over the coming year. Are there any capabilities you are focused on building out, or is it more about enhancing the existing product catalog?

No. We are pretty focused on, I would say, building out new capabilities, particularly in the video and the analytics space. That would mean new form factors, different cameras. We just had our partner summit, and we had the preview of a couple of different form factors on video cameras. Some technology that we... some battery-powered video camera technology that we are excited about. We previewed the EBS stuff with the international partners, and we are pleased to get that out. So all of these are sort of contributing and focused on the markets that we are already driving in, so we do not envision next year really introducing something that takes us into a different market. We are going to stay focused on the commercial, the residential, and the international markets, with most of the R&D effort that we are deploying right now.

Very helpful. Thank you.

One moment for our next question. Our next question comes from Darren Aftahi with Roth. Your line is open.

My questions. Two, if I may. I think it may have been the beginning of this year, Steve, but you kind of talked about 18% on the EBITDA margin. Why the pivot now? And second question, you talked about headwinds to SaaS growth for 2025. I guess, where are there areas where things could go right beyond maybe commercial, which you talked about? Which could counterbalance those headwinds. Thanks.

Hey, Darren. Yeah. Good memory. You guys always have a good memory that makes my life harder. I did talk about the 18% level at the end of the year. As we have seen some of the growth initiatives reach a more impressive level of scale, we got comfortable or we are comfortable at this point that EBITDA margins will be more in the 19% plus range coming into next year. And we are comfortable sort of saying that we do not envision going backwards off of that. So that is, you know, just an update. And as far as where can we get extra, you know, increased SaaS growth contribution, I would say that, you know, sort of it is going to be can we land a new logo someplace either domestically or internationally and increase the size of the pipeline and get that done in the first part of the year. Could be that something in corp dev results in some additional growth. It could be that we see sort of increased acceleration in the international business that we are not currently anticipating. The challenge right now, though, is we are looking out five quarters. So when we provide an initial look, and we do not like to lean into too many things that are sort of ethereal and not right in front of us. And, you know, I guess I would say we are pleased that on sort of a larger base, we are able to essentially see the same growth contribution coming next year as we are able to get this year even with some of these headwinds.

Fair enough. Thank you. Appreciate it.

One moment for our next question. Our next question comes from Jack Van Dardey with Maxim Group. Your line is open.

Okay. Great. Thanks, guys. Nice results. Looking at your 2025 initial SaaS outlook, maybe for Steve Trundle, the international side of the business, do you plan to grow the number of service providers you currently have in the international markets? Is there an assumption baked in there? And then also, are the existing partners you do have internationally, are they growing? Are they kind of assumed to be flat? Just curious to get if we can dissect that a bit further for your 2025 outlook.

Sure. Hey, Jack. Yeah. I think we will continue. So we are super fortunate to have a great set of sort of anchor tenants in the international service provider partner framework that we are going to market with right now. So there really are not a lot of names or brands that one could have at the largest at sort of the enterprise side of the business that we do not already have. That said, we are continuing to work to add a few, and then we want to build out the base of smaller service providers in many of the markets. There are still some markets where we are not particularly active yet, and we are working on that. So there will be some additional, you know, there will be some new names. We are adding partners still on the international side at a faster clip than we are domestically where we are more mature. Once we add someone, it usually takes, you know, at least a year, but a couple of years oftentimes to kind of reorient their business around Alarm.com and change the way they go to market. So there is some latency in the system after we add a partner, but we are still working at partners. I am trying to remember the second piece of your question.

Yeah. I was just wondering if you had plans to, that that baked in, you know, new countries expansion as into that 2025 outlook as well as just do you assume you are adding more partners internationally in general? I think you covered most of that.

Yeah. So in our 2025 outlook, we are not assuming we are signing new logos at this point. When we do modeling, we model off things that are real. We may add new logos. That would create some upside. And we may add some new markets that we are not currently servicing. Just keep in mind, though, there is some latency between those ads and between the point that you actually see the result of that flow into our P&L.

Yeah. Got it. Very very helpful. And then maybe just a quick housekeeping, for Steve. I am sorry. Can you just reiterate what the actual 2025 SaaS outlook range was again? I think I missed the actual ceiling of that range.

Yes. So the range for 2025 is $668 to $671 million.

Gotcha. Just that. Okay. Very helpful. Much appreciated. Thank you, guys. Good results again.

Thank you. Take care.

And I am not showing any further questions at this time. So ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.