David Trone – Vice President, Investor Relations Steve Trundle – President and Chief Executive Officer Steve Valenzuela – Chief Financial Officer.

Chris Rochester – Credit Suisse John DiFucci – Jefferies Nikolay Beliov – Bank of America Gabriela Borges – Goldman Sachs Matt Pfau – William Blair Jeff Kessler – Imperial Capital David Gearhart – First Analysis Adam Tindle – Raymond James Dillon Heslin – Roth Capital Partners Jack Vander Aarde – Maxim Group.

Good day, ladies and gentlemen, and welcome to the Alarm.com Q1 2018 Earnings Conference Call. [Operator Instructions] And I would now like to introduce your host for today’s conference, Mr. David Trone, Vice President of Investor Relations..

Thank you. Good afternoon, everyone, and welcome to Alarm.com’s First Quarter 2018 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. Before we begin, a quick reminder to our listeners.

Management’s discussion during the call today will include forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion, anticipated market demand or opportunities and other forward-looking statements.

These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Statements containing words such as anticipate, believe, continue, estimate, expect, intend, may, will and other similar statements are intended to identify such forward-looking statements.

These statements are subject to risks and uncertainties, including those contained in the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission and subsequent reports that we file with the Securities and Exchange Commission from time to time that could cause actual results to differ materially from those contained in the forward-looking statements.

Please note that these forward-looking statements made during this conference call speak only as of today’s date, and Alarm.com undertakes no obligation to update these statements to reflect subsequent events or circumstances except to the extent required by law.

Also during this call, management’s commentary will include certain non-GAAP financial measures and provide non-GAAP guidance.

Management believes that use of these non-GAAP financial measures provides an additional tool for investors to use in understanding the company’s performance and trends, but note that the presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the financial statement tables of our earnings press release, which we have posted on our Investor Relations website at investors.alarm.com. This conference call is also being webcast and is also available on our Investor Relations website.

The webcast of this call will be archived, and a telephone replay will also be available on our website. With these formalities out of the way, I’d now like to turn the call over to Steve Trundle. You may begin..

Thanks, David, and welcome to everyone joining our call today. We are pleased to report a strong start to 2018 as our first quarter results exceeded our expectations. Our SaaS and license revenue in the first quarter was $68 million, up from $50 million in Q1 of 2017. Our adjusted EBITDA in the first quarter was $23 million, up 63% over last year.

In the first quarter, our team continued to execute on initiatives to extend our position as the leading platform for the intelligently connected property. Starting with our commercial platform, we announced Alarm.com for Business.

This new integrated solution is unique in the market and will help our service providers expand their opportunities in the small and medium-sized business marketplace. We released Alarm.com for Business to our service providers for general availability in early April.

As part of the offering, we designed and implemented a comprehensive training and certification program for our partners, which they must complete in order to distribute and install the offering.

We expect that this new platform will give our service providers an opportunity to grow their addressable market by attacking the small and medium-sized business space.

Key capabilities of Alarm.com for Business include proactive commercial-grade security, video surveillance, sophisticated user management, multi-location awareness and intelligent operational reporting all delivered via a single integrated platform.

In parallel and as part of our Alarm.com for Business solution, we also introduced a series of enhanced video cameras. These include the commercial-grade 726 mini bullet and 826 dome video cameras as well as the 736 outdoor bullet and 836 turret cameras. Lastly, we added a major new offering with the release of our new Smarter Access Control solution.

Smarter Access Control is a complete access control solution designed specifically for small and medium-sized businesses. We developed this solution based on lots of feedback from our service providers.

It is innovative in the way that it fully integrates with the Alarm.com cloud-based platform and works with our entire spectrum of services including video surveillance, monitored security and energy management and automation services. The solution is also innovative in the way we designed the user management software.

From a simple mobile interface, subscribers can intuitively establish permissions for all access points of a business and for multiple employees. Permissions span both access control and intrusion detections systems, and employees can be granted access to a facility with traditional access cards or directly with the Alarm.com mobile app.

Facility managers and security personnel can review the video associated with access events, receive door-specific alerts and create scheduled lock and unlock rules. During the first quarter, we conducted a beta program that included over 150 businesses.

We then publicly unveiled our Alarm.com for Business platform in April at the International Security Conference and Exposition known as ISC West. The reaction that we’ve seen thus far is encouraging.

We believe that by integrating access control with video, intrusion and energy management, we and our service providers can provide a unique range of highly valued capabilities at a very competitive price point. At ISC West, we also showcased our new line-up of devices for the residential ecosystem.

This included new locks, appliance switches, audio system integrations with Sonos and Legrand, our next-gen smart thermostat, a new streamed video recorder for 24x7 video recording and a 180-degree field of view indoor Wi-Fi camera with push-to-talk capability.

And of equal importance, we demonstrated a wide variety of partner growth and productivity services and executed training programs on these services onsite, all with a focus on strengthening our value proposition to our partners.

As in prior years, the highlight of the show, for me, was hearing how our service provides appreciate our strong support operation. Providing great partner support through both innovative technology and hands-on service is a key component of our strategy. We believe that we remain best-in-class in this area.

This belief was further validated when ICMI, a leading call center consulting firm, named our partner service center as a finalist in the category of Best Strategic Value to the Organization. We know how important it is to support our service provides when they need help, and we place a high level of emphasis on customer service.

It is our belief that our commitment to this part of our business helps our service providers sell more, helps them provide a better experience for the end customer and makes it more likely that they will remain our partner and continue to feature our products and services through time. I want to turn next to what we are seeing in the market.

We continue to see our service providers performing well. Through the first four months of this year, our service providers have collectively originated more new accounts than in the first four months of any prior year. This excludes contributions from Connect, which Alarm.com did not own in prior years.

The most successful service providers are those who focus on building a well-branded, service-oriented relationship with the customer. They emphasize their ability to make it easy for a potential customer to purchase an integrated smart home system that has best-in-class dependable security at its core.

I am frequently asked about the impact of new entrants on our market. It was 2014 when Google purchased Nest, Apple launched HomeKit and Samsung purchased SmartThings, so we have been watching the retail space carefully for over four years. Over these years, we have seen many DIY products from both startups and large technology companies.

Such products are typically positioned as cheaper alternatives to the products and services that our service providers offer. There are customers for these offerings as the market is very diverse, but the customer for retail products is not often our customer.

Our customers want a security system with smart home capabilities that is well-designed, cleanly installed, certain to work when needed and, perhaps most importantly, doesn’t create a new burden on their time. Our customer views their smart home system as a permanent investment in their home or business.

They value the fact that a local servicing company will stand behind the installation. They value the fact that the system will serve its purpose regardless of whether their broadband connection is up, their power is on or whether they are available to receive an emergency text message.

Our customer also wants to be sure that the data from their home is used solely for the purposes of keeping them safe and in control. So if a potential customer wants to have a professional security system and wants to enjoy the best of today’s smart home capabilities, then our service providers offer the best available option in the market.

And this is why we believe we are seeing continued growth along with our service provider partners. We don’t dispute that there is also a market for cheaper, typically retail DIY-oriented security alternatives as we ourselves dabbled in that market after acquiring the Piper product business.

This market is very competitive and the customer tends to be less interested in a comprehensive security system or a relationship with a service provider. They also tend to be more price-sensitive and interested in solving a specific narrow monitoring or automation need.

Because the lifetime value of these customer relationships is much lower, if positive at all, the retail market is generally not appealing for our service provider partners. Next, I want to provide more specifics about our planned marketing investments, as discussed last quarter.

We are investing more heavily in marketing programs this year to support the new release of Alarm.com for Business and to continue to differentiate our technology and our service provider partners with consumers in our target segments. We will also continue to help our service providers with co-advertising campaigns.

Most of these initiatives will get rolling in the second quarter and will continue through the rest of 2018. We do not view our 2018 marketing investments as a major new initiative, but rather as a resumption of a steady marketing effort and well-established programs.

In conclusion, we are off to a solid start to 2018 and we’re looking forward to the year ahead. Along with our service provider partners, we have a broad set of opportunities to execute against in both the residential and commercial markets.

Before turning the call over to Steve Valenzuela, I also want to welcome David Trone, who recently joined us to head up Investor Relations. Welcome, David. And with that, I’ll let Steve update you on our financial results.

Steve?.

Thank you, Steve, and good afternoon, everyone. I also want to welcome David to the team. David brings a wealth of experience to Alarm.com. He spent almost two decades as a sell-side research analyst and most recently transitioned to investor relations.

Next, I will review our first quarter 2018 financial results and then provide guidance for the second quarter and our raised outlook for the full year of 2018 before opening the call for questions. SaaS and license revenue in the first quarter grew 35% from the same quarter last year to $68 million.

This includes Connect revenue of approximately $9.9 million for the first quarter compared to $2.3 million for the partial quarter of Q1 2017, from the closing of the acquisition on March 8, 2017. I’d like to remind everyone that our Connect software offering has a slightly different deployment model than our Alarm.com platform.

Both solutions generate monthly fees charged to service providers sold on a per-subscriber basis. For Connect, the service provider typically deploys the software in their own network operations center using their personnel and equipment to operate the software.

The service provider also needs to purchase their own server capacity, network operations bandwidth and cellular services among other expenses they must incur. With Alarm.com, all the services I just mentioned are managed and hosted in our data centers and provided on a turnkey basis for our service providers.

Our SaaS and license revenue visibility remains high with a revenue renewal rate of 93% in the first quarter, consistent with our historical revenue renewal rate of 92% to 94%. Hardware and other revenue in the first quarter was $24.8 million compared to $24 million for Q1 2017.

Total revenue for the first reached $92.8 million, up 25% from $74.2 million for the same quarter last year. SaaS and license gross margin for the first quarter was 84%, consistent with our gross margin in the same quarter last year. Hardware gross margin was 29% for the first quarter compared to 23% for the same quarter last year.

The higher hardware gross margin in the quarter was mainly due to mix as we were supply-constrained in the first quarter on a few products that carry lower gross margins. We expect hardware margins to moderate in the future consistent with our historical range of 20% to 22%.

Total gross margin increased to 69% for the first quarter, up from 64% in Q1 2017. The higher gross margin in the first quarter is mainly due to a richer mix of SaaS and license revenue accounting for 73% of total revenue for the first quarter compared to 68% for the same quarter last year.

Turning to operating expense, R&D expenses in the first quarter were $20.4 million compared to $14.5 million in the first quarter of 2017, as we continue to invest in R&D given the significant opportunities we see in our markets. We ended with 460 employees in R&D and total headcount of 809 employees.

Sales and marketing expenses in the first quarter were $10.8 million, or 12% of total revenue, compared to $10.3 million, or 14% of revenue, in the same quarter last year.

We expect to increase our investment in sales and marketing throughout the remainder of the year as we roll out marketing programs to promote our new and expanded offerings including Alarm.com for Business and Smarter Access Control.

Also, as Steve mentioned, our major trade show of the year, ISC West, was held in Q2 and most of those expenses flow to sales and marketing in Q2. As we communicated on last quarter’s earnings call, we expect sales and marketing expenses for the year to be approximately 14% to 15% of total revenue.

G&A expenses in the first quarter were $16.2 million compared to $15.4 million in the year-ago quarter. G&A expense includes non-ordinary-course litigation expense of $3.3 million in the first quarter compared to $1.8 million in Q1 2017.

Non-ordinary-course litigation expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance. Non-GAAP adjusted EBITDA increased to $23 million in the first quarter, up 63% from $14.1 million in same quarter last year.

In the first quarter, GAAP net income increased to $10.5 million compared to $4 million in the year-ago quarter. Non-GAAP adjusted net income was $16.7 million in the first quarter compared to $7.8 million for the first quarter of 2017. Turning to our balance sheet, we ended the first quarter with $96.8 million of cash and cash equivalents.

In the first quarter, we generated approximately $3.5 million in cash flow from operations. We pay our annual employee bonuses in the first quarter, which totaled approximately $6 billion.

Other uses of cash in the quarter included $3.5 million for the payout to the founding employees of PointCentral per their initial agreements and prepayments of inventory of approximately $5.6 million.

We have now fully adopted ASC 606, the new revenue accounting standard, and, as previously indicated, this has not had a material impact on our financial results. We have added additional disclosures in our 10-Q as required per ASC 606.

Moving to our financial outlook, we expect Q2 SaaS and license revenue of $69.4 million to $69.6 million, and we are increasing our expectations for full year 2018 SaaS and license revenue to be between $284 million to $284.5 million. This compares to our prior outlook for SaaS and license revenue for 2018 of $282.5 million to $283 million.

We are also raising our guidance for total revenue for 2018 to $381.5 million to $383.5 million, up from our prior guidance of $380 million to $382 million. This includes our guidance for hardware and other revenue of $97.5 million to $99 million, which is unchanged from our prior guidance.

Recall that we indicated on the last quarter’s call that we expect a market shift to embedding some of our modules in some control panels in 2018, which helps to drive costs down for subscribers. We expect this shift to have more of an impact on our hardware revenue beginning in the second quarter.

We are increasing our expectations for non-GAAP adjusted EBITDA for 2018 to be between $82.5 to $83.2 million, up from our prior range of $81.5 million to $82.5 million. We expect adjusted EBITDA be lower than Q1 in each of the remaining three quarters of this year as we invest in marketing and R&D.

We expect adjusted EBITDA for Q2 and Q3 to be at about the same level and Q4 to be seasonally higher than Q3 by approximately 6% to 8%.

We are also raising our guidance for non-GAAP net income for 2018, which is now expected to be $57 million to $57.5 million, or a $1.14 million to $1.15 per diluted share, up from our prior guidance of $56 million to $57 million, or $1.12 to $1.14 per diluted share.

This is based on our non-GAAP tax rate of 21%, as we have previously indicated, reflecting the new U.S. corporate tax rate. EPS is based on an estimate of 50 million weighted-average diluted shares outstanding. We expect full year 2018 stock-based compensation expense of $11.5 million to $12 million.

In conclusion, we are pleased with our strong start to the year. We are excited about the opportunities ahead for us and our partners with our recent launch of our expanded SMB solutions, Alarm.com for Business and Smarter Access Control, among other new products and services. Thank you for joining us on our call today.

And with that, operator, please open the call for Q&A..

[Operator Instructions] Our first question comes from the line of Michael Nemeroff from Credit Suisse. Your line is now open..

Hey guys, this is Chris Rochester on for Michael. Quick question on commercial.

Could you maybe remind us of the size of the commercial market that you’re planning to address? And then maybe any sort of sense on the magnitude of the difference in ARPS versus your residential offerings?.

Yes. This is Steve Trundle speaking. North America size TAM, probably 4 million properties is how we would size that market. We don’t necessarily expect we’re going to get them all, but that’s how we would identify the market.

I think ARPU generally on commercial to us is approximately double the average, and to our service providers can be significantly higher than what they would obtain from a residential customer.

And that’s probably – those are the two questions, I think, right?.

Got it. That’s helpful. And then maybe kind of sticking on ARPS side. I’m sure this year with the addition of Icontrol that probably pulled down the blended ARPs a bit. And I know you don’t give subscribers or guide to that.

But as we kind of think about 2018 if more commercial is coming online, should we kind of expect that ARPS to potentially – that blended ARPS to potentially increase? Or will that continue to be offset by additions from Icontrol?.

I think it will be a function of what percentage of our mix comes from commercial. If it’s a modest amount, then I would expect, at least what we would model is probably ARPS in the ballpark of where we are today. Currently, approximately 2.5% of our accounts are on a commercial service plan.

So if we’re able to get the new offering in the market, get our dealers trained up and see that accelerate, it potentially can move the dial up a bit. But remember you’re moving it on a really, on a meaningful base, so it would take quite a few accounts to move that large base up too dramatically.

And then you kind of offset that with routine competitive pressures and routine incentives and what not that are a part of our relationship with our service providers. And I’m not sure we would, at this point, be comfortable modeling the ARP up.

I don’t necessarily think that the – with the Connect piece that’s still – it’s unclear exactly that that’s going to necessarily be pulling down the ARP, but I wouldn’t jump to model it up just yet..

And I’m sure, because you didn’t bring it up, there haven’t been any major developments with ADT.

But anything worth kind of calling out there as you think about potentially transitioning onto Alarm from Icontrol?.

Yes. Well, I guess with ADT, what I can say is we obviously continue to work with ADT. I think we’re excited about the things that they’re working on potentially in concert with us. And we’re excited about their roadmap.

I think I would be best served to allow ADT to, when they feel it’s the right time for them, to announce exactly what their new product or what their product may be. So I’m going to hold off on that, at this point..

Thank you. And our next question comes from the line of John DiFucci with Jefferies. Your line is now open..

Thank you. I have a question for Steve Valenzuela and then a follow-up for Steve Trundle. So Steve Valenzuela, everything looks good in the quarter, good momentum in the business, but cash flow was a lot lower than we were looking for. Especially when we look at the lower U.S.

tax rate, we would have expected you to benefit more than most, anybody in our coverage, a couple other players too. But it looks like the use of cash had a lot to do with working capital so I just want to make sure I understand this.

It looks like the other assets line and accounts payable lines, together there’s about a use of cash of $12 million to $13 million, which we didn’t expect. I guess can you explain what we’re seeing there and what we should expect moving forward? Will those things like get us the other direction next quarter? Or if you can explain it..

Yes, John, hi, this is sorry to cut you off there. This is Steve Valenzuela. Yes, in terms of the cash for the quarter, we did point out that there was a $3.5 million payment to the earning employees of PointCentral. That, of course, would not be reoccurring. There was also a $5.6 million prepayment for inventory of cash going out in Q1.

And then in Q1 we also pay our employee bonuses, the onetime per year. So there’s a number of events that occurred in Q1, which drove up the cash used to be to more than normally. But if you look at the past trend, typically our cash flow from operations is between $10 million to $15 million, which certainly seems reasonable going forward.

So there was just a number of unusual events that occurred in the quarter, which were more timing-related or one-time related. And then in terms of the tax, we definitely did benefit from the tax. Again, we don’t pay tax necessarily quarterly, right? But we did see a very good benefit from the new U.S.

corporate tax rate and we anticipate that quarterly benefit was around $2 million in Q1. But again, you wouldn’t necessarily see the cash benefit from that in Q1 because taxes are not paid necessarily every quarter..

Okay. Okay, and then just one of the things you said there, Steve. Because the bonuses, I mean you pay that every year.

The other things are one-timers, but that one is something that – I mean that happens every year at this time, right?.

That’s right. That’s a quarterly Q1 event. I will say we did have more employees this year. Keep in mind, Q1 of last year we did not have the full years’ worth of employees from the acquisitions we did, which added over 100 employees. So the bonuses this year were higher than last year. But those events occur typically in the first quarter.

We pay those out..

Okay, great. And then if I can, Steve Trundle, so it’s kind of – we’ve been hearing a little bit about the opportunity in the SMB for a while now and it’s great to see that you’re sort of expanding there, actually actively going after that.

But I’m trying to get a sense of the timing of this because you mentioned you had trained a bunch of service providers. I guess can you give a sense like how many are trained versus how many want to be trained? I mean I assume some service providers probably just stick with consumers.

And then, did we see any of that benefit of pushing into this market in the outperformance this quarter? Or is that really yet on the come?.

To answer the second question, I think it’s more or less still on the come line. So I think the earlier question about sort of percentage of service providers that we would train, we feel like 80% or more of our service providers have at least some commercial component of their business.

It varies dramatically whether it’s sort of 5% or whether it’s 50%, or there are even a few new ones that are almost entirely, if not entirely, commercial-oriented. So we’re recruiting those folks. They don’t automatically want to be trained, though. I do want to be clear there. We have to do some marketing of the product.

We have to do things, like the ISC West show, where we demonstrate the product. And we have to create some demand from the service providers and sort of win them over on the merits of the offering one by one, and then make sure the first couple of installations that they do goes pretty well. So I think we’ve beat the drumbeat.

We’ve talked about commercial in the past, and it’s kind of an ongoing dialogue we’re maintaining. The things that occurred in the first quarter, though, or really shortly after the first quarter, were some tangible elements on the commercial side.

First, I think we got more aggressive about distinguishing the brand of Alarm.com for Business and packaging things together correctly in a way that’s more fitting for a service provider, who is not just dabbling in commercial, but who wants to go win new business with their commercial offering.

Second, we launched a set of new video cameras that were purposely built, explicitly or only intended, really, for the commercial type of installation. And I referenced those a minute ago.

And then the third was, I think, the integration and the offering and the availability now of the access control component was a big move for us on the product side in the first quarter, running a pretty lengthy beta program in hopes that we’ve got the product right.

And then, making that product available coincident with ISC West gives us really, we think, the first instance of a product where the intrusion piece, the access control piece, the video piece and the energy management piece were all built by a single company and all built with kind of seamless integration in mind. And that’s showing through now.

At least in our early experiences, that’s showing through in the reaction that we’re getting to the user interface. Commercial folks are saying, "Well, this is incredibly easy to use for what it does." And that was our intent. So those were kind of the milestones in the first quarter.

We haven’t – I don’t think we saw any material lift in the first quarter from the commercial offering. And I think it will actually take quarters, if not years, to unfold. It’s just sort of another tailwind for us, an element where we can build some growth as we go out and get the service providers trained and then executing efficiently..

See, that’s really helpful, but it just begs my last question here. In your guidance for the year, and maybe this is for Steve Valenzuela, is it implied anywhere in there that there is this inflection point in this business? Because you just said it will take time, perhaps years.

But I’m just curious if, in that guidance for the year, you’re anticipating any material uplift in the commercial business..

I would say typically modest. When we’re looking at new products or new offerings, we typically we’ll guide based on what we know today and have a little bit of modest potential there. But again, we like to include in our guidance kind of what we know. And the commercial offering is new.

We actually just really introduced the Alarm.com for Business and Smarter Access Control in April. So it actually was in Q2. So I think it would be premature for us to really go out on the limb too much for the new offerings for 2018 in our guidance..

That’s what I hoped you’d say..

Thanks John..

Thank you. And our next question comes from the line of Nikolay Beliov with Bank of America. Your line is now open..

Hi, thanks or taking my question. Question for Steve, Steve Trundle. Steve, I have a philosophical question for you. When you look at the lifetime of Alarm.com, it took you, I think, five to six years to get to 1 million residential subscribers. Then you got to 2 million in a period of a couple of years as the market crossed the chasm, if you will.

When you look at the business going forward, both on the international side and commercial side as kind of the new growth levers for the company, is it reasonable to expect some sort of inflection in both or either one at some point? Is there like market demand trends or like things you’re doing on your side to kind of like cause that? Or it’s going to be like more gradual uptake versus the residential adoption curve that you saw in the past?.

Yes. It relates a little bit to the last question, which is why we wouldn’t really drive guidance up when we announce a new product. And the reason is that, as I said, you go win service providers one by one. Then you make sure that their first installation is well done.

And you’re basically building, if you will, a printing press that, with each new service provider, can sort of print extra newspapers. And it takes a while to get them built, but eventually you get them built and the volume of what you’re able to print is much higher. And that’s kind of what we’re always trying to do with service providers.

So we do think that international and commercial – and for that matter, we still see nice growth residentially in North America. We think all of these things are going to contribute to, at least on an absolute basis, nice steady continued growth of the base of subscribers.

But I don’t necessarily like to imply that there’s going to be, at some point, an inflection. But the counter to all of this is always, as the base gets larger, you’re obviously replacing a set of subscribers, as well, that are attriting on a routine basis so that creates a little bit of a headwind.

But on the whole, we think with the breadth of the offering and the ongoing growth in North American residential as well as sort of adding on the commercial international and then some of the things we have going on in the subs give us enough different angles to attack the TAM, that we can continue to drive nice subscriber growth..

And a follow-up for Steve Valenzuela.

Steve, can you give us an update on the other revenue line? What are the big buckets and what the growth rate – what was the growth there that you saw in the quarter?.

Steve Valenzuela.

You mean the other segment, when you say other line?.

Correct..

Yes, actually we saw good growth in the quarter in the other segment. SaaS revenue grew over 70% over the last Q1 of 2017, but it is off of a small number. It’s less than 5% of our overall revenue as we break that out in our Qs. But we’ve seen good growth.

We didn’t really comment on it this quarter because we have so much going on with ISC West, with the new product announcements, but we’re seeing some good growth in the other segment..

Thank you..

Thank you..

Thank you. And our next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is now open..

Great. Good afternoon. Thanks for taking my question. I wanted to follow up on some of the DIY comments in the prepared remarks, and I want to talk specifically about DIY installation coupled with professional monitoring. So my question is for Steve Trundle.

Are you seeing that in your dealer conversations comes up more, the dealers having that conversation come up more with their customers? And how do you think about Alarm.com’s ability to participate in that particular niche of the market particularly if it’s able to open up the TAM a little bit because of the price elasticity associated with lower installation costs?.

Right. So does it come up with our service providers? It does come up in two different ways. One is service providers are anxious, in some cases, to participate more in the DIY market, which I would differentiate, by the way, from the retail market a bit.

They consider providing a solution to the customer that is with professional-grade equipment that they then can support themselves that offers our service and that includes professional monitoring, and it’s a very curated kind of high-touch, high-service experience.

And some have been very successful in that domain, and therefore we do reasonably well, I think, in what we call the DIY with pro monitoring segment with a few service providers in particular that have been strong performers there.

The second discussion is sometimes, "Well, are we worried about the retail products being overly predatory to the offering of the service provider? And how should the service provider respond?" Most of that tends to be – there tends to be discussion about that, but when we look at the results, we find it to be sort of a good discussion, but not something that necessarily necessitates action.

The service providers continue to find customers that want what they sell and want those things that I sort of talked about a few moments ago. So it tends to be more of kind of an abstract conversation..

That makes sense.

And as a follow-up, on the success that you’re having with the marketing spend that you’re upticking this year, how do you think about measure – well, how do you think about measuring the success on the marketing campaigns that you’ve put in place for this year? And what are some of the key messages that you’re focused on communicating in that marketing to consumers?.

Yes. The measurement on marketing, especially if you’re in a channel or in a business – we don’t sell directly to customers so when we do marketing we’re not attempting to drive a lot of direct response activity. We want our service providers to be more successful selling.

So it’s therefore hard for us to really get great measurements on the efficacy of the spend. That said, we do believe that – we have service providers all over the spectrum. Some are very small without any marketing budget. Others have meaningful marketing budgets and have really created a great brand in certain markets.

So I think the things we hope to do are, first, we want to begin to get the word out on Alarm.com for Business.

We feel like, much as we educated the market three, four, five years ago on what a smart home system with security should do, where we spent fairly heavily on that, we want to educate the small business owner in particular on what a smart business security system should do.

And we feel like that’s going to take a mix of various formats to get that message out. And that will make it easier for our service provider to walk into that small business and make the sale if the owner has seen the brand and has seen the differentiation that we’re trying to drive. So that would be the first goal.

The second would be to be a little more supportive.

At this point, we don’t need to educate the residential consumer on what the IoT enables, but we do need to probably, in my opinion, do a better job informing them of the various paths to purchase that they can take and make sure that they’re aware of the ability to kind of go with a low-risk, kind of lower-effort deployment of their smart home system by contacting one of our service providers.

So we likely will highlight some of the investments in time that one needs to make on a persistent basis to keep a system working, probably highlight some of the deficiencies in some of the other alternative products that are out there and again, give our – some of this is training the service provider personnel themselves.

If you’re a salesperson at one of our dealers, you feel better about what you’re selling and you’re better equipped with the talking points to make the sale if the technology provider, which, in this case, is Alarm.com, is messaging those same points and you’re hearing them on the radio or you’re seeing them online.

So we want to make sure we get those points across and that we’re amplifying some of the messages of our service providers. Then the last is really just, in certain markets at times, we will support a service provider with a co-marketing campaign that is partially branded Alarm.com. And that’s been successful.

Our service providers can implement direct sort of calls to action so those become more measurable. And when we see those sort of being good investments, we’ll make them over and over. So those are the three real goals there..

Do you have a sense for what the average lag time is between marketing dollars going up and subscriber growth going up?.

I really don’t. That’s – it’s not – I don’t know that we’ll necessarily see it in the near term.

I think if we had a lever like that that was sort of easily discernible and we could see that an incremental $5 million in marketing generated, six months hence, an extra 25,000 subscribers or something like that, then our job would be much easier and we’d be much more confident putting more investment on the marketing side.

The reality of our business is things with the channel that we operate through, it takes a while and it’s very hard to measure exactly the source of the incrementally positive results..

Gabriela, I would say if you look at our marketing spending. Sorry. If you look at our marketing spending, typically the magic number is one and payback is 12 because the amount of marketing spending in a prior year is less than the actual incremental SaaS and license revenue we generate in the following year.

So we typically have a very good payback period for marketing, but it’s hard to tell exactly of what programs are driving those numbers, but just give you an overall stat for marketing that we kind of look at..

I appreciate the color. Thank you very much..

Sure. Thank you..

Thanks..

Thank you. And our next question comes from the line of Matt Pfau with William Blair. Your line is now open,.

Hey guys, thanks for taking my questions. First, I was hoping if we could get an update on the international business and perhaps what geographies you’re seeing the most traction in. And then also you mentioned previously entering some new geographies this year, so maybe just an update on how that’s progressing as well..

Sure. Yes, good question, Matt. I didn’t touch upon that. But international has continued. I think I touched upon it a little bit after the fourth quarter that we were feeling better about the progress that our international team was making.

We were beginning to see some of the what I had previously described as impedance in the system, some of that impedance being resolved in terms of getting the right ecosystem of products, the right actual hardware products and carriers integrated to support a wider number of markets and then to enable our service providers to have optimal installation experiences.

So that’s going – continues to go pretty well. I believe, at this point, we’re in approximately 30 different geographies outside of North America. The dominant ones continue to be Latin America, Australia, New Zealand, Turkey, and then I think we’re seeing some uptick now in Western Europe.

We’ve talked in the past on this call about one partner in particular, which is Securitas, and it’s taken some time to really begin to get the deployments underway there, but I think they’re now underway in a few more markets.

So we’re generally seeing a nice, expected but nice – it’s nice when you have an expectation and it actually occurs – an expected result from our international team. And to give you one data point, at this point, we’re over 100,000 subscribers outside of North America..

Got it. And then also wanted to hit on the commercial business. And so if you look at a lot of small businesses out there, I mean my guess would be most of them have a security system installed due to requirements from their insurance policy, most likely.

So I guess when you think about your dealers going out there and targeting businesses and further penetrating smart systems into the commercial market, is it driven more by new business formation or businesses opening up new locations and then needing a security system? Or how do you get existing businesses with security systems to switch over to a smart system?.

Right. So I think that the service providers will go to their existing base of subscribers. And it’s in the interest of our partner to try to drive higher value to their customer.

And a couple of things now that are coming together that I believe, and we believe, can drive much higher value for a commercial customer are the combination of our access control offering and the video offering, particularly when you note that those capabilities can be tightly integrated with the intrusion system whether it’s new or existing.

So I suspect therefore that there will be a lot of upsells on the existing base of commercial customers. But beyond that, it will be a mix. There are also new business formations, folks that maybe didn’t think they needed an intrusion system, but do need an access control system. So I think we’ll see kind of an overall mix.

I think, though, that there is plenty of room in many existing small business accounts that may have an access – or, I’m sorry – an intrusion system that’s sort of a relic of the 1990’s to go in and say, "Do you like what you have? Is it working for you? Does it add a lot of value to your business?" and if the customer flinches on one of those questions, be in a position to present a much higher value proposition that would actually help them more effectively operate their business.

So I think that’s what we’ll be doing..

Thank you. And our next question comes from the line of Jeff Kessler with Imperial Capital. Your line is now open..

Thank you. And Thank you for taking my question. A question for Steve and one question for Steve Valenzuela. Getting back to commercial again. There is, I think most of the non-security marketplace doesn’t understand how much – what percentage of penetration there already is with regard to commercial. And as you said, it goes from 5% to 100%.

Many, many of you, I think, of your better and mid-sized clients already have a significant amount of commercial in there. And they’ve bought from, in the past, they’ve bought from companies who claim to have integrated product, unified product. There’s a lot of words that go around it. It doesn’t always – these don’t always integrate.

Sometimes they do.

How are you going to go in there and get your value proposition across that it’s really easy, it’s really – it’s easy to install, easy to use? And up to what point can you push that value proposition?.

Right. It’s a good question, Jeff.

Yes, I think it starts actually with something I commented on in my prepared comments, which is what type of company are we in the way that we provide service to our service providers? Do they trust us? Are we the type of company they want to do business with? And my experience thus far and when I talk to the service providers is that the investments we are making in supporting our dealers are second to none.

We really do try to work very hard on that. And that, before you ever get to the product features, often times that’s the most important thing. A person that’s out there trying to get an installation done or having a problem wants to know that a company they’re dealing with is going to treat it as a priority and get it resolved.

So we’re lucky that we’ve built that reputation. It allows us to go to a service provider and start with that as the value proposition. Before we ever get to the features, we can talk about how much they like using the dealer site, how it makes their business better, how all the reporting we do makes their business better.

And then they say, "Well really, if Alarm.com is comparable even on some of these other features, all of the other value-add they’re doing for me justifies trying to put more in that basket." That basket meaning the Alarm.com basket. And we start there and then, of course, we can get into some specific capabilities.

And I think one of the things I highlighted in my comments is the ability, for example, to let a facility manager simultaneously manage codes on an intrusion panel and access to the facility all in sort of one integrated way is something that we’re not seeing too many other places.

The ability to control a v-way block that may be appropriate for one facility in the context of the overall access control system is something we’re not seeing too many places. So we find those use cases. We get them to do at least one installation. And then hopefully, and what we’ve seen thus far, is that the installation is easy.

That’s the most important thing. And they can envision it being easy for their consumers and we can begin to drive some replacements in that base..

Okay, great. Steve Valenzuela, you began to talk a little bit about the other businesses. You folks mentioned one that seemed to be doing well. Could you go through – I mean you have a number of, quote-unquote, other businesses, some of which you talked a lot about last year, some of which you haven’t talked about lately.

If you could just update us on everything from second homes to hotels to power, things like that..

Hi, Jeff. It’s Steve Valenzuela. Yes, within our other segment we have PointCentral, which provides unattended access for vacation rental property managers. And last quarter we actually announced a large REIT, the expansion of a large REIT with Invitation Homes, which we’re quite excited about. That will take some time to roll out.

But PointCentral is doing quite well. Then we have EnergyHub, which provides an energy management system, demand response, energy management for the utilities. And that’s actually had a good contribution in the fourth quarter from a seasonal energy savings that comes in the summer, but we record it in the fourth quarter.

And then, Building 36 with HVAC is a smaller piece of the other segment, but an opportunity we see given the opportunity to do some of the similar things we’ve done for security with HVAC. So we see good opportunities in all those other segments.

Again, those are still very small and less than 5% of our overall revenue, but we are seeing a good growth, as I mentioned earlier in our call..

Okay. One quick final question. For the providers, the service providers, their margin on installation for commercial industrial stuff, as we call it, is usually a real margin as opposed to an investment in a customer.

Is there some type of financial model that you have to look at now when you talk to your service providers who may actually be making money on an installation?.

Yes. So that’s a good question. They do typically have lower creation cost on a commercial installation.

In some cases, I think what you’re alluding to is the actual integration of a bunch of disparate products can be a fairly profitable exercise so there may be some reluctance to take on a product that doesn’t drive that kind of less than necessary activity.

But so far what we’ve seen, and again it’s early days, is when the – the service providers are busy. They don’t have much time. They’ve got – they’re constrained by the number of technicians they have.

So generally speaking, when the service provider sees a more efficient path to get to a recurring revenue stream, even if that means perhaps he or she is able to do a little bit less integration work because it’s not necessary, they still will generally favor the product that gets them most efficiently to the recurring revenue stream.

So I think we’ll probably be okay there..

Okay, great. Thank you very much in quarter..

Thank you..

Thank you. And our next question comes from the line of David Gearhart with First Analysis. Your line is now open..

Hi, good afternoon. Thank you for taking my questions and congratulations on the strong quarter. So just on the last questions on the other business areas, just wondering if you can give me an update on the HVAC channel.

I think you had mentioned before that you’ve signed up 40 to 50 dealers in HVAC to push your offerings, whether it’s Building 36 or energy management home automation. Just wondering if you could give us an update on the number of dealers and the traction you’re seeing there, even though it’s small..

Hi, David. Yes. The number of dealers, I don’t know if I have that data point in front of me.

I probably can speak in generalities and just say that the team has been pretty busy with our next-gen smart thermostat, which – the Building 36 team, in addition to building their channel, is also sort of an expert group on how to develop a thermostat that will work with all of these different HVAC systems, which is then resold through the Alarm.com channel, through the PointCentral channel and others.

So they’ve been somewhat occupied with that effort. They have continued to build their channel. I would say, though, that we still don’t feel that we have completely hit the nail on the head in terms of the platform that we are making available for them to take out to the market.

So while we’re working with an ever-growing number of service providers there on the HVAC side, we’re not yet to the point where we really want to take a full swing, if you will, at that channel until we feel like we’ve got everything developed correctly. So you see some features that we’ve kind of alluded to.

I think we talked, at some point, about HVAC safeguards as an example. Maybe that was at CES I believe we announced that capability. You can imagine that would be super valuable to that channel.

And until you’re really putting it out there and you’re able to take sort of the first 50 to 100 service providers and get them successful with it, you don’t want to necessarily pile on a ton more. So it’s still, in that case, with that business, probably early days.

And I would say that we’re still at a point where we’re intentionally constraining, at some level, the rate of growth of their dealer network until we feel like we’ve hit the nail on the head with the capability set..

And then sticking with the channels, in the past, I think you’ve mentioned that there are some additional channels that you could target, whether it’s insurance. I think of smart entertainment or areas like that, that could be an interesting channel, whether it’s audio/visual dealers and what not.

Just wondering if you can give us quick thoughts around alternative channels or just enough on your plate an opportunity that not really looking to add on anything at this point..

Yes. I think we’re always open-mined about new kind of channel opportunities. We do apply a kind of an economic filter to each opportunity. So two that you’ve referenced; insurance, we think there is tremendous value in the data that we are able to generate from a home.

And we think that that data set can make not only the customer safer, more aware of their property, but also can allow the insurance company to be more precise in how they underwrite a property. So there we think there’s a ton of economic value that can be generated with various types of partnerships.

And particularly outside of the U.S., our international team has been successful in cultivating and then closing a couple of partnerships that do exactly that. A/V and that sort of thing, I think the A/V space is a little bit more crowded. It is almost purely an automation play.

And I think we need to provide ample functionality to sort of allow the customer to control everything in their home. But I likely would not move to drive to really fully adopt that channel. We haven’t come up with a play that we think passes the economic filter to justify heavy investment in A/V, as an example..

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

Okay, thanks, good afternoon. Steve, you alluded to the retail lifetime value of a customer being low and maybe not even positive in that space.

What is it for Alarm.com new subs? And can you maybe tie that into justifying increased spending or customer acquisition costs in light of that?.

Yes. This is Steve Valenzuela. We’ve looked at the LTV to CAC ratio. Typically over six for us. And the lifetime value of our subscribers tends to be quite long. Usually they will start with a 36-month or a 60-month contract and they will then tend to renew. We have a high renewal rate.

So we actually believe that there is a good amount of average eight to 10-year life for a typical subscriber. Of course, there is churn that does occur from time to time. But I think we’re pretty lucky that we have such a high revenue retention rate..

Okay, that’s helpful. And there was a question earlier regarding ADT. I just wanted to ask about that. Just to clarify, they’re investing in a lot of the new commercial offering.

Are they using Connect or Alarm.com for that? Can you help us with that? And if not Alarm.com, why not, with what would appear to be a new offering?.

Yes. So a couple different things there on that question, Adam. In terms of what ADT is using, as I think we’ve, in the past, said that there is use of both the traditional Alarm.com platform and the Connect platform. That continues to be the case. It varies a bit by, at times, even by their dealer.

So that – and some of their dealers in some part of their business may use Alarm.com for commercial. Other parts are still primarily on the Connect platform.

And Connect, at the moment, we have not implemented a commercial set of capabilities on the Connect, but they’re more than likely using the residential plans, which still offer quite a bit of capability for a small business on the Connect side.

In terms of their direction, we obviously would hope to have the opportunity to work with ADT if we can add value to their commercial strategy, but I can’t say, at this point, that they’ve gone through any sort of RFP or otherwise, and that we’ve won any incremental new business there that’s tied specifically to commercial..

Thank you. And our next question comes from the line of Darren Aftahi with Roth Capital Partners. Your line is now open..

This is Dillon on for Darren and thanks for taking my question. I wanted to touch really quickly on international and see if you – sort of what your outlook is there, if you’ve made any progress. Or sort of a lot of the investment has been on commercial in rolling that out and then also the access control updates.

And then also with sort of some of your video products, you’ve had machine learning implemented, and I was wondering if there’s also some new use cases there with machine learning across the whole platform..

Sure. On the international side, I had a question on that a little earlier and went into some detail on that. We are making progress. It continues to be growing. The geographies are expanding.

So generally positive there, feeling pretty positive on the – this quarter, I think with the breadth of announcements we had at ISC West, it made sense for us to focus a little bit more on what we’re doing. And each quarter we’ll focus on something different, but this quarter the timing was right to spend some time on the commercial offering.

With regard to machine learning and AI, in a sense, Alarm.com has long implemented at least some form of machine learning. We’re collecting a ton of data about a ton of different properties and then, in some cases, making predictions based upon that data set even before we get to video.

Currently, the focus, though, is very much on video analytics and convolutional neural network deployments on the edge in the devices. So that’s where most of the AI/machine learning type of investments are being made.

And we’ve talked about the capacities of the team we acquired from ObjectVideo to work in that domain, and they’re making good progress and we’re excited about some of the things that we hope to deploy later this year..

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

This is Rushif [ph] for Mike Latimore. Thanks for taking my call.

What percent of hardware sales included alarm radio in this quarter?.

I’m sorry.

The question was hardware sales in the quarter?.

Hardware sales where the Alarm.com manufactured radio was included..

Oh, I see. Okay. I got you. Okay. Yes, we actually haven’t broken that out in the past. I think what you’re alluding to, perhaps, is we’ve talked about the modules. Some modules going forward will be embedded in some control panels. We didn’t see a major change in the quarter.

We said we would expect to see more of that impact in the second quarter for hardware revenue..

Yes. I guess would probably – we don’t have that data point directly in front of us, but I think what we said is if we rolled the clock back a couple years, about half of the new installations were coming with the radio manufactured by Alarm.com.

We saw that dropping to something in the 35% to 40% range, and that trend is underway but didn’t impact us much in the first quarter. We expect it, though, to kind of continue at a slow pace, to see a higher percentage of accounts on a going-forward basis likely coming from controls that where we’re not making the radio..

And one more on the commercial side.

So do you see you commercial offering exceeding 5% of revenue by this year end?.

I am guessing, but the guess would be no, given the base that we have and given the place where we are with the product at the moment. I would not expect 5% to be from commercial, no..

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

Steve V., you provided Connect SaaS revenue for the first time in a while.

Did I hear you correctly, it was $9.1 million?.

The actual number for Connect revenue for Q1 was $9.9 million compared to $2.3 million in the quarter last year..

Okay. So that’s ahead of my kind of internal estimate. I just want to touch upon the kind of the ARPU/subscriber dynamic with Connect.

Is there a – is that solely driven by subscriber growth? Or is there ARPU lifts in/ARPU growth within the Connect subscriber base?.

There are different levels of plans in terms of various different levels of plans for the Connect platform.

But again, keep in mind, as I said on the prepared remarks that Connect we license the software to our service providers, for the most part, and the service providers have to incur the whole hosting, their people, managing the service, the cellular fees.

And so it’s a different type of deployment than an Alarm.com platform offering from our other service providers..

So within the world, though, of that software, a customer that takes, for example, a rich video subscription would be on a different plan than a subscriber who is really just doing interactive security or interactive security and automation..

Got it.

So that holds true for both the core Alarm platform and the Connect platform then?.

That’s correct..

And then just a follow-up for Steve T. With over, I think you mentioned over 100,000 subscribers are located outside North America.

Are international subscribers entirely supported by the Alarm core platform? Or is there any Connect mix in there?.

That’s 100% Alarm.com..

Okay, thanks.

And then are the ARPU pricing dynamics between Alarm North America and international dealers the same in terms of like the basic plan per month that Alarm receives and then premium ARPU lifts for attached services?.

Generally in the same ballpark and definitely the same structure..

Okay.

But the dollar amounts might vary?.

You get into like currencies. Obviously, the size of service provider, I think, is probably more of an impact than the market. But, as is the case, even in North America across service providers, there will be variance. But we’re not really doing kind of market-specific pricing schedules..

Thank you. And that does conclude today’s Q&A session. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day..