Ladies and gentlemen, thank you for standing by and welcome to the Alarm.com's First Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, David Trone, Vice President of Investor Relations. Thank you. Please go ahead sir..

Thank you. Good afternoon, everyone and welcome to Alarm.com's First Quarter 2020 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, each from their separate offices as we are following social distancing practices.

Before we begin, a quick reminder to our listeners.

Management's discussion during the call today will include forward-looking statements, which include projected financial performance for the second quarter and full year 2020 and key assumptions underlying the guidance, including the timing and amount of installation activities by the fourth quarter of 2020; anticipated impact of the global economic uncertainty caused by the COVID-19 pandemic on our business, including on our hardware sales and our SaaS and license revenue growth rate and on anticipated market demand for our offerings; our business strategies, plans and objectives for future operations, continued enhancements to our platform and offerings, opportunities for growth in our current markets 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 began, believe, continue, estimate, expect, indicates, may, project, will, and other similar words 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 on February 26, 2020, and in subsequent reports that we file with the Securities and Exchange Commission from time to time, including the updated risk factors section of our quarterly report on Form 10-Q that we intend to file with the Securities and Exchange Commission shortly after this call, that could cause actual results to differ materially from those contained in the forward-looking statements.

Please note that the forward-looking statements made during this conference 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 commentaries will include non-GAAP financial measures and provide non-GAAP guidance.

Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in understanding the company's performance and trends but notes 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 statements tables of our earnings press release, which we have posted to our Investor Relations website at investors.alarm.com. This conference call is 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. So with these formalities out of the way, I'd now like to turn the call over to Steve Trundle. You may begin..

Thank you, David. Good afternoon, and welcome to everyone. We're pleased to report solid Q1 results to start off the year. Our SaaS and license revenue in the first quarter was $91.9 million, up 14.9% over last year. Our adjusted EBITDA in the first quarter was $29.2 million.

I want to thank our service providers and the Alarm.com team for their contributions to our results and for their ongoing performance during these challenging times. We carried significant momentum from last year into the first quarter.

During most of the quarter, the market continued be very healthy for us on a number of dimensions, including commercial, video, energy management and international. This momentum, along with confident execution, led to solid financial results.

In the first quarter, we had a record level of hardware sales that were driven by subscribers continuing to add video to their smart home systems at an increasing rate, with many also choosing to further enhance their system with our AI-enabled video analytics capabilities.

Our R&D program also continued to deploy new technology in key areas throughout the quarter. We introduced a series of capabilities to both simplify and enhance the experience for more sophisticated subscribers with more advanced systems.

We made it easier for video analytics subscribers to discover and share video clips of important activity from the Alarm.com mobile app. We introduced our seen feature to our Apple Watch app to make controlling multiple automation devices more convenient.

We also expanded our upsell engine and launched a new portal that makes it easier to upgrade existing systems with self-installed devices.

On the Alarm.com for Business platform, we launched a commercial-grade strain video recorder, which gives our service providers a competitive and differentiated solution for supporting larger video installations in the SMB market.

We also launched video health reports for commercial video customers, which provides a monthly update on the condition of video cameras and stream video recorders. This ensures continuous, uninterrupted video coverage.

During the quarter, we also worked hard to begin onboarding some large new international partners, and our subsidiaries continue to build their product offerings and market opportunities.

Our subsidiary PointCentral successfully acquired Door Fort which is an innovative start-up that provides a software-based access control solution for multifamily dwellings.

And EnergyHub announced a new relationship with Baltimore Gas and Electric, the largest electric and natural gas utility in Maryland with over 1.25 million residential electricity customers.

In this relationship, EnergyHub and BG&E will enable a first-of-its-kind electric vehicle-charging program that incentivizes off-peak charging and minimizes grid impacts as the adoption of electrical vehicles increases.

Next, I want to shift in more detail about what we have seen in the markets we serve since the COVID-19 pandemic took hold as I'm sure that this is an area of interest for our investors.

As we approach the middle of March, the lockdown measures put in place to combat the novel coronavirus began to reduce service provider's ability to sell and install new security or smart IoT systems for both homes and businesses.

Homeowners began sheltering in place and social distancing, and some were more reluctant to schedule system design appointments or installations with our service providers, particularly in the more urban markets. Some businesses that might normally be candidates for our commercial offerings were temporarily shuttered.

Both businesses and consumers generally moved from conservative resources as the state of the economy became more uncertain. And some of our service providers delayed marketing campaigns that they typically kick off in the spring or generally scaled back their operations in an effort to protect their employees.

As the weeks were on, many of our entrepreneurial service provider partners moved to adapt to these conditions. They began actively emphasizing more of a distant selling model and also providing their technicians with PPE required to conduct nearly thorough installations and repairs.

As a result of these steps, we have begun to see sales and installation activity turning back upwards in the last week or so. We hope that this initial positive momentum continues to build. Some North American markets have been less impacted than others.

This seems to be largely a function of where the virus has spread widely or has been relatively contained. In some areas, our service providers have continued on a relatively normal trajectory in April. On an overall basis, we are currently seeing installation rates running at about 70% of what we would characterize as normal.

Our best guess based on what we see today and recognizing that we are probably better at IoT technology than we are at epidemiology is that installation rates will gradually recover as the year progresses to about 95% of normal by the fourth quarter.

In general, we believe that the COVID-19 pandemic is simply pushing out the time line for fulfilling underlying demand until conditions allow our service providers to get back into homes and businesses broadly.

Revenue retention is holding at expected pre-COVID, indicating that existing subscribers who are responsible for the bulk of our revenues are not choosing to terminate their security or smart property services.

As we've seen in previous economic downturns, most people continue to place a high priority the safety and security of their businesses or families during this uncertain time. Other key metrics we are watching are hardware sales and DSOs. Hardware sales are down in April after a very strong first quarter.

This essentially confirms the lower installation rates we're seeing. DSOs are stretched to some degree but remain at a manageable level. Internally, our focus has been to ensure the safety and health of the Alarm.com team and to maintain the reliability of our services for the millions of people who depend on them.

We proactively implemented numerous steps to protect our workforce ahead of government measures. We are fortunate that our employees have remained healthy, and our teams remain productive. We are also continuing to execute on the bulk of our recruiting plan, which will be important to our future growth.

During this time, we've also been working closely with our service providers so they can continue to build their businesses during the lockdown. One example is our extensive online program.

We designed a training program to keep installation, support and sales teams proficient with our latest capabilities like video analytics and our commercial offerings. The number of course completions by technicians increased significantly in April. The Alarm.com Academy also ramped up the number of live training webinars we offer each week.

We believe this investment in training during the lockdown will give our service providers a more solid foundation upon which to pursue growth opportunities as macro conditions improve. In summary, we remain confident that we can continue to advance our strategy through this period.

We have a lot to be thankful for, and I want to thank our service provider partners, our ecosystem partners and the Alarm.com team for their hard work and our investors for their trust in our business. And with that, let me turn things over to Steve Valenzuela.

Steve?.

Thank you, Steve. I will begin with a review of our strong first quarter 2020 financial results and then discuss guidance before opening the call for questions. SaaS and license revenue in the first quarter grew 14.9% from the same quarter last year to $91.9 million.

This includes Connect software license revenue of approximately $9.7 million for the Connect software which is now primarily deploying a new platform that is powered by the Alarm.com SaaS software that we operate and host for the service provider.

Our SaaS and license revenue visibility remains high with a revenue renewal rate of 93% in the first quarter, in the middle of our historical range of 92% to 94% and only slightly lower than last quarter by approximately 20 basis points. Hardware and other revenue in the first quarter was $60 million, up 86% over Q1 2019.

We continue to see strong sales of our video cameras, which primarily accounted for a large increase in hardware sales. Hardware revenue in the first quarter also benefited from our acquisition of OpenEye, which closed in Q4 2019 and contributed $8.2 million in hardware revenue in the quarter.

Total revenue of $151.9 million for the first quarter grew 35.3% from Q1 2019. SaaS and license gross margin in the first quarter was 86.6%, up approximately 200 basis points from Q1 2019 gross margin of 84.6% due to improved efficiencies we have been able to achieve in our operations.

Hardware gross margin was 23.9% for the first quarter compared to 17.5% for the same quarter last year, primarily due to product mix and inclusion of OpenEye, which has a slightly higher hardware margin. Total gross margin was 61.8% for the first quarter compared to 65.3% for the same quarter last year, mainly due to the increase in hardware revenue.

Turning to operating expenses. R&D expenses in the first quarter were $39.7 million compared to $26.5 million in the first quarter of 2019. R&D expense in the quarter includes approximately $4.4 million for in-process R&D for two small asset acquisitions.

We ended the first quarter with 650 employees in R&D and total headcount of 1,227 employees, up from 519 employees in R&D and headcount of 938 in the year ago quarter. Sales and marketing expenses in the first quarter were $17.1 million or 11.2% of total revenue compared to $13.2 million or 11.8% of revenue in the same quarter last year.

Our G&A expenses in the first quarter were $20.9 million compared to $19.2 million in the year ago quarter. G&A expense in the first quarter includes non-ordinary course litigation expense of $2.5 million compared to $5.5 million for Q1 2019.

Non-ordinary course litigation and acquisition expenses are part of our adjusted measures and are excluded from our measurement of our non-GAAP financial performance. Non-GAAP adjusted EBITDA in the first quarter of $29.2 million grew 20.4% from Q1 2019.

In the first quarter, GAAP net income was $8.8 million compared to GAAP net income of $9 million for Q1 2019. Non-GAAP adjusted net income increased to $20.9 million in the first quarter compared to $17.2 million for the first quarter of 2019. Turning to our balance sheet. We ended the first quarter with $171.7 million of cash and cash equivalents.

We have a strong balance sheet and cash flow-positive business model. To provide additional flexibility, we drew $15 million on our revolver in March as macro-level economic uncertainties began to emerge. We do not expect to use these funds for operating purposes.

Our total bank debt is $113 million of our available $125 million revolver, which expires on October 2022. During Q1, for the first time, we activated our $75 million Board-authorized share buyback plan and used $5.1 million of our cash to buy back 147,153 shares of our stock at an average price per share of $34.97, excluding commissions.

In the first quarter, we generated approximately $12.9 million in cash flow from operations compared to negative $1.2 million cash used in the first quarter of 2019. Our free cash flow for the first quarter was $9.2 million compared to negative $4.1 million cash used for the same quarter last year.

In the first quarter, our capital equipment purchases were $3.7 million compared to $3 million in Q1 2019. Next, I will review our outlook for the second quarter in 2020. This is a challenging period to forecast, but we are providing guidance based on what we know today.

There are many unknowns with regard to the pandemic, including the timing of the reopening of economies and how this impacts our service providers, their existing and potential customers and our supply chain, among other factors. Our guidance should be considered in this context.

For the second quarter of 2020, we expect SaaS and license revenue of $92.4 million to $92.8 million. For the full year of 2020, we expect SaaS and license revenue will be between $375 million to $380 million, which is about 99% of our guidance.

We are forecasting total revenue for 2020 of $515 million to $535 million, which includes hardware and other revenue of $140 million to $155 million. We believe hardware revenue in the second quarter will be significantly than the first quarter.

We are updating our estimate for non-GAAP adjusted EBITDA for 2020 to be between $100 million to $103 million. Non-GAAP net income for 2020 is estimated to be $69 million to $73.5 million or $1.36 to $1.45 per diluted share. We expect our non-GAAP tax rate to remain at 21% for 2020.

EPS is based on an estimate of 50.7 million weighted average diluted shares outstanding. We expect full year 2020 stock-based compensation expense of $26 million to $28 million. In summary, we are pleased with our strong start to the year.

We believe that our strong balance sheet, positive cash flow and recurring subscription-based business model will allow us to weather the current environment. We will continue to work hard to support our service provider partners and their customers during these challenging times. And with that, operator, please open the call for Q&A..

[Operator Instructions] I show our first question comes from Adam Tindle from Raymond James. Please go ahead..

Okay, thanks, good afternoon. I just wanted to start, Steve, on guidance for SaaS and license revenue for fiscal 2020. Essentially unchanged which is quite impressive.

If you could maybe just talk us through some of the metrics that gave you confidence to reinforce that? And I guess, more specifically, looking for obviously, gross adds are likely going to be challenged, but ballpark of kind of how much or what you're seeing, churn trends, retention rate declined modestly, still very healthy, but decelerated a little bit, so any assumptions there and ARPU trends.

So gross adds, churn and ARPU would helpful in thinking about the full year guidance?.

Sure. This is Steve Trundle. And Steve, you can chip in if there's something I missed. Yes, we looked at things pretty carefully. I think we're very fortunate that a lot of our service providers are just very entrepreneurial, and they have adjusted practices some, so they're continuing to do business.

In most cases, it really depends some on the area of the country or the area of the world. In my prepared remarks, I noted that currently, we were off in terms of gross new creations relative to what's normal. We were at about 70%.

And I indicated that within the last couple of weeks, we've seen that what we think or what we hope is a bottom and a slow trend line back up. So we were careful to note this is a tough quarter to guide. And we were careful to note a few of our assumptions in guiding.

The biggest one being that we see a trend line as the year progresses, steadily upwards to the point that, in the fourth quarter, we're at around 95% of normal in terms of gross creations, and that's an important trend at. Steve noted that revenue retention is sort of right where it's always been, right, in the normal range of 92% to 94%.

So we haven't seen any changes there, no changes really on ARPU.

And then we benefited a little bit from a strong first two months of the year where, coming in January and February, things were probably a little hotter than we expected, and that gave us a little bit of a push that allowed us to get comfortable with something close to the prior guide..

Adam, Steve Valenzuela. The revenue retention I talked about, going from 94% to 93%, that's really rounding because it's only 20 basis points. So it's very minor and really had nothing to do with COVID. It's just more of a mathematical rounding down versus rounding up..

Yes, makes sense. Steve, if I could just do one follow-up. Obviously, you had healthy cash generation in the quarter. You're coming from a strong cash position into this, which is nice.

Maybe can just talk about how you're thinking about potential impact to Alarm.com from a cash standpoint as the dealer base goes through this challenging period that Steve mentioned.

Any considerations that we should think about from a cash generation standpoint?.

Well, we have a good cash flow generation model. And in fact, in Q1, typically, Q1 is a cash usage quarter because that's when we pay the company bonuses, typically timing wise. But this last quarter, we saw a very good cash generation, free cash flow of about $9 million. And if you look at last year, we entered about $50 million of free cash flow.

Based on our models for the year, we were projecting around $40 million to $50 million of free cash flow for this year, and we still feel that that's still a number. It might be a little bit less. If you look at our DSOs, for example, in Q1, the DSOs actually held flat to Q4 at about 49 days.

Now we will see that tick up a little bit, and we factored it into our models. And some of the dealers have taken a little bit longer to pay, which is understandable given the circumstances. But we have over 90% of our receivables current or within 30 days of the due date.

So we actually have a very good accounts receivable process, very good DSOs, very good cash flow generation engine. And the $50 million we pulled down really was at the beginning of the pandemic, if you will, and the lockdown.

And I went through 2008, where liquidity is dried up, and I talked to our banking syndicate, and they said, "Hey, by the way, all of our clients are pulling down their revolvers as much as they can." We decided to pull down $50 million.

Again, we don't intend to use that and we don't intend to need that for operating purposes, but it's good in this kind of environment, cash is king, so to speak, and there will be some good opportunity out there to deploy our cash at some point perhaps. But in the meantime, the cost of that capital was very low.

We have a revolver that doesn't expire until October 2022. So it made a lot of sense..

Thank you for the color..

Thank you..

Thank you. Our next question comes from Nikolay Beliov from Bank of America. Please go ahead..

Hey guys, thanks for taking my questions. I hope everybody is safe and healthy. Just wanted to dig a little bit deeper into the guide question for Steve Valenzuela. Steve, I mean if net new business is down 30% and still going to be down minus 5%, minus 10% as the year progresses, but thematically, you would think that the guide should be down.

I don't want to be that blunt, but I mean, I'm just trying to understand what's helping out the guide.

Is it international? Is it commercial, the other businesses that gives you comfort to maintain the guide and not to take the opportunity, frankly, to might as well lower the guide?.

Yes, Nikolay. Hope your family and everyone is safe, for everybody on the call as well. This is definitely a challenging time. But I would say that we started the year, we came in better on Q1. So we have a launch pad, if you will, for subscription we're coming off of, which is significantly fairly significantly above what we were expecting.

And so we've actually modeled the improvement occurring over the year to the point where Steve said, by the end of the year, we'll be at about 95% in terms of the activations. The retention has really maintained where it has been prior to pre-COVID-19. And so in our modeling, which is we've gone through that, we feel comfortable with the guide..

Got it. And on the underneath the covers., I mean, can you expect stack rank for us please. The relative growth rate between international, commercial, U.S.

residential, the other businesses, can you give us more color on the relative growth rates across the businesses please?.

So the commercial has been well, we don't update that every quarter, but commercial has been running at about 40% growth rate. International has been running a little bit better than that. That's the last time we updated. But again, it's something we're not going to necessarily update every quarter.

We continue to see good growth in Q1 in commercial and in international..

I was just going to add, yes, that's what we are seeing in the first quarter. I'd say, as I noted, we're seeing differences in geography that are pretty dramatic in terms of where the market is still performing and where it's not. And the U.S. is granted, the majority of our business is U.S., but the U.S.

is much more operational than our rest-of-world markets right now. So whatever we define as a shutdown is less than what a shutdown is in Europe and Latin America. So that International will not that model this year, I don't think..

Got it. And Steve, my last question is, do you think there's going to be a permanent change in the way your service providers deliver the product? Is there going to be more shift toward DIY.

Do you feel like as a technology to card, you need to maybe modify and make the installation simpler to the point where it can be shipped to the customer and DIY fashion can be installed easier and removing potentially as the pandemic on your business, you're simplifying installation from both product perspective and logistical perspective..

Yes, it's a good question. We saw some of that. So we have a mix of DIY service providers in the partner base, obviously.

I would say that they probably saw a modest uptick in the COVID period, and we also saw a number of service providers implement, at least temporarily, a modified fulfillment methodology where the first thing they do is ship to customer our product in a self-installation kit and let the customer protect the property on an interim basis until the customer is comfortable with the technician coming to the house.

And if you've stickers up on your door and you want it to look polished, eventually, you're more than likely going to want a service provider to come and really do a bang-up job, get all the outdoor cameras mounted correctly, get the thermostat install correctly, get all those things done well.

But if you need immediate protection, a number of our service providers did implement, what I would call, probably interim DIY fulfillment mechanisms to bridge the gap, especially during the beginning of the pandemic.

And then as this went on, a number of them got comfortable with procedures, and I think the consumer got comfortable with the set of procedures where they're doing all the right things in terms of checking the occupants of a property or business for any health conditions, making sure they're going in with a proper PPE, well scheduled, eliminating human contact, all those types of things.

So the business began to recover on that. As I noted in my prepared remarks, we did roll out I noted this specifically, a way for the consumer to add to their system new devices more easily than has been the case in the past.

So we added an entire sort of add device portal that allows you if you are a service provider and someone wants to add, for example, a doorbell camera and they want to add a thermostat or whatever it may be to the system device, we now can let the dealer ship that to the consumer, and the consumer is guided through a set of self-fulfillment processes and can upgrade their system more easily without any human contact.

So I'd say we saw some we see some modest adjustments, and we're sort of angling to support more of that. But I also do want to note that a lot of the service providers are able to get out there and fulfill demand to the consumer..

Thank you, guys..

Thank you..

Thank you. Our next question comes from Matt Pfau from William Blair. Please go ahead..

Hi guys. This is David Robinson on for Matt. I just had a question around the video analytics commentary. So I know, in the past, you disclosed how kind of uptake of video analytics has improved year-over-year.

Since you had kind of a good quarter with regards to the camera sales, I was wondering if you had metrics or any more commentary on how those customers are uptaking the analytics solution?.

Yes. David, I'd say we probably saw more of the same in the first quarter slightly higher video attachment rate. I think the last time we updated that metric, we said over 35% video attachment on an overall basis. And I'd say it held. It was slightly above that in the first quarter.

And then on analytics, specifically, more than half of the new installations, getting our pro video solution, if you exclude those Connect customers where we can't deploy it within one case, but if you exclude that, you look at OS that are deploying our video solution on the core platform. At this point, it's over half for taking video analytics.

And that also is trending upwards on..

Some great business, thank you..

Thanks..

Thank you. And our next question comes from Reed Motulsky from Imperial Capital. Please go ahead..

Yes, hi.

In terms of the core industry award, has that helped you gain share with the small and medium business market via traction with the integrators? Or what does the Alarm has to do to improve your value to the integrators in that category?.

Yes. So that award, it's a bigger deal than maybe you might think. If you're working with integrators and service providers, and you're constantly streaming out new technology, your product is only as good as the support behind it.

And we've got a lot of people that depend on us, they're going to business or they're going to the residential customer and they're trying to install something that's new, it's pretty critical that they feel like they've got a reliable partner and service infrastructure behind that piece of technology.

So it's a domain where we treat it as a very high priority and we do a good job of it. That's our core team. So being recognized by the business intelligence group for that contribution, I think, does help the business.

It means that when our sales team is these days on Zoom, speaking to prospective system integration partners, they can point to third-party credible third-party references that suggests that we will be there. We don't just say it, we will be there for our partners and support them in a professional manner.

So I think it does help us, particularly in dealer recruitment, but even in dealer retention. It's almost sales for us. If you're supporting the dealer well, they'll keep using you..

Great.

And regarding cloud services from OpenEye, what progress has been made in terms of the SaaS offering for customers?.

I'm sorry, I missed the second part of that question, David..

What progress has been made in terms of software as a service offering for customers?.

Right, OpenEye, sure. That's right on plan. So I think we OpenEye was, like all parts of the hardware business, being impacted by the pandemic, but we're not slowing down the transition of the model there to more of a SaaS model.

I don't know if I have a metric I can update you on to give you an indication of that progress but probably not, but we are continuing that transition sort of on or even a little bit ahead of plan based on the anecdotal sales feedback I'm getting on some of the OpenEye..

Got it.

And then can I go to sales feedback, is that if more people working remotely want more stuff on the cloud sort of thing going on?.

Well, it definitely helps. If you're especially the small business customer, you need to the value there are two points where real value is created right now.

One is if you're an actual customer and you have a business or you're the manager of a business, being able to remotely manage that business at this point or at least remotely in on it, keep track of things is more important than ever.

And then the second price of sort of real value coming from the remotes that our cloud infrastructure enables is for the service providers themselves. They don't want to have to go visit a customer to make a repair.

At this point, if it gets all avoidable, you have really good remote tools that work through the cloud, and you can do things like debug or reconfigure a Wi-Fi connection or powers like over the radio [ph], whatever it may be, if you can do those types of things remotely and minimize the number of visits you need to make to a property, it makes it more feasible for our service providers to support their customers remotely.

So definitely, it has been and in fact, I heard from one service provider who said, look, I didn't fully appreciate the value prop of Alarm.com until this pandemic. And now I can't imagine getting through it without your tools. So we've seen some endorsements like that, that are encouraging and I think that does come from a cloud infrastructure..

Great, thanks so much..

Thank you. [Operator Instructions] I show no further questions in the queue. This concludes our Q&A session. Ladies and gentlemen, thank you for participating in today's conference call. You many now disconnect..

Thank you..

Thank you..