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Alarm.com Boosts Its Full-Year Guidance

Timothy Green, The Motley Fool

Connected-home software provider Alarm.com (NASDAQ: ALRM) reported its second-quarter results after the market closed on August 7. Both revenue and adjusted earnings grew by double-digit percentages, although the company expects sales growth to slow down in the second half. Marketing costs will also rise as the company invests in Alarm.com for Business.

Here's what investors need to know about Alarm.com's second-quarter report.

Alarm.com results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$104.5 million

$86.0 million

21.5%

Net income

$10.7 million

$9.9 million

8.8%

Non-GAAP earnings per share

$0.34

$0.22

54.5%

Data source: Alarm.com.

What happened with Alarm.com this quarter?

  • Software-as-a-service (SaaS) and license revenue rose 20.4% year over year, to $71 million. That number includes software license revenue of $10.2 million, which was up 20% from the prior-year period.
  • Adjusted EBITDA was $23.4 million, up from $15.9 million in the second quarter of 2017.
  • Operating cash flow was $11.7 million for the quarter, down from $11.8 million in the prior-year period.
  • Cash and cash equivalents reached $106 million, up from $96.3 million at the end of 2017.
  • Alarm.com announced the Builder Program, aimed at partnering up home builders and the company's service provider partners. The program offers a turnkey solution for deploying smart-home technology in new home communities.
  • New connected devices were integrated into Alarm.com's platform during the quarter, including smart locks from August Home, Kwikset, and Yale.
A smartphone running Alarm.com's app next to a drawing of a home.

Image source: Alarm.com.

Alarm.com provided the following guidance:

  • Third-quarter software-as-a-service and license revenue is expected to be between $72.2 million and $72.4 million.
  • Full-year software-as-a-service and license revenue is expected to be between $286 million and $286.5 million, up from a previous guidance range of $284 million to $284.5 million. Total revenue is expected to be between $388 million and $390.5 million, including $102 million to $104 million of hardware and other revenue.
  • Full-year adjusted EBITDA is expected to be between $85.1 million and $85.9 million.
  • Full-year non-GAAP earnings per share is expected to be between $1.19 and $1.20, up from a previous guidance range of $1.14 to $1.15.

What management had to say

Alarm.com CEO Steve Trundle discussed the new builder program during the earnings call: "As I have mentioned on previous calls, new homebuyers tend to have a high adoption rate on smart security and automation systems.... The best-in-class hardware products in our ecosystem allow builders to tailor solutions to the target buyers and the design aesthetic of a given community."

Trundle also gave an update on the international business:

We reached the total of 100,000 active international accounts during the second quarter, not including Canada. Today, we have 151 active service provider partners in 37 countries outside of North America. Our services are currently localized for 40 countries.

CFO Steve Valenzuela explained why marketing costs were on the rise:

As we previously indicated, we are investing in sales and marketing to promote our new Alarm.com for Business and Smarter Access Control products, and we initiated more general marketing programs designed to raise the stature and awareness of service providers who offer Alarm.com. We plan to continue these investments in the second half of 2018, consistent with our prior guidance for sales and marketing expense to be approximately 14% to 15% of total revenue for 2018.

Looking forward

Alarm.com's new full-year guidance calls for revenue growth of about 15% at the midpoint. That's a significant slowdown compared to recent quarters, but it's an improvement over the company's previous guidance. Hardware and other revenue is expected to be roughly flat compared to 2017, with SaaS and license revenue expected to grow by more than 20%.

Sales and marketing costs are on the rise, which investors should keep an eye on. Over time, those expenses should come down as a percentage of revenue as the growth rate slows and the business matures. But persistent higher spending could be a sign of increasing customer churn, with more marketing dollars going toward replacing lost customers. That's not something to worry about yet, especially since Valenzuela explained the increase in spending. But it could become an issue down the road.

Alarm.com's second-quarter report checked all the boxes, with double-digit revenue and adjusted earnings growth and a guidance bump. With the market for smart home technology likely to grow for many years to come, Alarm.com is well-positioned to ride the smart-home wave.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends Alarm.com Holdings. The Motley Fool has a disclosure policy.