Alarm.com Holdings, Inc. (NASDAQ:ALRM) Q4 2023 Earnings Call Transcript
Alarm.com Holdings, Inc. (NASDAQ:ALRM) Q4 2023 Earnings Call Transcript February 22, 2024
Alarm.com Holdings, Inc. beats earnings expectations. Reported EPS is $0.62, expectations were $0.48. Alarm.com Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Alarm.com Q4 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Zartman, Vice President of Investor Relations. Please go ahead.
Matthew Zartman: Good afternoon, everyone, and welcome to Alarm.com's fourth quarter and full year 2023 earnings conference call. Please note that this call is being recorded. Joining us today from Alarm.com are Stephen Trundle, our Chief Executive Officer and Steve Valenzuela, our Chief Financial Officer. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our quarterly report on Form 10-Q and Form 8-K, which will be filed shortly after this call with the SEC, along with the associated press release.
This call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP and non-GAAP measures can be found in today's press release on our Investor Relations Web site. I will now turn the call over to Stephen Trundle. Steve?
Stephen Trundle: Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report fourth quarter and full year results that exceeded our expectations. Our SaaS and license revenue in the Q4 was $148.3 million up 10.3% over the last year. Our adjusted EBITDA for the quarter was $45.6 million. Despite some uncertainty throughout the year, we delivered solid SaaS revenue growth by sharpening our focus on key initiatives. We also delivered record adjusted EBITDA and cash flow performance. I want to thank our service provider partners and our employees for their contributions to our 2023 performance. I'll focus my prepared remarks today on our long-term strategy. We believe that we have the right opportunities in our sites and the right plans to attack them.
Our R&D program is positioned to leverage the growing universe of IoT data and to continue building innovative AI based offerings that will empower our service provider partners and deliver unique value to end customers. We have transitioned from a focus on one primary market where we have been very successful, mainly the North American Residential monitored security market to a more diversified business serving a larger overall TAM. We've expanded into the video market, both commercial and residential and the commercial access control and intrusion market. We developed an international business and cultivated new IoT enabled growth businesses like EnergyHub. These growth initiatives collectively represented 31% of our total SaaS revenue in 2023 and together grew 27% year-over-year.
Let me kick through these various elements of our strategy. I'll start with the commercial market. We are attacking the market opportunity with a purpose designed solution that deeply integrates access control, intrusion and video monitoring into a single cohesive platform that the largest commercial integrators can leverage to solve their clients' multisite requirements. We've made good progress in our R&D pipeline here. During 2023, we launched third party camera support to enable our video solutions to operate with existing camera installations and originate additional SaaS revenue. We also launched a new access control product called Cell Connector. It leverages our work with LTE cellular networks to connect the access door controller directly to the Alarm.com platform rather than depending on an end customer's internal networks.
OpenEye, our cloud-based video solution for large scale commercial customers launched new solutions during the year through its open ecosystem architecture. For example, SalesConnect is a new point of sale solution that integrates transaction data from the leading suppliers of point-of-sale systems. OpenEye triggers real time alerts for point-of-sale exceptions such as voids, refunds and overrides and retrieves the corresponding video of the transaction. OpenEye also integrated environmental sensors to launch a new solution that detects smoke from cigarettes and vapes, monitors temperature, humidity and air quality and detects sound anomalies. Both solutions are sold as an additional SaaS module and significantly strengthen OpenEye's position in the retail, grocery and quick serve restaurant verticals as well as secondary schools.
Shifting to our video business, we're deploying increasingly capable video analytics solutions. Importantly, we leverage our R&D investment in video and video analytics across our residential, commercial and international businesses. Our goal is to take advantage of a significant shift in video-based monitoring technology that is underway. Traditional video systems operate only on premise and use legacy technology. These systems are being replaced particularly in business properties. Our video solutions employ intelligent AI processors at the edge coupled with flexible cloud-based software and storage and additional layers of more refined cloud resident video analytics capabilities. The market is competitive, but we believe we are in a strong position to capture share as the shift away from traditional systems continues to unfold.
One area where you will see us extending our video capabilities further in 2024 is in the realm of proactive deterrence. In 2023, we launched a capability called Perimeter Guard. Perimeter Guard can already identify a person during times when the potential for trouble is greatest or when the subscriber is away and then trigger a series of responses. Video cameras enabled with Perimeter Guard can emit audible warnings and strobe life responses. An escalated video event can also be sent directly to the monitoring station through our alarm response software. This enables monitoring station operators to view video feeds and talk down through the cameras onboard mic or via an external microphone, so they can try to diffuse a potential threat before escalating a step further by initiating a police response.
Shifting to our international business, we are driving growth by supporting our international partners to fully operationalize Alarm.com and deploy our solutions in the diverse range of commercial and residential markets they address worldwide. Last year's acquisition of EBS, a European based business that designs and manufacturers Universal Communicators will significantly expand our support for our international partners. Universal Communicators can work with a wide range of legacy control panels. Service providers can cost effectively upgrade existing customers to Alarm.com. EBS has been in business for 30 years and its product support control panels that have been widely deployed in international markets. The final element of our growth strategy is the continued development of our growth venture businesses.
These SaaS based businesses consist of EnergyHub, Building 36, PointCentral and Shooter Detection Systems. Each is developing innovative IoT enabled applications that can further expand our TAM. As you know, these businesses are at various stages of development with EnergyHub being the most mature. We expect these growth businesses to continue to increasingly contribute to our overall performance next year and become more efficient with scale. Next, I want to comment briefly on our EBITDA margin strategy. EBITDA is a choice that we make in our strategic planning cycles. One can choose between investing in the future health of the business or harvesting profits to produce cash today. I believe that producing meaningful positive EBITDA while also making reasonable long-term investments inspires good operational discipline and allows the company to selectively evaluate both organic and inorganic opportunities.
Our commitment to ongoing R&D investment into future opportunities is a cornerstone of our synergistic relationship with our 11,000 plus service provider partners who handle the bulk of the sales and marketing activities on our behalf. I have previously indicated that we have a long-term target range of adjusted EBITDA margin of 18%, assuming a similar mix of SaaS and hardware revenues and a similar go to market approach as we have today. Our target range remains unchanged, and as Steve Valenzuela will discuss shortly, our full year adjusted EBITDA guidance for 2024 implies an adjusted EBITDA margin of 17.5%. Lastly, before I hand things over to Steve Valenzuela, I also want to briefly discuss the settlement of the Vivint matter. In December, we announced that we entered into a long-term intellectual property license agreement under which Alarm.com will license to Vida, our intellectual property portfolio.
The revenues associated with the new license agreement are reflected in our guidance for 2024. We simultaneously settled all outstanding litigation matters between the companies. We are not able to share the details of this confidential settlement and it will therefore be hard for us to answer detailed questions on this particular matter. But I can say that I believe that the outcome is a good one for Alarm.com and its investors. To conclude, I'm pleased with our performance in 2023 and I'm excited about the year ahead in 2024. And with that, let me turn things over to Steve Valenzuela. Steve?
Steve Valenzuela: Thanks, Stephen. I'll begin with a review of our fourth quarter and full year 2023 financial results and then provide guidance for 2024 before opening the call for questions. Fourth quarter SaaS and license revenue of $148.3 million grew 10.3% from the same quarter last year. For the full year of 2023, SaaS and license revenue of $569.2 million grew 9.4% over 2022. Non-GAAP SaaS and license revenue, excluding Vivint license revenue, grew 13% in 2023 year-over-year. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 94% in the fourth quarter. Partner and other revenue grew 5.8% in Q4 2023 to $77.9 million mainly driven by sales of video cameras. Total revenue of $226.2 million for the 4th quarter grew 8.7% from Q4 2022.
For the full year of 2023, total revenue grew 4.6% year-over-year to $881.7 million. SaaS and license gross margin for the fourth quarter remained solid at 84.6%, which is slightly down from 85.2% in the year ago quarter, mainly due to mix. Hardware gross margin was 25% for the fourth quarter, up 610 basis points from 18.9% for Q4 2022, due mainly to the improvement in our supply chain and to a lesser extent product mix. Total gross margin was 64.1% for the fourth quarter, up 230 basis points from 61.8% for Q4 2022, mainly due to the improvement in hardware margins. Turning to operating expenses. R&D expenses in the fourth quarter were $61.3 million compared to $57.4 million in the Q4 of 2022, mainly due to an increase in headcount and related compensation expenses as we continue to execute our growth strategies.
We ended 2023 with 1118 employees in R&D, up from 1004 employees at the end of 2022. Total headcount increased to 1989 employees for 2023 compared to 1733 employees at the end of 2022. Sales and marketing expenses in the fourth quarter were $25.9 million or 11.5% of total revenue compared to $23.6 million or 11.3% of revenue in the same quarter last year. Our G&A expenses in the fourth quarter were $24.2 million compared to $25.4 million in the year ago quarter, down slightly due to lower legal costs. G&A expense in the fourth quarter includes non-ordinary course litigation expense of $1.1 million down from $1.9 million for Q4 2022. Non ordinary course litigation expenses are part of our adjusted measures and are excluded from the measurement of our non-GAAP financial performance.
Non-GAAP adjusted EBITDA in the fourth quarter was $45.6 million compared to $39 million in Q4 2022. For all of 2023, adjusted EBITDA was $154 million an increase of 4.8% from adjusted EBITDA of $146.8 percent for 2022. In the fourth quarter, GAAP net income was $31.3 percent compared to GAAP net income of $18.1 percent for Q4 2022. Non-GAAP adjusted net income was $33.9 percent or $0.62 per diluted share in the Q4 compared to $28.7 percent or $0.53 per share in the Q4 of 2022. GAAP net income for the full year of 2023 was $81 percent compared to GAAP net income of $56.3 million for 2022. Non-GAAP adjusted net income for 2023 was $113.2 million or $2.07 per diluted share compared to non-GAAP net income of $106.9 million or $1.95 per share for 2022.
Turning to our balance sheet. We ended the Q4 with $697 million of cash and cash equivalents, up from $622.2 million at December 31, 2022. For all of 2023, we used $27.3 million to repurchase approximately 488,000 shares of our common stock. Through the 12 months ended December 31, 2023, we generated $136 million of cash flow from operations, up from $56.9 million for 2022. Our free cash flow for 2023 was $128.4 million compared to $28.3 million for 2022. These results were driven by a combination of an improvement in our working capital due to an easing of supply chain dynamics and increase in profit margins. Before turning to our financial outlook, I want to provide some additional context about the IP license agreement and settlement with Vivint.
For Q4 2023, the agreement had no impact on our SaaS and license revenue or on our non-GAAP financial results. Looking ahead to 2024, our guidance includes the expected contributions from the new agreement. With that said, I will now turn to our financial outlook. For the Q1 of 2024, we expect SaaS and license revenue of $148.6 million to $148.8 million. For the full year of 2024, we expect SaaS and license revenue to be between $622.5 million to $623.5 million. We are projecting total revenue for 2024 of $912.5 million to $933.5 million which includes estimated hardware and other revenue of $290 million to $310 million. We estimate that adjusted EBITDA for 2024 will be between $160 million to $164 million. We expect adjusted EBITDA in the Q1 of 2024 to represent approximately 22% to 23% of our annual guidance.
Non-GAAP net income for 2024 is projected to be $116 million to $118.1 million or $2.10 to $2.14 per diluted share. EPS is based on an estimate of $55.2 million dollars weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2024 to remain at 21% under current tax rules. I do want to point out, however, that some of our tax payments will be front loaded for the new Section 174 requirement to capitalize R&D costs if Congress does not act to reverse this change in the tax code. We expect full year 2024 stock-based compensation expense of $51 million to $53 million. In summary, we are pleased with how well our service provider partners and internal teams have performed over the past year. We are focused on executing on our business plan and investing in our long-term strategy, while continuing to deliver profitable growth.
And with that, operator, please open the call for Q&A.
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