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Edited Transcript of ALRM earnings conference call or presentation 25-Feb-20 9:30pm GMT

Q4 2019 Alarm.com Holdings Inc Earnings Call

Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Alarm.com Holdings Inc earnings conference call or presentation Tuesday, February 25, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Melvin Trone

Alarm.com Holdings, Inc. - VP of IR

* Stephen S. Trundle

Alarm.com Holdings, Inc. - President, CEO & Director

* Steve Valenzuela

Alarm.com Holdings, Inc. - CFO

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Conference Call Participants

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* Adam Tyler Tindle

Raymond James & Associates, Inc., Research Division - Research Analyst

* Darren Aftahi

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* David William Gearhart

First Analysis Securities Corporation, Research Division - VP

* Jeffrey Ted Kessler

Imperial Capital, LLC, Research Division - MD

* Matthew Charles Pfau

William Blair & Company L.L.C., Research Division - Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

* Sui Ying Cheong

BofA Merrill Lynch, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Alarm.com Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions). Please be advised that today's conference is being recorded. (Operator Instructions).

I will now hand the conference over to the Vice President of Investor Relations, David Trone.

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David Melvin Trone, Alarm.com Holdings, Inc. - VP of IR [2]

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Thank you. Good afternoon, everyone, and welcome to Alarm.com's Fourth Quarter 2019 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 include projected financial performance for the first quarter and full year 2020; potential impact on public health crisis, such as the coronavirus, on our global supply chain; the impact of certain investments in our business; our business strategies; continued enhancements to our platform; anticipated market demand for our offerings; opportunities for growth in our current markets or to expand into new 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 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 our updated Risk Factors section of our most recent quarterly report on Form 10-Q, filed with the Securities and Exchange Commission on November 5, 2019, and subsequent reports that we file with the Securities and Exchange Commission from time to time, including our annual report on Form 10-K, 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 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 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 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 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.

With these formalities out of the way, I'd now like to turn the call over to Steve Trundle. You may begin.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [3]

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Thank you, David. Good afternoon, and welcome to everyone. We are pleased to report that fourth quarter results were above our expectations. Our SaaS and license revenue in the fourth quarter was $90.1 million, up 15.7% over last year. Our adjusted EBITDA in the fourth quarter was $30 million. Our fourth quarter results helped close out a strong 2019, with annual revenue exceeding $0.5 billion for the first time in our company's history.

I want to thank our service provider partners, our ecosystem partners and our employees who enabled us to achieve this revenue milestone. Today, more than 9,000 service providers sell and service our technology to their customers in more than 6.8 million properties in over 40 countries around the world. Alarm.com manages more than 100 million connected devices and sensors through our cloud services.

On our last call, at the end of Q3, I spoke about our increasing confidence in several growth areas, as well as our intent to step up our level of organic investment to more fully capitalize on the opportunities we see. That process is underway.

On today's call, I will review some of the elements of our strategy in 2020 and touch upon the growth areas where we are investing. First, we are working hard to extend our position as the most innovative platform provider for service provider businesses that want to capitalize on the wide set of emerging IoT-driven monitoring applications. This requires that we continue to build scale across our technology stack and operations.

We are aiming to fully address opportunities across the single-family and multifamily residential markets, the small business market and the enterprise commercial market. For each property type, we are aiming to provide fully integrated, fully supported best-in-class applications in the areas of security, automation, energy management, water management and health, and we will deliver these applications across geographies and languages, such that we can drive growth in both our North American and international businesses. We are steadily making progress against these goals.

In the commercial market, for example, we are focused on delivering a purpose-built solution that intelligently integrates video, access control and intrusion. In 2019, we significantly enhanced our position and product offering. We launched our commercial video analytics service for small- and medium-sized businesses. We also applied our AI technology in -- called the Insights Engine, to our access control solution for large-scale commercial installations to intelligently detect unexpected access control events and alert the right personnel.

We also expanded our commercial market opportunity with the acquisition of OpenEye in late 2019. OpenEye is a leading commercial SaaS company, with a mix of products and services that address the unique needs of the enterprise market. OpenEye's go-to-market strategy is synergistic with the service provider channel that primarily consists of large commercial integrators.

Their end customers are large-scale enterprises, such as diversities, schools, banks, national retail chains and property management companies. Looking forward, we intend to create new capabilities for commercial customers by integrating many of our technology assets with OpenEye's enterprise video platform.

As an example, we expect that the integration of our video analytics capabilities into the OpenEye software stack will unlock additional value in each OpenEye deployment. We also intend to strengthen the Alarm.com video offering by integrating many of the enterprise elements of the OpenEye platform.

Shifting to the residential space. Our service provider partners continue to lead the market, and our results demonstrate that leadership. Security and life safety remain the top consideration for homeowners when purchasing smart home products and services. As more devices become connected in the typical home, the value of an intelligently-integrated solution not as professionally serviced only increases.

Over the last decade, we have seen many new entrance attempt to disintermediate the professional service provider channel. These companies typically entered the market with a plug solution product for self-installation and then attempted to broaden our offering by adding a few additional devices. None has significantly impacted our business or the professional service provider, and most of them have failed to create sustainable business models.

So we have continued confidence that our go-to-market approach and the extensive solutions that we have developed a professional service provider channel on the right strategy. Moving forward, we will work hard to extend the technology advantages that our service providers enjoy in the residential marketplace.

Our focus is on advancing the overall security and service provider experience and on creating new growth opportunities for service providers by extending monitoring to more aspects of the home. As an example, we recently announced our new Smart Water Valve+ Meter device, called CES in January. This device is a critical component of a comprehensive whole home water safety solution that protects properties from the full range of water-related issues. It can detect leaks, respond to water sensors and automatically shut off the property's water supply in the event of the problem. Notably, from its central point of installation on the home's water main, it can protect extremely slow leads that waste water or cause damage anywhere in the property.

A second element of our strategy that I would like to discuss is our video plan. Our video product development efforts have translated into meaningful results, both financially and in terms of customer engagement and satisfaction. Since launching video analytics in late 2018, we've seen a strong increase in the adoption of our video services. In 2019, the attachment rate of video services for new account installations was well over 35%. .

In 2020, we expect this positive trend continue as some of our larger service provider partners begin deploying our video analytics capabilities, and as we launch several new products currently in our pipeline. As an example, we plan to launch a lower-cost indoor camera, called the Alarm.com 515, that will round out our camera lineup. .

Planned for availability this summer, it offers two-way audio, 1080P image quality and has the onboard compute power required for our video analytics service. Its smaller size and lower price point should expand the market opportunity for our video analytics services.

A third key element of our strategy is international. Last year on this call, I highlighted that we had reached a confidence level with our international business that warranted building out our global team and presence. We executed on this throughout 2019, with the goal of providing unmatched support through our existing international partners, while also adding additional international partners that can contribute to further growth. We feel that these efforts have been going well, and our confidence in this aspect of our business is increasing.

The final element of our strategy is expanding our addressable market by building our segment businesses. These include PointCentral, EnergyHub and Building36. As reported in our other segment, SaaS revenue for our segment businesses grew 51.6% in 2019. We have made solid progress building these teams, refining their business models and scaling their operations over the last few years. Each segment business is focused on an attractive growing market.

PointCentral provides an enterprise solution for vacation rental property companies, residential REITs, and multifamily dwelling units. As an example of the successful 2019 deployment, PointCentral was installed in over 8,000 apartment units managed by BH Management. Building36 partners with HVAC servicing companies, while also leading our product development efforts in thermostats and water safety devices and solutions.

Last year, Building36 launched a sophisticated new HVAC monitoring solution in partnership with Goodman Amana and in the fourth quarter, worked to further extend its market opportunity by integrating HVAC systems manufactured by Lennox. EnergyHub provides an enterprise software solution for managing distributed energy resources to the energy utility market. Over 45 energy utilities that reached more than 45 million households in the United States now use EnergyHub's technology.

In summary, we had a solid fourth quarter and finish 2019 with nice momentum. As 2020 gets underway, I also want to introduce our new Board member, Simone Wu. We are very excited to add Simone to the Board team. Simone serves as a Senior Vice President and General Counsel for Choice Hotels International. Her previous experience includes more than 10 years at XO Communications, where she also served as Senior Vice President and General Counsel. Simone brings broad operational, management and legal experience to our board, and we are looking forward to working with her.

Lastly, I want to thank our service provider partners and the Alarm.com team for their hard work in 2019 and our investors for their trust in our business.

And with that, let me turn things over to Steve Valenzuela. Steve?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [4]

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Thank you, Steve, and good afternoon, everyone. I will start with a review of our fourth quarter and full year 2019 financial results and then provide guidance for 2020 before opening the call for questions. SaaS and license revenue in the fourth quarter grew 15.7% from the same quarter last year to $90.1 million. This includes Connect software license revenue of approximately $10.6 million for the fourth quarter, down from $10.7 million in the year-ago quarter.

The drop in Connect license revenue is expected as our customer, who we licensed the Connect software to, is focused on rolling out their new platform on Alarm.com SaaS software that we operated host for the service provider. SaaS and license revenue for our Alarm.com segment grew 14.6% in the fourth quarter, and our Other segment grew 34% year-over-year, driven by strong results at our subsidiaries, including EnergyHub and PointCentral, both of which Steve just described.

For the full year of 2019, SaaS and license revenue grew 15.9% from 2018 to $337.4 million. Our Alarm.com segment grew SaaS revenue by 14.2% year-over-year and our Other segment grew 51.6% in 2019. Our SaaS and license revenue visibility remains high, with a revenue renewal rate of 94% in the fourth quarter, at the high end of historical range of 92% to 94%.

Hardware and Other revenue in the fourth quarter was $50.4 million, up 50.2% over Q4 2018. The increase in hardware revenue was primarily due to an increase in sales of our video cameras, and to a lesser extent, the inclusion of OpenEye in our financial results from the closing of the acquisition on October 21, 2019.

Total revenue of $140.5 million for the fourth quarter, grew 26.1% from Q4 2018. For all of 2019, total revenue grew 19.5% to $502.4 million. SaaS and license gross margin for the fourth quarter was 86%, up approximately 90 basis points from Q4 '18 gross margin of 85.1%.

Hardware gross margin was 20.8% for the fourth quarter, compared to 18.8% for the same quarter last year, primarily due to product mix. Total gross margin was 62.6% for the fourth quarter, compared to 65.1% and for the same quarter last year, mainly due to the increase in hardware revenue.

Turning to operating expenses. R&D expenses in the fourth quarter were $30.1 million, compared to $24.4 million in the fourth quarter of 2018. We ended the fourth quarter with 621 employees in R&D, up from 500 employees in the same quarter last year. Total headcount increased to 1,160 employees, compared to 884 employees at the end of 2018. Sales and marketing expenses in the fourth quarter were $18.4 million or 13.1% of total revenue, compared to $16.3 million or 13.7% of revenue in the same quarter last year.

Our G&A expenses in the fourth quarter were $18.2 million, compared to $17.8 million in the year-ago quarter. G&A expense in the fourth quarter includes non-ordinary course litigation expense of $2.1 million, compared to $3.2 million for Q4 2018. G&A expense in the fourth quarter also includes $813,000 in acquisition-related expenses. 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 fourth quarter of $30 million, grew 43.7% of Q4 2018. For all of 2019, adjusted EBITDA was $108.3 million, up 16.4% from adjusted EBITDA of $93.1 million for 2018. In the fourth quarter, GAAP net income was $13 million, compared to GAAP net income of $7.9 million for Q4 2018. Non-GAAP adjusted net income increased to $21.5 million in the fourth quarter, compared to $14.5 million for the fourth quarter of 2018. Non-GAAP net income for 2019 was $77.2 million or $1.54 per diluted share, up 16.8% of non-GAAP net income of $66.1 million or $1.33 per share for 2018.

Turning to our balance sheet. We ended the fourth quarter with $119.6 million of cash and cash equivalents. In Q4, we used $58.8 million in cash to acquire 85% of OpenEye net of acquired cash. In the fourth quarter, we generated approximately $23.3 million in cash flow from operations, compared to $25.7 million for the fourth quarter of 2018. Our free cash flow for the fourth quarter was $14.6 million, compared to $24 million for the same quarter last year.

In the fourth quarter, our capital equipment purchases were about $7 million higher than Q4 '18, mainly for facility-related costs and additional service for our data centers. Through the 12 months ended December 31, 2019, we generated $27.8 million of free cash flow, compared to $49.7 million for the same period in 2018. Our 2019 cash flow from operations and free cash flow were reduced by the $28 million payment we made in 2019 to settle the TCPA matter.

Turning to our financial outlook. For the first quarter of 2020, we expect SaaS and license revenue of $89.9 million to $90.1 million. For the full year of 2020, we expect SaaS and license revenue to be between $382 million to $382.5 million. We are projecting total revenue for 2020 of $547 million to $557.5 million, which includes estimated hardware and Other revenue of $165 million to $175 million. At this time, the potential impact on global supply chains from the coronavirus is difficult to predict, and therefore, it's not possible to fully determine the impact on our hardware revenue.

While there could be some short-term impact from the coronavirus, we are hopeful this will not impact our full year results. We estimate that non-GAAP adjusted EBITDA for 2020 will be between $107 million to $110 million. Non-GAAP net income for 2020 is projected to be $74.9 million to $75.4 million or $1.48 to $1.49 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 performance in the fourth quarter and full year 2019. We are focused on executing on our business strategy and investing in our growth opportunities, while continuing to deliver solid financial results. Before I turn the call to the operator for Q&A, I'd like to mention that we will be holding our investor and Analyst Day on May 19 at our headquarters in Tysons, Virginia. We will be sending out invitations soon, and we hope to see many of you there.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Nikolay Beliov with Bank of America.

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Sui Ying Cheong, BofA Merrill Lynch, Research Division - Analyst [2]

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This is Jacqueline Cheong on for Nikolay. Can you please double-click on how commercial is doing and the progress there and when would we expect it to kind of ramp up and hit some sort of inflection point?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [3]

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Sure, Jacqueline. This is Steve speaking. So yes, commercial is doing pretty well. We -- it grew at an accelerated pace last year. We, obviously, made the OpenEye acquisition to further strengthen our commercial story and, particularly, strengthen our story in the enterprise market. So when was -- when is it going to be sort of a real value mover?

I'd say it's already positively impacting our business. And as we build the base of service providers who promote, install commercial offering, we should see it continue to accelerate. I would say we're at roughly 10% of service providers, right now, are trained and marketing the offering in the commercial space, and we expect that number to continue to grow.

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Sui Ying Cheong, BofA Merrill Lynch, Research Division - Analyst [4]

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Got it. And could you talk about like what training is required? And how -- why aren't we seeing more service providers trained on the commercial platform?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [5]

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Well, first, just keep in mind, sheer numbers. So with 9,000 service providers, when I say 10%, that means that in a relatively short period of time, 900 have come up and are actively beginning to solve the offering. Second is a lot of them are busy in the residential space. If you're a service provider, you have to make a decision. Do I want to stay focused on the business that's good in the residential space or I wanted to begin to divert resources into the commercial space?

Quite a few have a preference for sort of staying where they're strong and focusing on the residential space, and that's fine with us. That's a great market. But with the improvements to the offering, we're continuing to recruit more service providers that already have a history of competing in the commercial enterprise space.

And in terms of training, it's a lot of block and tackle execution. It's training on everything from how to install door strikes to how to price, how to sell. It really depends on the experience of the service provider with -- or in the commercial space already, how much of that training is actually necessary. But with our products, we do take each service provider through a certification process.

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Sui Ying Cheong, BofA Merrill Lynch, Research Division - Analyst [6]

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Got it. Got it. And if I could just put in one more. Just also wanted to hear about how international is doing? It sounds like we're seeing a little bit of a ramp, but when do we expect an inflection in this segment as well?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [7]

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Yes. So I think we're definitely seeing a ramp. Our service providers internationally are executed well in 2019, I would say, and some of the investments we have made in prior years. I think in prior years, people have asked, well, how long does it take? What do you have to do? What are the steps? And I sort of went into a refrain of similar types of things. You have to train, you have to get your pricing set. You have to make sure all the ecosystem products are working for a given market.

A lot of that came together in 2019, and we saw enough service providers really succeeding on the execution side that we gained confidence in that part of the business, partially in the back half of the year. And we expect rough numbers, we ended the year with well over to -- or very close to or over 200,000 non-North American subscribers, and we're seeing an acceleration of kind of installed rate.

So I don't know what we necessarily characterize as an inflection, but we see good, solid momentum there, and that's one of the drivers for why we are going to continue to step up our efforts to cater to the international markets.

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Operator [8]

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Our next question comes from Adam Tindle with Raymond James.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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I just wanted to start with the 2020 guidance. The SaaS and license revenue growth, initial guidance is quite healthy at mid-13% year-over-year range. I think that's just about the same percentage growth as you started guiding. 2019, obviously, ultimately, exceeded it, but now you're starting off a bigger base.

So I'm just hoping for maybe some thoughts around key drivers as you build up 2020 Saas and license initial guidance, why the confidence to start out with a similar percentage growth target as 2019, and it looks like that's going to progress as the year moves on, because Q1 is going to start slightly below that year-over-year growth. So why does it accelerate as the year progresses?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [10]

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Sure. I'll take that initial whack at that, Adam. And first, you're pretty perceptive to go back and look at history. So yes, we felt some things coming together at the back half of 2019. We've talked about increasing contribution from a number of the growth areas of the business.

And then we saw strength in our North American service provider channel as well in parts of it. So we -- our model, and the way we do guidance, is really more of a budgeting process, where it's bottom-up and we look at current trajectories, and then we model off of that, and we treat it as a budget that we intend to hit.

So when we see some of the results coming in, and we see growth in international, growth in some of the segment businesses, the North American business doing well, growth in commercial, I think even on the bigger base, because some of these things are beginning to create a more material contribution, we felt comfortable with the guide that on a percentage basis was similar to what we did this time last year.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Okay. And the acceleration as the year progresses, is something that happens in the back half of the year that maybe doesn't return?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [12]

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Yes. There's a little bit of -- yes. I mean Q1 always, I think, is a little seasonally weak quarter at some levels. I mean not dramatically weak, just slightly weak. And yes, I think, obviously, to get to our kind of goal through the end of the year, we have to have out-performance in the back half of the year, or what you would call accelerated performance. So yes, that's what we -- that's what we're currently modeling.

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Adam Tyler Tindle, Raymond James & Associates, Inc., Research Division - Research Analyst [13]

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Okay. That's helpful. And I just have a kind of a bigger picture follow-up, Steve, on investments. And I'll acknowledge that, that maybe this is somewhat unfair because it's predicated on prior success of the business, but bear with me. You've talked about the payback period on recurring revenue, how healthy that's been. We've been able to take prior year sales and marketing, add it to prior year SaaS and license revenue, and usually get a proxy for wherefore your SaaS revenue should be at a minimum.

Now that we're done with 2019, I think this was the first year where that payback period model extended beyond that 1 year. And if we look at 2020 guidance, it implies that payback period extends a little bit further. So the question is, maybe first, just tackle why the payback period has elongated? And then how do you weigh the investment opportunities, given the core business is not saturated, what are the key metrics that you're focused on, on these investment decisions?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [14]

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Yes. Starting with the -- starting with sales and marketing payback period. I would say as a more meaningful chunk of the business is tied to less mature initiatives, earlier stage initiatives, the upfront sort of sales and marketing expense really required to prime the pump that is higher on a relative basis than it would be in a more mature segment.

So if we take a segment like international, we're going to work really hard to bring on a service provider in a given country, that in the first few months after that relationship's consummated, might create 5 or 10 actual subscribers for us, and clearly, that doesn't justify the sales and marketing spend on an annual basis anyway. The reason we do it, of course, is we hope to have a decade's long relationship, but as you're trying to set up a number of these relationships that, hopefully, will be decades long, you do have some increased burden on the sales and marketing side.

And I think that's what we're seeing when we look at both -- some of there earlier stage segment businesses. Particularly, I think last year or at the end of third quarter, I talked about wanting to actually intentionally step up investment in some of the organic growth initiatives in the segment businesses, based on what we saw there, and that requires building out a bigger sales team, and we have the confidence now that demand or native demand is likely there, that the product in different cases is ready, and it's time to prime the pump with some increased sales and marketing energy.

So I'd say that's why in aggregate, you see that. I don't think we want to pull back from being thorough in servicing our more traditional North American partners, either they -- while we may not be selling a ton of new business to a given service provider in North America, we still have growth there with additional offerings in video and commercial, and we want to make sure, at some point, sales moves from sort of sales to service.

And as a partner kind of continues their legacy with us, we want to make sure we're keeping in place a meaningful service component and helping them continue to grow their business. So you get somewhat more efficient as the base build in a mature business, but you don't want to drop the service component. And then the new businesses require some upfront energy. I think that's why that payback -- that cap ratio is elongating a bit.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [15]

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Adam, this is Steve Valenzuela. I would add, too, with OpenEye acquisition, we're going to be investing in their sales team. If you look at the opportunity for the enterprise, you've got a $4 billion market. And as a private company, they were really constrained in terms of the number of salespeople. And given that, that sale is an enterprise sale, we are going to be adding a number of additional salespeople to the OpenEye team, and that does increase the sales and marketing expense a bit.

But still looking at other companies, if you look at our sales and marketing spending as a percent of revenues around 13% for 2019, may be up 100 basis points for 2020, but it's still relatively low when you compare to other companies out there. So we feel very good about our investment in sales and marketing.

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Operator [16]

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Our next question comes from Matthew Pfau with William Blair.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [17]

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Wanted to ask, on the video analytics products, you mentioned that there's several large -- larger partners that are going to market with video analytics in 2020. How come it took these partners over a year, I guess, to start to offer the product? And then as you look across your base, what percentage of partners that could offer video analytics are doing so currently?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [18]

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Yes. Let me start with the second question, which is what percentage of partners that could offer analytics are doing so. My guess is -- this is a guess, but this is from looking at sales reports and whatnot, is that number is actually probably pretty high at this point. I'd say 60% plus are in our offering analytics with the video solution. And the reason for that is it's just such a better customer experience and everyone is focused on delivering a world-class customer experience to the consumer.

With the larger entities, some have already moved, some have not. And a year is actually not that outrageous when you think about the -- if you're a large enterprise, again, when you think about reconditioning the way that salespeople in the field sell, the way that technicians are trained to do installations, those sorts of things, it just takes some time to work through that deployment plan.

And also, at times, takes a little bit of effort to work things out with us on the cost and those type of things. So we've -- I think we've cleared most of those hurdles at this point, and therefore, that we're able to comment that we expect to see that trend continue.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [19]

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Got it. And as you increase the breadth of the offering and get more complex, something in things like video and the Smart Water Valve, the associated installations also become more complex. So how do you work with your partners to incentivize them to sell those more complex deployments and then also make sure that they're done properly, so that it doesn't end up reflecting poorly on your end?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [20]

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Right. Now that's an excellent question, and that's something we have to focus on with training and support. The first is making sure that you're -- we're very proud of our support team. So making -- and the reason for that is if you're one of our partners, and you're attempting to sort of enter the market with a new IoT-type of product, you have to feel confident that the supplier you're working with is going to support you effectively.

So the first thing is making sure that we have great support resources in place. That's everything from e-mail and telephone support, to training, to knowledge-based articles, those types of things. That's not really an incentive. It's just table stakes, something you have to do, but it's hard to do well.

Second is the market is creating, in terms of incentives, the customer is increasingly asking for capabilities like this. And all of our service providers are, I think, focused on delivering the most value they possibly can to the consumer. So there's a little bit of a market bait there, if you will, where in order to add more customers and remain relevant to a wider segment of the TAM, you need to expand the universe of ecosystem devices that you support.

And water is a good example. It will be a hard one. It will be a hard one because it involves plumbing as part of the installation. And what we'll do is work to create the right network of third-party providers, who can come into a home or a small business and make adjustments to the plumbing apparatus. And the value, though, to an insurance company, to the homeowner, if you actually look at loss, is immense, and the value to a consumer, just sort of the peace of mind of knowing that they have leaks or don't, is pretty high as well.

So we think the market will demand it. If we'll figure out how to execute on the actual delivery of the product. But it's a good question because it is one of the reasons why sometimes we announced something, and then a year later, we're in 50% or 60% in terms of installs that could be deployed with the technology.

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Operator [21]

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Our next question comes from David Gearhart with First Analysis.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [22]

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In prior quarters, you had talked about some of your large dealers having difficulty getting significant or sufficient credit to buy accounts. Just wondering if you could give us an update on that front and activity around those large dealers in regards to that issue?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [23]

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Sure. David, I'll take that one. The market for us has 3 segments. There are sort of very large, well-capitalized players. There are smaller, very local insurance providers. Those 2 segments are both in fine shape right now. And there's a third sort of chunk, which is large players who are -- who have through the years, become dependent on a handful of lenders, and we've seen some softness in that lending community that persists today.

So it's still an issue that folks are working through. I think the issue is that, that credit is not as widely available to the service provider in a certain category today as it was a year ago and the issue hasn't yet gone away. Do I think it will go away? Yes. I think we'll see a trickle of deals, a trickle of additional entrants.

The terms on -- at some point, as the markets evolve and terms on debt deals evolve, and at some point, the deals become so attractive that a lender wants to participate. And I think that's kind of where we are right now, is probably at a point where we're just beginning to see some participants that are looking more anxiously at the opportunity to lend into this segment out of chain.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [24]

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Yes, I would add that there are a couple of lenders that we've heard of recently that see it as an opportunity that are starting to take a look and think that the -- there's a good opportunity for them in the business. And whereas in the past, they may not have looked at this area, but there are a few that are starting to see that, that it is a good opportunity.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [25]

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Okay. And then lastly for me, you mentioned coronavirus in your prepared remarks, and I wanted to touch on that briefly. One of your peers, maybe less so on the do-it-yourself space with scale, announced their results yesterday, and they talked a bit about having difficulty getting components, and it's making it hard to actually build products.

So I'm just wondering, are you not facing that at this time? And the related question is, do you have enough safety stock of components on hand and what kind of runway do you think that gives you?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [26]

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Yes. So we're all watching the news, probably with more interest than normally. And at this juncture, obviously, we have to make an estimate for the year, based on what we know today. And we have accommodated a certain amount of challenge in our supply chain with the estimates we've provided for the year. We haven't accommodated the absolute worst-case scenario, but that's partially because I don't think we're going to have the absolute worst-case scenario.

If we -- while -- if we look at what's actually going on with factories, I think most are reporting that factories are gradually coming back online. In terms of our suppliers, that's true. We say, we look at a percentage of capacity that's now back online, and it's not increasing as quickly as we have liked, but it is increasing.

Do we have an infinite supply on hand? No, we don't. So I expect, at some point, we'll see some factories come back online, we'll be okay. We'll see a few products where we'll have some execution challenges, we'll have to manage those and we'll scramble accordingly. But based on what we see today, I'm, I guess, hopeful that we'll see this thing gradually in the supply chain anyway, work itself out.

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Operator [27]

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Our next question is from Nehal Chokshi with Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [28]

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I have two questions. First is that within that great SaaS and license revenue growth that you saw, it was acceleration, were there any onetime license related revenue behind that?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [29]

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So for the full year of 2019?

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [30]

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4Q '19.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [31]

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Fourth quarter.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [32]

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Oh, for four -- Q4, onetime. There's always a tad of seasonality in the number in the fourth quarter when we get some value out of our energy contracts that are dependent on how those contracts performed during the year. And those are -- those can be challenging to replicate over and over again. You may get the next year, you may not. You just don't know. And so we had some strength there, I would say, in the fourth quarter, in particular.

We also have a bit of strength in various types of performance incentives that, whether they be energy-related or related to reliability of our services, that came in slightly positive. So there was probably a small component of the Q4 SaaS number that was not necessarily repeating, I would say. But -- and that's probably why, if we look at the Q1 guide, Q-over-Q, it looks on a relative basis, a little smaller, and that kind of captures some of what that volatility was.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [33]

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Okay. Great. And you've talked a lot about video on the call and adoption by your customers that's now at 35% in new accounts for calendar year '19, and you expect that positive trend to continue. Were you basically trying to say that the attach rate to new accounts is going to go up? Or you are expecting that to stay flat? And has that been the driver of, what I calculate to be, a second year in a row of 8% ARPU increase?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [34]

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Yes. So I think, what did I mean by the confidence that the trend will continue. I do think that we'll continue to see an increase in the percentage of new installations that have video attached. I'm not sure where the endpoint is, it may be 50%. I don't know if we'll get there this year, but I think we'll continue to see an upward trajectory there, particularly in the second half of the year.

So we would hope to provide an even higher attach rate data point towards the end of the year. In terms of how that translates to ARPU, obviously, selling more services is better. At the same time, we have to be mindful of making sure we're providing reasonable value to the service providers.

So we'll hopefully see some benefit there, but we're not going to -- we're not going to use it primarily as -- we're not going to get overly zealous about preserving or gaining massive ARPU growth out of the service. We want to provide a great service to the customer and make sure that we're protecting the value we already provide.

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Operator [35]

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Our next question comes from Darren Aftahi with Roth Capital Partner.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [36]

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I heard that 9,000 is service provider number. Did I hear the ending subscriber account you had at the end of 2019?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [37]

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Yes. We said, that was that 6.8 million subscribers.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [38]

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Great. Fantastic. So maybe I could kind of follow-on to last question. So it looks like in the fourth quarter, that the core SaaS, at least what we call -- that opened that comps, that kind of reaccelerated and is more in line with kind of first half of the year kind of level, that didn't look like comps were really any easier last year.

So I'm just curious if there's anything you would call out in that reacceleration? And as part of that commercial international, Steve, it sounds like some of your commentary is directionally kind of positive there, but anything you can kind of call there would be helpful.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [39]

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Yes. I think, as Steve said, there is some seasonality in the fourth quarter, with the energy programs, we get the benefit as a taxes, utility savings, energy savings that typically record in the fourth quarter, and those were positive. But I would say, too, that we did see growth in international starting to contribute in the fourth quarter. It's not a huge number, but it did take a little bit of a stair-step up in the fourth quarter, as we saw a number of the new international dealers online.

I think commercial also is contributing. I think video analytics is contributing and video plans, as we talked about before, video certainly adds not only the hardware that comes along with video, but also the ARPU related to video. So I think those are all positive elements that contributed to the fourth quarter performance.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [40]

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Great. And then on your commentary around video services uptake on new customers. I think you said 35%. I'm just kind of curious, a while back, it may have been at your ISC West Day, you kind of talked about increasing kind training for the service providers. I'm curious, attach rates on video for existing subs, where your service provider base is going back and up-selling those services, what kind of the attach rate you're seeing maybe on a trailing basis?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [41]

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We're definitely doing that. In terms of the -- what I can tell you, 1 data point I do have that I'll share is about 18% of our actual video camera sales, I believe, in the fourth quarter went back to the base. So that's coming from either our service providers going out and upgrading existing customers to get them to a level of device capable of supporting video analytics, or it's going into customers, who simply don't have video attached to their home or business. So it's definitely a part of our strategy as to continue to go back into the base and penetrate. I don't have the number handy for exactly what the base penetration is, but...

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [42]

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Great. And then just last one for me. I think on the last call, you talked about $540 million to $550 million for revenue guidance, it's about $7.5 million better this time around. I'm just curious, you didn't segment out what the numbers were, so I'm kind of curious what that $7.5 million is skewed towards. Is it SaaS or hardware?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [43]

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Yes. Actually, it's Steve Valenzuela. So we took up the SaaS guide by about $7 million. So most of that increase is SaaS.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [44]

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But we've never actually given a guide on it, but I think we took it above $7 million above.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [45]

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Yes, of the consensus, exactly.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [46]

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But if you look at our hardware number, it's really not elevated at all relative to 2019, and if you include the OpenEye component. So that's where most of the gain there versus our initial outlook is coming from on the Saas side.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [47]

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That's right.

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Operator [48]

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Our next question is from Mike Latimore with Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [49]

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Congratulations on the quarter. Can you provide a little more color on international? And maybe how many service providers are sort of onboarded now versus a year ago? And are there any particular countries that are sort of the most fruitful going forward here?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [50]

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Let's see, a little more color. I don't have the number of service providers in front of me. But I'd say the main thing we're watching is the creation rate, how many accounts per week or per month are you actually installing. We saw that move in the back half of the year well above 10,000 a month. That gave us confidence that we would see increased growth in 2020 in the international segment.

The markets that are good -- it's actually almost every market we're in. So Latin America has shown nice strength in the last 6 months. Europe, I feel like we're beginning to get some momentum there, with a couple of different service providers, so some strength there. Australia's been strong for a long time, continues to be strong. Turkey is a market that has been strong for a long time, continues to be strong. So yes, most places where we're participating, we feel some momentum on the international side. I think I noted we're in about 40 countries now, with good service provider relationships, and those are all in different stages.

But in general, we're not really seeing a place where we're sort of running into failure at the moment. If we're running into failure, it's usually things that we can solve. Fix the product, get the right devices supported, get the right support apparatus in place. And those are the type of problems we'd like to encounter because they're solvable and that's kind of what we're seeing.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [51]

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Right. And then I got -- I'm interpreting that you're a little more confident in the North American residential market, I guess. One, is that true right now? And then two, is that tied largely to this credit dynamic improving or something else?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [52]

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I think it's just the -- based on the production and the delivery of the service providers in 2019 was, we thought, solid. There's been a lot of concern and noise about an impact coming from various places on the service provider. But if we look at the -- beyond the whole at the performance of the North American Residential segment, it was pretty good. So I think that's probably -- on the debt market thing, it's not a part of the market where we're an active participant.

So we're an outsider looking in, but from my discussions with various partners, I have a belief that it will gradually work itself as new entrants come in, and as that firms up and that comes -- what I'm hearing is, I don't have a business problem. What I have is a balance sheet problem at the moment. I need to roll debt over, et cetera, and we have fewer participants. So as the participants come in, if the business is solid, I think we'll see that rectify itself.

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Operator [53]

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Our last question is from Jeff Kessler with Imperial.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [54]

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As you -- as we look at the worldwide security industry and looking at your larger security providers and looking at, secondly, your acquisition of OpenEye, who deals with enterprise size, enterprise sized installers or the world of commercial dealers and the world of installers is beginning kind of morph together.

So how are you interpreting this in terms of going to your larger dealers who may be doing both commercial and resi and dealing with the integrators, who basically are just all commercial, and getting them -- those folks to get on the same -- I'm talking about the -- on the commercial side, getting them all on the same page, those commercial dealers, and those integrators, to start taking on your products, so that if you want to call it, the sales channel, begins to even out for you and you begin to get a common message across to both of those groups to accelerate your commercial business and the enterprise business at the same time?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [55]

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Yes. So there's a couple of parts to that question, Jeff. First, I think you're absolutely right that the system integrator component of the channel is sort of converging with the commercial dealer part of the channel. The integrator is moving into more recurring revenue-oriented types of business models and the commercial dealer is moving up into the enterprise space zone. So that process is underway. We want to make sure we have the right product there. And for us, the focus is really on being -- it's not the first, the best at a fully integrated enterprise-grade solution that incorporates access video intrusion, and in some cases, energy management.

If that all works together nicely, and the presentation of that functionality to the user is exceptional, then we think we'll have the right product there, and we'll continue to make inroads. As we look at the service providers who are more residentially focused, if you actually ask them what their biggest challenge is, the biggest challenge I usually hear is that I can't hire enough technicians. I'm constrained from an HR perspective, especially in the current economy.

And against that backdrop, it's sometimes hard to get a person to say, hey, when I'm already under-resourced, and I'm struggling to hire enough technicians to install on the demand I see right in front of me, sometimes it's difficult to get that person to also want to leap into a new market. So I think it's a type of thing where you sort of chip away. You hope that they're able to scale up their HR functions, hire more technicians, meet the demand on the residential side for installations.

And as they do that, they become more successful, they maybe gain more capacity to invest and invest in hires that are focused on the commercial space, and then gradually build that out. We don't need everyone to be -- we don't need or really want everyone who's strong in residential to move to commercial. So we just want to make sure that for those service providers that are doing both, that we've got the right platform that allows them to kind of move across the entire potential market that's addressable to them.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [56]

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All right. Last question. At this time last year, you talked about investing -- spending some time in 2019, investing some more -- investing some, reinvesting more into your business, which was kind of like, I'm not saying it was an adoptive or so, but it was kind of like a call that's saying, we better watch out for what your EBITDA would be, what some of the numbers below the revenue line were going to be and you did invest more heavily in the business.

Where did things go right so that those help more -- those have increased investment in your business did not basically ended up with numbers that were particularly higher than what most analysts were thinking about at the beginning of the year?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [57]

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Right. A question of whether it went right. So you're talking about the EBITDA number being higher, and the reason is...

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [58]

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Yes. I'm talking about the fact that you said that you were going to spend this year investing fairly heavily in the business, that is kind of -- at the kind of code for the fact that expenses will be higher, investments would be higher, R&D would be higher. And it was -- and you became more optimistic throughout the year with regard to how your revenues were reacting to those investments. What was the cause of that?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [59]

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Well, I guess, I would say that the cause was in perfect execution on the recruiting front at Alarm.com. So we intended and markets are tough on the recruiting front. We intended to scale up last year our R&D function even faster than we did. And so when you have slightly fewer employees than you expected, then you end up with a higher EBITDA number, particularly when that's compounded by growth that was better than we expected on the -- on top line. So we had better top line growth, higher hardware sales. We didn't quite hire as many people as we wanted to in 2019.

Then, towards the end of the year, as we rolled into 2020, we acquired OpenEye, I think we commented, we intend to invest in that business and build it out. So a lot of the reasons you just articulated in your question on the commercial space, build out our presence there. So in that case, we're taking a business that is going to contribute, I think we've indicated $40 million. And top line we've indicated, we're definitely not running that at sort of the company's EBITDA margin level.

We're probably going to run it for a while in an investment mode and a loss. So that was one of the reasons, I think, towards the end of last year, I communicated that as we go into 2020, we're going to continue to look for opportunities to deploy capital in growth initiatives, both organic and, in some cases, resulting from acquisition.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [60]

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Will OpenEye eventually have a cloud? Will eventually OpenEye have a cloud platform?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [61]

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Yes. They already do, actually and the cloud is getting richer by the day.

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Operator [62]

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Thank you. And ladies and gentlemen, this concludes our Q&A and program for today. We appreciate your participation. You may now disconnect. Have a wonderful day.