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Edited Transcript of ALRM earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q3 2019 Alarm.com Holdings Inc Earnings Call

Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Alarm.com Holdings Inc earnings conference call or presentation Tuesday, November 5, 2019 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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* Darren Aftahi

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

* David William Gearhart

First Analysis Securities Corporation, Research Division - VP

* Kevin Damien McVeigh

Crédit Suisse AG, Research Division - MD

* Madison Suhr

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

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

* Nikolay Ivanov Beliov

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Alarm.com Q3 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to introduce your host for this conference call, Mr. David Trone, Vice President, Investor Relations. You may begin.

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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 Third 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 fourth quarter and full year 2019 and for 2020; anticipated timing of payments of certain liabilities; 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 and subsequent reports that we file with the Securities and Exchange Commission from time to time that could cause actual results to differ materially from those contained in the forward-looking statements.

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

Also during this call, management's commentary will include 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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Thanks, David, and welcome to everyone joining our call today.

We are pleased to report another solid quarter that exceeded our expectations. SaaS and license revenue in the third quarter grew to $84.9 million, up 14.3% year-over-year. Our non-GAAP adjusted EBITDA in the third quarter was $26.3 million. We've had an active quarter and early fall. We introduced a number of smart home solutions and devices. In September, we gathered the entire company together over the course of several days to review our long-term strategy, product road map and progress against our goals and to better connect as a team. We also recently hosted a number of our service provider partners here in Washington, D.C. for our annual Partner Summit to present our latest products and R&D priorities. And in late October, we announced the acquisition of OpenEye, a leading provider of video management software for commercial applications.

On today's call, I'll focus on the new smart home products we launched and the acquisition of OpenEye. I'll close by providing some initial thoughts on our planning process for 2020.

Starting with our product pipeline, we launched 2 new residential video cameras that significantly upgrade our indoor and outdoor lineup. Both cameras present sleek industrial designs, offer increased field of view and provide enhanced picture quality even in highly variable lighting conditions. They also have substantially increased onboard compute capacity. This improves their overall performance and gives us an edge computing environment that we can use to support the more advanced video analytic capabilities that we plan to deploy in the future.

A common challenge with deployments supporting most video cameras or other IP devices is their dependence on the subscriber's WiFi network. Our 2 new cameras have isotropic antennas that create a more uniform and efficient wireless connection.

We also recently launched the Smart Gateway, a device that provides a private and secure WiFi network dedicated to Alarm.com video cameras. The Smart Gateway makes installations easier and faster and reduces the likelihood of subsequent support issues caused by changes to the subscriber's WiFi network.

These new products are examples of our ongoing goal to minimize inefficiencies associated with unmanaged WiFi networks and to make it as easy as possible for our service provider partners to deploy our video services.

Energy management also remains an important smart home category and opportunity for us. During the quarter, Building 36 launched an innovative new HVAC monitoring service. It's enabled by a new device called Alarm.com LYNC that directly connects with the HVAC system.

With a rich set of remote monitoring, diagnostic and home automation capabilities, service providers can proactively support and service their customers. When a trouble condition occurs, they can remotely access error codes and deploy a technician to the home or business with the necessary parts, equipment and training to service the system in a single visit.

With this new solution, Building 36 offers HVAC contractors a unique opportunity to leverage smart home technology that can transform their customer relationships.

Shifting to our commercial business, I want to focus on our very recent acquisition of OpenEye, a leading commercial video management software company.

OpenEye has licensed over 200,000 cameras at more than 14,000 different sites through a go-to-market channel of servicing partners that complements our own service provider network. They have approximately 110 employees at their headquarters in Liberty Lake, Washington, near Spokane.

Let me explain how we're thinking about this opportunity. First, OpenEye expands our overall opportunity in the commercial market and complements the Alarm.com for Business platform.

OpenEye solutions and its commercial partners address the unique requirements of large enterprise commercial customers and national accounts. Their customer base includes universities, banks, national retail chains and property management companies. These applications require unique software capabilities like advanced forensic video search, point-of-sales system integration and customer site mapping.

The OpenEye user is often located in a dark station or other setting where video from a large number of cameras is viewed on a secure workstation rather than on a mobile app. OpenEye is focused on addressing these unique needs, and they have developed a refined and proven set of capabilities for this market segment.

Second, the market that OpenEye serves is in the very early days of a significant transformation. Enterprise-class video deployments are shifting from an on-premise solution to increasingly include cloud-enabled architectures referred to as Video Surveillance as a Service, or VSaaS. We believe we can help OpenEye lead that transformation and build a strong, durable recurring revenue business model.

We like markets where emerging technology is generating growth opportunities by creating new value propositions for users and recurring revenue for our service provider partners.

Third, we see an opportunity to further leverage some of the technologies created by Alarm.com in the OpenEye channel. As an example, we have invested heavily in advanced video analytics over the last couple of years, and much of the work we have done in that domain will allow us to enhance the OpenEye software stack and drive even more value from each deployment.

Lastly, we like the OpenEye team and see an opportunity to further scale our R&D program. In the near term, OpenEye will continue to focus first and foremost on continuing to exceed the expectations of their current and prospective customers and partners. As we build up the OpenEye team, we see a number of opportunities to accelerate differentiation in the commercial space and to build new value through integrations with our existing technology assets, like the video analytics integration that I just mentioned.

We also plan to introduce elements of the OpenEye platform to the Alarm.com platform to strengthen our video offering. OpenEye's seasoned management team brings the experience and entrepreneurial attitude to continue to scale operations and grow the business in the kind of disciplined, customer-centric manner that we like. I want to welcome the entire OpenEye team to Alarm.com.

Before I turn things over to Steve Valenzuela, I'll share some current thoughts on our strategic plan. We have an opportunity to define the predominant IoT solution sets and applications to expand our leadership position in existing markets and build durable positions in new ones and to continue to deliver solid growth over the next decade.

As we look at both our core security market and the broader IoT-enabled intelligent property markets, we see more opportunities than we can pursue with our current capacity. I believe we need to accelerate our level of investments in a number of areas. We are beginning to make plans to do that. Our recent acquisition of OpenEye gives us a platform and an established team to accelerate the development of our suite of smart business services. The business is good, but can be further scaled with better capitalization.

Similarly, we are organically expanding the teams and programs across our portfolio of market opportunities to accelerate these growth initiatives. Our continued progress internationally necessitates additional field staff and engineering resources. I see next year as a significant year for our international team based on the pipeline of opportunities we are tracking.

Our PointCentral business is expanding its markets to include multi-family dwelling units and is developing a more channel-oriented business model.

EnergyHub has proven its business model and is in the process of scaling up. Our video products are being well received by the market and our investments in analytics have paid off. With continued development, we have an opportunity to be the leader in intelligent video solutions across a number of market segments.

Our existing service providers in the North American security channel are performing well. We continue to invest in expanding our platform so they can deliver more services to more customers in the most efficient manner possible. And lastly, our R&D program has produced some exciting new technologies that we're planning to commercialize in the second half of next year.

I've been considering whether we are investing the right amount back into our business to sufficiently cultivate all of our longer-term growth opportunities. I have concluded that we should likely move to increase our investments back into the business so that we can more fully pursue the wide set of opportunities that we see and continue to expand our business.

I look forward to updating you more on our strategies after the fourth quarter when we present our plan for 2020.

To conclude, I'm pleased with our third quarter results. I want to thank our service provider partners and our team for their hard work and our investors for their continued 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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Thanks, Steve. I will begin with a review of our third quarter 2019 financial results and then provide guidance for the fourth quarter and our raised outlook for the full year of 2019, before opening the call for questions.

SaaS and license revenue in the third quarter grew 14.3% from the same quarter last year to $84.9 million. This includes Connect's software license revenue of approximately $10.8 million for the third quarter compared to $10.5 million for Q3 2018. Our SaaS and license revenue renewal rate was 94% in the third quarter, at the high end of our historical range of 92% to 94%.

Hardware and other revenue in the third quarter was $43 million, up 14.4% over Q3 2018. The increase in hardware revenue was primarily due to an increase in sales of our video cameras.

Total revenue for the third quarter was $127.9 million, up 14.3% over the same quarter last year.

SaaS and license gross margin for the third quarter was 85.4%, up approximately 90 basis points from the prior quarter, mainly due to improved efficiencies we have been able to achieve in our network operation centers. Hardware gross margin was 18.3% for the third quarter compared to 18.8% for the same quarter last year, primarily due to product mix. Total gross margin was 62.8% for the third quarter, slightly better than gross margin for Q3 2018 of 62.5%.

Turning to operating expenses, R&D expenses in the third quarter were $29.5 million compared to $22.9 million in the third quarter of 2018, as we continued our planned investments in R&D to support the opportunities we see in our markets. We ended the third quarter with 582 employees in R&D, up from 496 employees in the same quarter last year. Total headcount increased to 1,043 employees compared to 866 employees at the end of Q3 2018. Sales and marketing expenses in the third quarter were $14.5 million or 11.4% of total revenue compared to $14.1 million or 12.6% of revenue in the same quarter last year.

Our G&A expenses in the third quarter were $18.7 million compared to $43.7 million in the same quarter last year. Last year's G&A expense included a charge of $28 million for the TCPA settlement. G&A expense in the third quarter includes non-ordinary course litigation expense of $2 million compared to $33.2 million for Q3 2018, which included the $28 million provision for the TCPA settlement. G&A expense in the third quarter also includes $1.6 million 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 third quarter was $26.3 million. In the third quarter, GAAP net income was $17.7 million compared to a loss of $7.7 million in Q3 2018. Non-GAAP adjusted net income increased to $18.6 million in the third quarter compared to $18.2 million for the third quarter of 2018.

Turning to our balance sheet. We entered the third quarter with $164.3 million of cash and cash equivalents. In the third quarter, we made the final payment of $23 million for the TCPA settlement. And with our initial payment of $5 million in Q1 2019, we have now satisfied the settlement agreement.

In the third quarter, our cash flow and free cash flows were reduced by our final payment of $23 million for the TCPA settlement. Including this payment, cash flow from operations was $1 million compared to $19.8 million for the third quarter of 2018. Our free cash flow was negative $4 million compared with $16.6 million for the same quarter last year.

In the fourth quarter, we acquired 85% of OpenEye for $61.3 million in cash plus $2.8 million in holdbacks, subject to post-closing conditions, with an additional potential payment of up to $11 million in 2021 based on their 2020 financial performance. OpenEye will be included in our Alarm.com segment.

Now let's turn to guidance for the fourth quarter and for the full year of 2019. We expect SaaS and license revenue of $87.3 million to $87.5 million for the fourth quarter. For the full year, we expect SaaS and license revenue to be between $334.6 million to $334.8 million, up from our prior guidance of $333.2 million to $333.7 million. We are raising our guidance for total revenue for 2019 to $472.6 million to $476.8 million, up from our prior guidance of $460.2 million to $465.7 million. This includes our increased guidance for hardware and other revenue of $138 million to $142 million.

We expect non-GAAP adjusted EBITDA for 2019 to be between $101.5 million to $103 million and non-GAAP net income to be $72 million to $72.6 million or $1.43 to $1.44 per diluted share. We expect our non-GAAP tax rate to remain at 21% for 2019. EPS is based on an estimate of 50.4 million weighted average diluted shares outstanding. We expect full year 2019 stock-based compensation expense of $20 million to $21 million.

Finally, I will provide some early thoughts on 2020 as we are currently in our planning process. At this time, we are anticipating total revenue of $540 million to $550 million, approximately $40 million higher than current consensus, mainly attributable to expected higher revenue from our acquisition of OpenEye to be included in hardware and other revenue on our P&L.

We plan to include the majority of OpenEye's revenue in our hardware and other revenue line item on our P&L as their solution today is mostly on-premises software and hardware.

We currently believe that OpenEye SaaS revenue in 2020 will not be material. However, we expect that their SaaS contribution will increase in future years as more of their solution will be delivered as a SaaS offering.

We will provide our initial guidance and plan for 2020 when we report our fourth quarter of 2019 results in February next year.

In conclusion, we are excited to welcome the OpenEye team to Alarm.com, and we look forward to working together to expand our growth opportunities in the commercial space.

We are focused on closing out a strong 2019 and on investing in a number of growth opportunities that Steve mentioned to build for the future.

Thank you for joining us on our call today. 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) Our first question comes from Adam Tindle with Raymond James.

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Madison Suhr, Raymond James & Associates, Inc., Research Division - Research Associate [2]

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This is Madison on for Adam. I know you've been expanding your presence internationally in areas such as Brazil and Chile and also adding staff to existing markets. As this has expanded recently, I was hoping you could talk about how this has progressed relative to your expectations and any early learnings that you can share with us.

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

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Sure. Madison, this is Steve Trundle speaking. I would say that generally the progress we've made internationally has been in line with our expectations at this point.

We've had a few positives and a few bumps here and there, but I think we're probably more excited about the way it's shaping up for the next 12 to 15 months than at any period in the past. It's growing. It's growing at a faster rate than the rest of the business.

We are, I think, closing the gap on small -- on the set of -- we're closing the gap on all the little things that you have to get right to really deploy at scale in international markets. So in general, we're pleased and feel like it's tracking about where we expected at the beginning of the year.

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Madison Suhr, Raymond James & Associates, Inc., Research Division - Research Associate [4]

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Okay. That's helpful. And then just on the hardware revenue, it looks like guidance implies a pretty meaningful decline on a sequential basis. And I know there's a little bit of seasonality there, but it's obviously above what we've seen historically. Can you talk just talk through some of the drivers on the hardware revenue guidance? Anything outside of just typical kind of conservatism there would be helpful.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [5]

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Sure. This is Steve Valenzuela. Typically, Q4 is seasonably the weakest quarter for hardware. If you look at past Q4s, it's typically the lowest hardware contribution in the quarter for the year. And that's typically tied to the holiday season and people focus on a number of other things. And so it's just typically a seasonably weaker quarter for -- of the year for hardware.

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Operator [6]

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Our next question comes from Nikolay Beliov with Bank of America.

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Nikolay Ivanov Beliov, BofA Merrill Lynch, Research Division - VP [7]

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When you guys look at your business for next 12 months, I know you're still doing the plan for 2020, and look at the incremental business, is there a way for you to stack rank for us the major contributors by size to the incremental subscription revenues over the next 12 months? And I'm referring to maybe the new deals you signed up, expansion within existing dealers, international, commercial. Just go down the key revenue drivers, that will be helpful, I think.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [8]

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Sure. I don't know if I can give you an absolutely discrete breakdown by each of those domains, but I can give you some thoughts on how we think about it, and you got some of the first parts right.

So we have the core North American business that's growing at a certain clip. One of the big drivers there really has been -- really there are a couple of drivers that also play internationally, but especially in North America, the success we've had with the video offering and the recent addition of analytics to the package is helping.

The commercial piece in North America growing a little bit faster even this year than the residential piece for us in terms of percentage growth and still is growing off a small base but is becoming increasingly relevant. So it will be a focus next year. And obviously, with the acquisition of OpenEye, we're increasing our focus in that domain and even moving a bit further up the food chain to what's called the enterprise space.

The international itself is a driver and growing at a nice clip and I think probably will accelerate more next year than any year in the past. I feel like a lot of things are sort of about ready at the moment. And then we have the PointCentral business where I would think as a growth driver will be sort of steady state. Next year, continue to grow. Their -- that team is moving into a couple of new segments, the biggest one being the multi-dwelling unit segment. And I guess I forgot EnergyHub as the other driver, where EnergyHub benefits from scale. The larger they become, the more relevant they become. The more utilities that are on the network, the more relevant they are to all the device makers.

So that also is a growth driver for us. So those are kind of the key components of the picture that we look at, and we do a lot of bottom-up modeling, and then we do some top-down analysis on the segments, and those are the segments that we're really focused on.

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Nikolay Ivanov Beliov, BofA Merrill Lynch, Research Division - VP [9]

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And my second question is about margins, EBITDA margins for 2020 in light of the investments, Steve, you talked about. I mean shall we model EBITDA flat margins next year? Should we model EBITDA margins down? Can you give us some, at least, directional sense?

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

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Yes, directionally, so I definitely wanted to cover that this quarter as we start thinking about next year. And I think the way I am thinking about it, Nikolay, is I'm thinking basically about where we are today, good solid cash flow, I think solid EBITDA, and I'm happy with the level we're at today.

If I think about the contribution that would come from incremental growth, I start -- so we do plan to grow next year. That will generate some incremental contribution. And I think about basically accelerating some of our growth investments by plowing that incremental contribution back into the business, is sort of the way I'm thinking about it.

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Operator [11]

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Our next question comes from Kevin McVeigh with Crédit Suisse.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [12]

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Steve, any sense of how much OpenEye impacted the quarter and then ultimately the rest of 2019?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [13]

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So this will -- Steve, you may correct me here. This is Steve Trundle. It had no impact on Q3 on the results we just reported because...

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [14]

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Yes. We closed it towards the end of October. This is Steve Valenzuela. So it didn't impact Q3 at all.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [15]

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And then -- and in terms of how we look at Q4, I think that we've only sort of been in there for a couple of weeks. So modest, very, very modest impact on our model as we look at Q4, maybe a couple of million dollars we sprinkled in on the hardware and other side, but not much. So really not much there. And then I think as Steve V. said, when we kind of think about the initial picture for 2020, we did model in some meaningful revenue from OpenEye on the hardware and other line into our 2020 initial look.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [16]

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Got it. And then obviously, there -- what do you think of kind of the EBITDA impact? Would that be reinvested as well or that would be kind of growth in 2020?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [17]

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Good question. Yes, currently, sort of -- it's a business that is well run and has been run to conserve cash and, in some ways, that drives a focus on selling software licenses as opposed to selling SaaS because you get your cash upfront. So it's sort of a nice breakeven business at the moment. I think the way we think about it is we would say it's probably a little undercapitalized, and we would prefer to capitalize the business better, try to accelerate the growth and try to accelerate a shift to an economic model that drives down the upfront cost for the service providers and/or the end customer by shifting some of the software cost into a SaaS model that's more reflective of the way Alarm.com works.

So the way we're looking at it is while it's a good, healthy, kind of could be a no impact type of business, we're likely to accelerate investment into the business and would not be a massive headwind to EBITDA but would be one of the things when I talked about plowing some incremental profits back into the business, that will be one of the areas where I would expect to be plowing.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [18]

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Got it. And then just to finish it out, how should we think about this within the context of the Stanley partnership earlier in the year? And how has that been scaling on the commercial side?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [19]

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Yes. Good question. I don't know that we've sort of matched those 2 initiatives just yet. I think in the case of OpenEye, there are about 400 existing service providers and system integrators who are their partners, and there's very little overlap in that group. So the great thing is similar business model to us but very little overlap in the actual established partnerships.

And I honestly can't remember whether Stanley is one or not. But what I would say is as we think about our service providers, we feel like -- and this is inclusive of all of them, we feel like the product that we're adding to our stack with OpenEye will be relevant, particularly to those on the high end of the space, and you've identified one, where they're needing to install, in some cases, a couple of hundred cameras on a given customer site. So that's where it's particularly relevant, and there may be a fit there, but I don't think we've connected that just yet.

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Operator [20]

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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 [21]

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I wanted to come back to OpenEye just briefly. With a mix between hardware and license, should we expect directionally a lift on the hardware and other gross margin side as we go forward into Q4 and maybe into next year?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [22]

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Yes. Good question. Steve, do you want to take that one?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [23]

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Yes. I think the gross margins for OpenEye for hardware are higher than our typical gross margins, so there would be a little bit of a lift in the overall gross margins for Alarm.com.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [24]

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But basically, I think it's around 25% of what we're going to be taking from OpenEye or what's contributing there as software, which is pretty high-margin revenue relative to what we see on typical hardware revenue. So their contribution would provide a bit of a tailwind on the gross margins on the hardware and other line item because such a meaningful component of it is actually software.

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

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Okay. Got it. And then I wanted to ask Steve V. in terms of the tariff issue that's been talked about the last couple of quarters. What are you seeing on that front? And would you say directionally you're more positive on guidance or you're maintaining your expectations on the tariff front in your current outlook?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [26]

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We certainly have, as we've talked about in the past, we certainly have been incurring costs related to tariffs. We've been absorbing some of those. We've been able to pass some of that on, and so we still take a cautious view on tariffs. We don't know when the next tweet is going to come out, so we have to be careful. But I would say we're just -- we're being cautious when it comes to tariffs.

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [27]

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I would add a little color though, which is it hasn't quite been the big event that maybe we expected it to be. There are material additional costs. We're incurring some of those costs, but it does not seem to have affected demand. And I think that's probably because we and our service providers sort of figured out the right amount of these incremental costs that we should absorb and what's sort of the right amount that the customer may be willing to absorb without materially altering demand.

So while they're still relevant and we look forward to them potentially going away, it hasn't really been the big event that I think maybe we were fearful of 3, 6 months ago.

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David William Gearhart, First Analysis Securities Corporation, Research Division - VP [28]

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Okay. And then last for me, litigation expense roughly $2 million from the quarter, down sequentially. Can you give us any sense of what we should expect, just in absolute dollars for litigation? Should we model roughly flat for the next year, on 2020? That's it for me.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [29]

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Yes. It's really hard to predict litigation expense. As you said, for Q3, it was $2 million down compared to $5 million in Q3 2018 if you exclude the TCPA settlement. So it does kind of bump around at around the $3 million to $5 million per quarter level depending upon when events can occur. So it's always hard to predict when litigation matters come to the higher level of the case. But I would say if you look at the -- if you look at it in 2018, litigation expense was around $17 million, not including the TCPA settlement. In 2017, it was $7 million. And then in 2016, it was around $14 million.

So going forward, I think if you're modeling around the historical range, around the $14 million to $17 million. But again, that's caveated with it's very hard to predict when cases will come forward, it's hard to predict when the cost will be incurred.

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Operator [30]

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Our next question comes from Darren Aftahi with Roth Capital.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [31]

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A couple, if I may. First, I guess for Steve Trundle. You talk about investments. Why strategically is now the right time to kind of reinvest in all these areas of the business you kind of mentioned?

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

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Yes. I think it's because we have dipped our toes in the water in a number of domains. I think one being commercial, one being international. I could say the same thing about the HVAC segment. So in a few cases, and EnergyHub for that matter, we have been kind of playing delicately and not fully committing. But I think you do that, and you basically wait for the business to show you that it's worthy of being sealed. And I think we're at a point now where we feel more confident that a number of these efforts are worthy of capital allocation and will drive positive results with some additional scale. So that's one thing.

The second, I would say, is I feel like we've got into a healthy level of cash production that allows us to be sort of forward leaning with our corp dev activities. And I don't want to go to the point that we're entirely driving growth with corp dev when we have so many great organic initiatives that are also worthy of capital allocation.

So I think we're at a nice point in terms of a mix of cash production and sort of positive points with a number of these efforts. And therefore, I thought now is a good time to -- and we're not saying tomorrow, by the way. We still have 3, 4 months of this year to go through, and then we'll really get into the details of planning out next year.

But I felt like now is a good time for us to begin to think about how we're going to operate the business the next couple of years in terms of the EBITDA piece.

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [33]

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And I would add, too, that we've built a very good balance sheet. We have strong -- Steve talked about strong cash flows. And again, if you look at last -- for 2019, the EBITDA is at around the guidance of over $100 million, $102 million about, which is a good amount of EBITDA. This year, if you exclude the TCPA payments, we're going to probably generate about $65 million of cash flow, which is very a good amount of cash generation.

So I think we're at the point where we've got the business, a good balance sheet, good cash flow generation, and so the opportunity there is given all the opportunities with commercial, with video analytics and international, EnergyHub and PointCentral, all of those are really coming to the forefront of being ready for investment that we think will yield growth for the future.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [34]

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Great. That's helpful. A couple more, if I may. Just with the integration of OpenEye, how do we think about your service provider base? I think in the past, you talked about, I think it's well over 1,000 of your service providers are trained on your core commercial. But when you integrate these 2 platforms together going into 2020, like -- and beyond, how do we think about your service provider base vis-à-vis commercial strategy?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [35]

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Yes. So I think that by early part of next year, we will be providing a path for a set of service providers to become certified in the OpenEye solution as efficiently as possible, and we'll enable those folks who service markets that are relevant to OpenEye to become OpenEye service providers. We'll make that easy for them. We'll do some integrations with various parts of our offering back into the OpenEye platform and vice versa, so begin a couple of things. There's some fairly low-hanging fruit that we can go after initially in terms of simple integrations, and then we'll get to work on probably the more sophisticated integrations on things like the video analytics piece. But -- so the nice thing is there's not a ton of overlap right now. I think there will be some service providers that we enable by the first quarter, second quarter, assuming that they're interested, in adding the OpenEye offering to their solutions set and that's kind of how we're thinking about it.

At the same time, we think the business is good on its own. And we want to avoid sort of interfering with the business or doing things that would cause it to change trajectory on where it is other than maybe what I discussed a moment ago, where I talked about the value we see in driving down some of the upfront costs by shifting to a bit more of a SaaS model.

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

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That's helpful. And then lastly, what was the other SaaS revenue in the quarter?

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

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It was $5 million, up about 45% year-over-year for other SaaS, for the other segment.

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Operator [38]

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Our next question comes from Nehal Chokshi with Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [39]

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So this OpenEye acquisition is pretty exciting, I think. And so a lot more questions on this. First, was this a competitive process?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [40]

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I'm sorry. What?

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Steve Valenzuela, Alarm.com Holdings, Inc. - CFO [41]

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Was it a competitive process?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [42]

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Oh, a competitive process. Yes, the -- what I would say is that they had retained -- they had a retained banking relationship that was exploring a few options. I think the -- in terms of a strategic, we were the -- we were sort of the only one that was invited to consider the situation. So yes, it was sourced -- it wasn't a big auction, if that's what you mean, but...

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [43]

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Understood. That's helpful. And then who would you consider OpenEye's biggest competitor today?

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

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There are a set of folks. I want to avoid naming any single one, but a set of fairly established traditional NVR players who deliver software and NVRs that normally sit on-site and allow you to monitor hundreds of cameras without really a lot of cloud apparatus included. So OpenEye already is a cloudy-oriented provider, and that's really -- their big piece of differentiation is they allow you to manage the entire deployment through the cloud. If you want to share resources, you do that through the cloud. So it's already implemented as a hybrid cloud/on-premise model. They've gravitated to a more on-premise traditional pricing scheme, primarily because of the cash flow benefit that drives for a company that's self-funded.

But there are 3 or 4 large players that are in the traditional space. And then there are a handful of startups like OpenEye. I think on the disruptor list, OpenEye is probably the leader. And there are a couple of others that are driving entirely cloud-driven architectures. But I would say they probably have more traction than any of them.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [45]

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Are any of those established players Chinese vendors that have been recently put -- placed on a restricted list and maybe would be creating some disruption that you guys can go and take advantage of?

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

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I think that dynamic creates some additional opportunity in that OpenEye is also open, which means while they have a set of proprietary cameras that they offer, they support probably 12, 15 different partners, who -- when you go to a large commercial site, they don't want to be told that you need to replace all of the cameras they have installed over the last 3 or 4 years around the location so that you can run the OpenEye software. They want you to work with what's there, and that's driven the company to be fairly open and partner-oriented and support a wide range of cameras, including a number who are not on any type of list or have a -- that may have any of those liabilities associated with them. So that was another attractive element of this opportunity.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [47]

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Got it. And then finally, has the lack of VMS or VSaaS been an issue for driving the adoption of Alarm's other commercial offerings?

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Stephen S. Trundle, Alarm.com Holdings, Inc. - President, CEO & Director [48]

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I would say that not entirely because we have not gone after the segments that they're focused on. So we probably were working within a small -- slightly smaller TAM than what is conceivable with the OpenEye solution. And in our case, a typical installation will be anywhere from 2 to 30 cameras. And the way that video is -- on the commercial side is consumed is normally through an iPad or an iPhone or some other mobile device.

In their case, a typical installation could be hundreds of cameras that all need to be managed through a similar or through a single software stack. And the majority will be consumed by a person that's sitting in a guard station with 30 or 40 different cameras alternating in a proprietary user interface.

So that part of the market that they serve, customers like Gonzaga University or Olive Garden, some of these large sort of distributed players, Bed Bath & Beyond, that's a segment that we haven't really targeted with our commercial offering to date, and therefore, I wouldn't say we've been hindered, but now we have an opportunity through OpenEye to target more of that segment.

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Operator [49]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.