Alarm.com Holdings, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Alarm.com Q2 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to introduce today's conference call to Mr. David Trone, Vice President of Investor Relations. You may begin.

Thank you. Good afternoon everyone and welcome to Alarm.com's second quarter 2020 earnings conference call. As a reminder, this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO; and Steve Valenzuela, CFO. 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 third quarter and full year 2020, anticipated impact of the global economic uncertainty caused by the COVID-19 pandemic and emerging market dynamics and trends on our business and on anticipated market demand for our offerings. Our business strategies, plans and objectives of future operation continued enhancement to our platform and offerings, opportunities for growth in our current markets and other forward-looking statements. These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Statements containing words such as began, believe, continue, estimate, expect, indicates, may, project, trend, will, and other similar words are intended to identify such forward-looking statements. These statements are subject to risks and uncertainties, including those contained in the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2020, and in subsequent reports that we file with the Securities and Exchange Commission from time to time, including the updated risk factors section of our quarterly report on Form 10-Q that we intend to file with the Securities and Exchange Commission shortly after this call, that could cause actual results to differ materially from those contained in the forward-looking statements. Please note that the forward-looking statements made during this conference speak only as of today's date, and Alarm.com undertakes no obligation to update these statements to reflect subsequent events or circumstances, except to the extent required by law. Also during this call, management's commentaries will include non-GAAP financial measures and provide non-GAAP guidance. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in understanding the company's performance and trends, but notes that the presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the financial statements tables of our earnings press release, which we have posted to our Investor Relations website at investors.alarm.com. This conference call is being webcast and is also available on our investor relations website. The webcast of this call will be archived and a telephone replay will also be available on our website. So with these formalities out of the way, I'd now like to turn the call over to Steve Trundle. You may begin.

Thank you, David. Good afternoon, and welcome to everyone. We are pleased to report solid second quarter results. Our SaaS and license revenue in the second quarter was $95.7 million, up 16.2% over the same period last year. Our adjusted EBITDA in the second quarter was $29.2 million. I want to thank our service provider partners and the Alarm.com team for their continued strong performance as we navigate these challenging times. Our results were driven by decent momentum in new account installations in the U.S., which picked up nicely in the back half of the quarter after a slowdown caused by the COVID-19 shutdowns in March and April. Our service provider partners adjusted to the environment and successfully implemented new safety procedures that allow them to return to conduct the installation. We believe that their trusted reputations reassure consumers who seemed mostly comfortable with allowing our partners to operate inside their property. On today's call I'll focus on our OpenEye team's recent product and integration development and then discuss initiatives to help our service providers continue to adapt to the evolving market condition. I'll close by commenting on the recent announcement by ADT and by providing some additional details on the effect of COVID on the markets that we serve. Beginning with OpenEye, as you probably remember, we acquired the company last year to expand our commercial opportunity in the large enterprise and national accounts market. The cloud services component of the $4.4 billion video-based security market in the Americas region is forecasted to increase from 9% of the total market in 2018 to 15% of the market in 2022. OpenEye is a leader in this transformation with its innovative solutions. I should note that OpenEye has experienced more disruption from COVID than the North American residential component of our business. They tend to service schools, financial institutions, restaurant chains, and other large or multi-site customer locations. These sites have been less accessible for installations. In some cases, project budgets have also been paused, while companies manage these uncertain conditions. We view this disruption as temporary. Meanwhile, we have been very focused on executing our internal goals for Alarm.com integration of OpenEye and the R&D program we have for the platform. OpenEye recently launched OWS 24/7 Lite, a pure SaaS offering optimized to address mid-tier commercial customers. It supports up to 24 recording channels per system and provides access to streamlined versions of the OpenEye platform's robust enterprise feature set. We designed the OpenEye subscription service to provide a cost-effective and highly flexible option for businesses that want to get started with OpenEye technology without a sizable upfront capital investment. Since launching OWS 24/7 Lite, a growing number of Alarm.com's traditional service providers have included the offering in their toolbox and started to engage their mid-tier commercial customers. One recent example is Bargain Hunt. They have been an Alarm.com subscriber for several years with 90 locations. They were initially attracted to the capabilities Alarm.com offers for the efficient and secure management of multiple locations. After using our enterprise console, they expanded their deployment with our smarter access control service. Earlier this year, Bargain Hunt was introduced to OpenEye's full suite of video services, and they will begin rolling it out to their retail locations this month. Next, I want to share how we're evolving our support for our service providers, so that they can continue to optimize their operations in the current COVID environment. Every year we typically take advantage of a number of in-person opportunities to engage with our service providers and to conduct extensive training on the services and capabilities we offer. Recently, our training program, the Alarm.com Academy, launched an entirely new catalogue of training programs, and we significantly expanded our digital platform for online learning. We've seen a strong increase in session participation throughout the year, including during the second quarter. The new training is designed to help our service providers leverage the extensive tools and services we provide for remote system configuration, testing, troubleshooting, and repair. We initially developed these capabilities to help reduce operating costs for our service providers in normal times. The COVID-19 pandemic has given these differentiated capabilities significant new utility value. We also launched a new series of smart tip instructional videos, small group workshops, interactive troubleshooting scenarios, and live webinars to replace in-person sessions. All of these were added during the second quarter and have been helpful in making sure that our service providers are well versed on the latest services and capabilities that we offer. Next, I want to comment on the announcement ADT made two days ago regarding their partnership with Google. I'm sure that our investors are wondering what this means for Alarm.com. ADT has indicated to me that it is day one for this initiative and they are working to further develop a view of both the initial objectives and their longer-term plans. We believe that ADT continues to view Alarm.com as a strategic partner. Our software is the technology platform that powers the ADT command and control offering and provides the Smart Home Services for a large and growing percentage of their residential and commercial customers. The launch of command and control in 2019 was a significant undertaking, and has been a success by many measures. We expect to continue working with ADT to support and expand the deployment of this offering for the foreseeable future. As we have always done, we will continue to focus on our mission of delivering to our service providers and their end customers, the most innovative, secure and reliable platform available. We believe our focus on serving our partners and on technology innovation has served us well and we remain committed to our approach. Over the past quarter, we have continued to win awards for our innovation, as well as grow our partner base despite the challenging environment. We have more than 9,000 service provider partners globally. Our large ecosystem of hardware partners enables a breadth of services and capabilities that span the DIY, full service residential, multifamily, small business and commercial smart property verticals. Often we see that one of the advantages that Alarm.com brings to our service provider partners is the ability to provide a single platform with a full spectrum of IoT application services that address all these market segments. Lastly, I want to update you on market conditions and our sense about the overall effects of the COVID pandemic on our business. As I mentioned on last quarter's call, the pandemic impacted new account sales and installations across all, but our energy hub lines of business in March and April, as shelter-in-place orders were implemented. The U.S. residential security market has improved considerably from this slowdown. Our commercial business, and especially our international business are seeing more of an ongoing impact from COVID. Overall momentum in new account installations continues to build through the second quarter, and our retention remains solid at pre-COVID levels. We're also seeing a couple of market dynamics that tend to favor sales of new security systems. During challenging economic environments, consumers historically tend to worry more about asset protection and security and safety become more important. And now we are seeing an emerging suburbanization trend where a growing number of households are seeking to migrate away from dense, expensive major metro areas to smaller cities and suburbs where single-family homes are more accessible. This appears to involve a high percentage of adults under 30 years of age, as a younger cohort of adults increasingly purchase single-family homes, we see a strong fit for our professionally installed and serviced Smart Home Solutions. I also want to remind you that the course of the pandemic will likely continue to influence economic conditions for the foreseeable future. The exact outcomes remain difficult to predict. As such, we will remain cautious about projecting what future conditions may look like and we will continue to focus primarily on what we've already seen, or are currently seeing in our markets. In summary, I'm pleased with our second quarter results. We remain confident that we can continue to advance our strategy as we navigate this uncertain period. I want to thank our service provider partners, our ecosystem partners, and the Alarm.com team for their hard work and our investors for their trust in our business. And with that, let me turn things over to Steve Valenzuela. Steve?

Thank you, Steve. I will begin with a review of our second quarter 2020 financial results and then provide guidance for the third quarter and our raised outlook for the full year of 2020 before opening the call for questions. SaaS and license revenue in the second quarter grew 16.2% from the same quarter last year to $95.7 million. This includes Connect software license revenue of approximately $9.8 million for the second quarter, down from $11 million in the year ago quarter. Our SaaS and licensed revenue visibility remains high with a revenue renewal rate of 94% in the second quarter, at the high end of our historical range of 92% to 94% and consistent with levels prior to the COVID pandemic. Hardware and other revenue in the second quarter was $45.9 million, up 16.8% over Q2, 2019. We continue to see strong sales over video cameras, which primarily accounted for a large increase in hardware sales. Total revenue of $141.6 million for the second quarter grew 16.4% from Q2, 2019. SaaS and license gross margin for the second quarter was 86.4%, up approximately 180 basis points from Q2 2019 gross margin of 84.6%, due to improved efficiencies we've been able to achieve in our operations. Hardware gross margin was 21.6% for the second quarter, compared to 18.9% for the same quarter last year, primarily due to product mix and inclusion of OpenEye which has a slightly higher hardware margin. Total gross margin was 65.4% for the second quarter compared to 63.4% for the same quarter last year, mainly due to favorable product mix. Turning to operating expenses. R&D expenses in the second quarter were $36.6 million, compared to $28.4 million in the second quarter of 2019. We ended the second quarter with 721 employees in R&D, and total headcount of 1,317 employees, up from 554 employees in R&D, and total headcount of 1,005 in the year ago quarter. We have continued to build our team during the pandemic, with particular focus on engineering staff, and have had success hiring for some positions that had been hard to fill in the past. Sales and marketing expenses in the second quarter were $16.9 million, or 11.9% of total revenue compared to $15.6 million or 12.8% of revenue in the same quarter last year. Our G&A expenses in the second quarter were $17.4 million, compared to $13.9 million in the year ago quarter. G&A expense in the second quarter includes expenses that we exclude from our measurement of our non-GAAP financial performance, which we refer to as adjusted measures. These include non-ordinary course litigation expenses of $1.6 million, compared to $3.1 million for Q2 2019. Q2 adjusted measures also includes non-ordinary course expenses of $543,000 for the secondary offering completed by TCV, and a reduction to expense of $1.7 million to adjust earn-out liability related to our acquisition of OpenEye due to the lower probability of OpenEye achieving their earn-out. Non-GAAP adjusted EBITDA on the second quarter was $29.2 million, up from $27.7 million for Q2 2019. In the second quarter, GAAP net income was $17 million, compared to GAAP net income of $13.8 million for Q2 2019. Non-GAAP adjusted net income increased to $20.6 million in the second quarter, compared to $19.9 million for the second quarter of 2019. Turning to our balance sheet, we ended the second quarter with $205.8 million of cash and cash equivalents. A very strong increase of cash of $34.1 million quarter over quarter. Our DSOs in Q2 remain constant at 49 days and up slightly from a year ago when our DSOs were 45 days. We have a strong balance sheet and a cash flow positive business model. In the second quarter, we generated approximately $35.1 million cash flow from operations, up from $24.1 million cash flow in the second quarter of 2019. Our free cash flow for the second quarter was $31.8 million, compared to $21.3 million for the same quarter last year. In the second quarter, our capital equipment purchases were $3.4 million, compared to $2.7 million in Q2 2019. Next, I will review our outlook for the third quarter in 2020. This continues to be a challenging time to forecast as there are many unknowns with regard to the pandemic. While our second quarter results show that our service providers are operating fairly well overall, we cannot fully anticipate how future results might be affected by the pandemic and its impact on general economic conditions or our supply chain, among other factors. For the third quarter of 2020, we expect SaaS and license revenue of $96.6 million to $98.8 million. For all of 2020, we expect SaaS and license revenue to be between $382.7 million to $383.1 million, up from our prior guidance of $375 million to $380 million. We are raising our guidance for total revenue for 2020 to $552.7 million to $563.1 million, up from our prior guidance of $515 million to $535 million, which includes estimated hardware and other revenue of $170 million to 180 million. We're raising our guidance for non-GAAP adjusted EBITDA for 2020 to $160 million to $107 million, up from a prior guidance of $100 million to $103 million. Non-GAAP net income for 2020 is estimated to be $74.2 million to $74.9 million, or $1.46 to $1.47 per diluted share, up from our prior guidance of $69 million to $73.5 million or $1.36 to $1.45 per diluted share. We expect our non-GAAP tax rates to remain at 21% for 2020. EPS is based on an estimate of $50.8 million weighted average diluted shares outstanding. We expect full year 2020 stock-based compensation expense of $27 million to $29 million. In summary, we are pleased with how well our service provider partners and our Alarm.com teams are performing in this environment. We will continue to work hard to support our service provider partners and their customers during these challenging times. And with that operator, please open the call for Q&A.

Our first question comes from Adam Tindle of Raymond James.

Thank you. Good afternoon. Steve Trundle, I thought I would begin with a general strategic update. The industry backdrop is quite volatile, yet your performance has remained stable, which is likely different from your competitors. You have a strong balance sheet and a stable, predictable business, giving you some flexibility to be more aggressive. Could you discuss how you plan to leverage this stability as a competitive advantage? Is this an appropriate time to consider larger initiatives? Additionally, what key metrics or criteria are you prioritizing in your investment decisions?

Sure, Adam. I believe we're in a fortunate position. Our service providers are generally performing well, providing a good level of stability. The businesses rely heavily on recurring revenues, making them more predictable. Looking ahead, we don't plan to change our strategy significantly. Instead, we will continue to reinvest in R&D and steadily expand the range of offerings available to our service providers to help them grow their markets. Over the years, we have evolved from residential services to include residential video, commercial solutions, and access control, which is essential for our service providers as we aim to cover a full spectrum of IoT application services. We have also been expanding globally, which requires substantial investment. That said, we will keep focusing on a couple of key areas. One is our corporate development function, which has been exemplified by our recent work with OpenEye. We will continue to explore opportunities to add value. Additionally, we might adopt a somewhat more aggressive marketing approach in the next year. In general, while it's a tricky time to be overly optimistic due to COVID-related uncertainties that create a cautious outlook, we are leveraging this dynamic to actively recruit, fill key open positions, and pursue growth in various directions.

Understood. That's helpful. Maybe just as a follow up more near term, SaaS revenue growth obviously accelerated this quarter, I think over 4% sequential growth. If you could just touch on some of the key drivers between ARPU, dealer ads, retention. And you also mentioned that I think subscriptions picked up at the end of the quarter. Could you give us an update on what you're seeing here in early August? Did that pick up at the end of the quarter continue kind of linearly, as you sit here in early August? Thank you guys.

Yes. Good question. So the thing that probably surprised us in the quarter was the strength of the U.S., particularly the U.S. residential market, which picked up a little more quickly than we expected. And really, at this point, is running pretty well. And that, we have a number of partners that are doing extremely well. That kind of covered some of the weakness that we saw commercially and internationally. The international markets have not come back quite as quickly. So a lot of the growth was driven by outperformance in U.S. residential. Now there also was some strong performance in the subs. If you look at the 10-Q, I don't know if it's out yet or not. But you'll see 60% year-over-year growth on the SaaS line in the subsidiary businesses and a good bit of that's driven by energy hub bringing on really moving to a more mature status in some of their electric utility relationships. And that's nice tailwind for the business. So some of it is ARPU driven. But at the moment, our posture on ARPU is to really focus on the value we're providing the service providers and make sure that we're not trying to get everything on the table necessarily, but instead deliver to the consumer steadily better experience. That said, video analytics has been continuing to pick up. And as customers use more, it really is a nice offering, as customers use more of the capabilities that we're able to render, then we get a trickle of improvement on the ARPU rate over time as well.

Thanks, Steve.

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

Thank you for taking my questions. I have a two-part question for Steve Trundle. First, Steve, what does the convergence between internet services and home security mean strategically? It seems that the competition in the smart home market has become more complex with this recent transaction. How do you view this development in the long term, and what implications does it have for your business? As CEO, what are your thoughts on this situation?

That's a two-part question, so I'll address the first part. If I understood your question correctly about the convergence of internet service provisioning with security, this trend has already begun. We have transitioned from relying almost entirely on wireless technology to increasingly leveraging consumers' internet connectivity, especially for video services and integrating additional third-party devices. As we utilize that communication channel, ensuring reliability is crucial because we're focused on providing a dependable security service, not gaming experiences. Our service providers are beginning to help consumers enhance the reliability of their internet services, which has also been part of our strategy. We developed the Alarm.com smart gateway to enable dealers to remotely manage the connectivity within homes that support video cameras and other internet-connected devices. This solution not only increases efficiency but is also becoming an integral part of their offerings. I believe this trend will continue. We also have some customers in the MSO sector, where bundled offerings are particularly beneficial. Reflecting on the current landscape, things have become both more complicated and not so. This announcement highlights the appeal of the professional service provider channel in the smart home market, which we've recognized for a long time. Our focus has primarily been on professional service providers, and this approach has served us well. This new development reaffirms our strategic direction from over a decade ago. While it's still early to fully understand the implications, we maintain a solid partnership with ADT, collectively servicing over 3 million customers. We are equipped with the competence and capability that will prove valuable moving forward. We're eager for upcoming discussions and planning sessions to explore future opportunities, although it's too soon to predict specific integrations of new devices.

I mean, just a clarification question, I can see how that makes from, okay, dual-brand strategy, ADT having DIY and professional services that at the same time. And that maybe didn't work out with Google, Brinks, that's well, but it was okay. And it sounds like Google wants to take it to the next level. But I guess the threat to you is that Google at some point might have a back end system for dealers that comparable in strength to your current technology. So maybe if you can help us compare and contrast what Google has today in that regard versus the capabilities of your system? Thank you.

I believe much of the difference stems from our background. Since 2004, we’ve primarily focused on professional service providers, developing backend software that enables them to manage extensive deployments, often dealing with multiple dealers. A significant portion of our offerings isn't directly consumer-facing. In commercial applications, we also deal with complex login hierarchies and permission routines. These wouldn't have been developed if we were just starting out recently. In contrast, Google has excelled on the consumer device front, creating well-designed, function-rich devices that have made a substantial impact, like the Nest thermostat. Their software focus has been on enhancing the consumer experience around those devices rather than building a platform for service providers. We're starting from a different foundation, but with the right collaboration, we could advance on both fronts. Additionally, our platform caters to various market segments, whether a dealer servicing small businesses or residential customers, engaging in DIY, or incorporating health components. We adapt our offerings to support service providers, which sets us apart from Google’s emphasis on consumer home devices.

Perfect. Thank you.

Our next question comes from David Robinson with William Blair.

I have a question about the OpenEye SaaS offering. Could you elaborate on how the sales process differs from the legacy offering? In the past, you mentioned plans to increase sales resources for OpenEye. Is that still the case, and how might that affect the profile of the target customer compared to the legacy offering?

That's a great question. The Salesforce enhancement is focused on two areas. First, the OpenEye team is expanding their sales team and increasing their outreach. Second, we're starting to offer this through the Alarm.com partner sales team we've had for a while. As we integrate OpenEye into the Alarm.com channel, it makes sense to adapt what I mentioned earlier as OWS Lite. This version is less enterprise-oriented and more of a true SaaS product with a low upfront cost, aligning with what our service providers are familiar with selling. We will continue to support the OpenEye platform for enterprise sales, targeting large institutions like universities that prefer traditional enterprise deployments with their infrastructure. This enterprise model is supported by a fast software layer for remote management. In summary, we are committed to maintaining our enterprise business while also focusing on a lightweight SaaS offering that will be more relevant for smaller locations and a wider market segment, ultimately presenting a more attractive and sustainable long-term economic model with reduced upfront costs for subscribers.

Great.

Our next question comes from Jeff Kessler with Imperial Capital.

Hi. Congratulations on a strong quarter in a challenging environment. I'm curious about your announcement regarding Johnson Controls International, which is the former ADT brand that has somewhat faded into the background due to Verisure. It has been considered in some cases and also experienced growth. You've entered Europe with Securitas, and now you're looking to support a potentially large range of consumer systems with Johnson Controls. Are you focusing solely on consumers, or do you plan to expand into small business or even enterprise markets with them over time? Could you discuss your European strategy, as it appears you're starting to cover the entire continent?

Yes, it's insightful that you mentioned that announcement. Many people in the U.S. may have overlooked ADT International, but it remains a significant and thriving business outside the U.S. It's not limited to Europe; it includes parts of Asia as well. We are launching in 11 countries across those regions, with an initial focus on residential services and enhancing the customer experience by offering a more comprehensive range of Alarm.com powered services. We aim to manage customer attrition while refreshing how we present what ADT International offers to consumers. They have executed exceptionally well in the first half of the year, and things are progressing positively. Regarding our overall ambitions, we aim to maximize every investment made in the North American market for international markets as well. When we invest in commercial services, access control, or video analytics, we do not consider these features as exclusive to the U.S. but rather evaluate their relevance to other segments and partners globally. Just as we observe in North America, various service providers cater to different market segments, be it enterprise, small business, or others. Some cover all segments, but given the existing fragmentation, we will continue to collaborate with a wide range of partners, and over time, we hope to enhance the overall smart property experience that consumers can expect in other markets.

Is this separate from your key with Secure Cost? Will it be in conjunction with them? Will there be any overlap? How are you planning to manage this?

No. It's similar to how we work with 9,000 service providers already, where we take as much as we can while maintaining an impartial stance. We conduct a lot of research and development, which we then distribute across various service providers. We have a strong relationship with Securitas and intend to fully support them. However, ADT International operates as a separate entity, so this isn't a partnership arrangement.

Sure. Could you provide more details about the energy hub? You mentioned it contributed positively to your growth, especially in SaaS during the quarter. What factors are contributing to its current success, since it seems to be impacting your numbers this quarter?

Certainly. I will discuss our tactics and then touch on our strategy. Regarding tactics, we have occasionally announced new energy hub partners, including some large and notable utilities. However, we haven’t disclosed every deal, as some partners prefer to keep that information private. Last year, many of these opportunities were in the initial stages, focused on trials and pilots. The accelerated growth we experienced in the second quarter stemmed from these relationships maturing and moving towards full deployment. Now, on to our strategy, the goal is to connect various energy-consuming devices primarily found in residential properties. We already do this substantially through our Alarm.com business. Additionally, on the energy hub side, we partner with a range of companies, including those we typically consider competitors, such as HVAC manufacturers, water heater producers, thermostat makers, and pool pump manufacturers. We aggregate their data and provide a degree of control to electric utilities, enabling them to better manage and oversee their grid operations and occasionally influence their production loads. This is a positive sector to be in, although it requires scale and time. Gaining traction with a few partners often leads to additional relationships. Furthermore, managing the edge of the grid is becoming increasingly complex due to factors like batteries and solar inverters, necessitating tracking and understanding of numerous components that generate more data. This presents a strong opportunity for software providers to thrive.

Okay. Thank you very much.

Thanks.

Our next question comes from Kevin McVeigh with Credit Suisse.

Great. Thank you. Hey, Steve, you mentioned unexpected strength in U.S. residential in the quarter. Maybe just help us understand what drove that just related to expectations?

Yes. In the last quarter, we mentioned that new account creation was about 70% of our expectations, which made us more cautious in our outlook for the rest of the year. We anticipated an increase, but we weren't certain when it would happen. Fortunately, it improved significantly during the quarter. What surprised us was the willingness of consumers to engage with companies that have a trusted reputation. Service providers like ADT and Brinks, which have strong reputations, have made customers comfortable allowing a well-known, trusted brand into their homes, particularly when they feel safety measures are in place. Additionally, many consumers are at home and more available for sales visits and installations, making them more likely to consider upgrading to a smart home system. Despite the severity of the COVID pandemic in the U.S., the consumer has shown remarkable resilience, even in areas like Florida and Texas where the situation is more serious.

And then again, just going back to ADT, Google. From a market perspective have you think just the competitive landscape reset. To the extent obviously, you work through a lot of distributors. How do you think the other distributors react? I mean, I know, that's a hard question. But do you think it triggers other type of relationships similar to what Google ADT have or just any thoughts on if there is any kind of industry fundamental change?

Okay. I think there's some background noise, but I'm not sure where it's coming from. It's still a bit early to assess the impact of the recent announcement on the market, so it's hard for me to predict how other service providers might respond. Generally, the market has been competitive for quite some time, both in technology and among service providers. This competition can be beneficial for us and our relationships with service providers, as it fosters the need for innovation. We're making investments to ensure we maintain a strong innovative presence. To provide consumers with a top-tier experience, I believe we are the ideal partner, and no matter how the competitive technology landscape evolves, it will be advantageous for Alarm.com.

Thank you.

Our last question comes from Jack Vander Aarde with Maxim Group.

Okay. Hi guys. Excellent quarter. Thanks for taking my questions. Okay. So, first question for Steve Trundle. One of my favorite topics to explore is the premium services front and kind of what new potential solution, services or any offerings during the pipeline that may go overlooked. Do not talked about as much. But could be quite unique to the current market while also being a material ARPU expansion driver. One example in my mind is the recent acquisition of AirDog, a maker of unmanned aircrafts. That sounds exciting. Could you maybe talk about the vision or the plan for unmanned aircrafts? And then anything else in the pipeline or on the drawing board you might be able to talk about?

We are continuously working to broaden the range of value we can deliver to consumers through our service providers. There have been some developments that are not fully operational yet but have garnered attention, such as the connected car capabilities we introduced in the fourth quarter of 2019. This technology is still in the early stages of deployment. We have previously highlighted the significance of water monitoring and management for consumers, and we are making substantial investments in this area. I am optimistic that within the next 12 months, we will introduce an appealing offering that will be more widely implemented. With AirDog, we have been focused on enabling cameras to be more versatile, allowing them to capture dynamic events rather than remaining fixed in one position. This involves fundamental research and development, which is an ongoing effort that we will continue to support. We aim to keep our service providers ahead of the curve, which requires us to look beyond the next six to twelve months and occasionally take calculated risks on initiatives that we believe will provide distinct value over time, even if they take longer to realize.

Got it. That's helpful. And then also, Steve Trundle, if you could provide maybe a status update on PointCentral, which I imagine it's been likely impacted or more disruptive than your residential business, giving vacation and property rentals. But they did acquire Doorport back in early May, which is already announced I think last quarter too. But any additional color you can provide on PointCentral? And maybe just informally speaking, when you might see them scale into a larger contributor to Alarm as a whole to the business?

Yes, that's correct. They have been and continue to be more affected by COVID than other segments. Their customers are vacation rental companies, which are currently doing well. People are traveling and staying in vacation homes more than before, as this is how many are spending their summer vacations. The market is strong, but there aren't many opportunities to install new systems this summer since everything is fully booked. We expect winter to be the time when we can hopefully re-enter the vacation rental market with a quicker installation rate. Additionally, they are involved in creating a comprehensive multifamily platform that can serve both large rental home owners and those managing multiple 300-unit buildings. PointCentral offers a smart property solution that benefits property owners, managers, and tenants alike. Doorport is relevant to this vision, focusing more on multifamily high-rise residential properties. We aim to enhance value at the access point that tenants use through a smart intercom solution. We intend to achieve this through multiple partnerships in the intercom sector as well as a cost-effective retrofit solution that does not rely on the building's internet connection. We believe Doorport is a leader in this area and will integrate well into the PointCentral multifamily offerings, thus strengthening our technological position.

Got it. That's helpful as well. And then lastly, I'll take last one and then queue here. For Steve Valenzuela, so the SaaS and license revenue guidance for 2020 was raised. I know, a lot of analysts have already kind of questioned or had questions about this. But it does imply robust growth. And that's great to see. Just hoping you can maybe break it down though in terms of the underlying drivers. Would you say, what are the factors there that are embedded there in terms of maybe international subscriber growth. Does embed international subscribers grow, commercial subscribers grow? And then how much it's split towards this ARPU expansion in general?

Yes, Jack, thanks for the question. I'm actually here. This is the first question I got. So it's good to get a question. So yes, the SaaS pro forma, as you've talked about, really is new subscriber ads, really in North American residential being the major driver. We continue to see really good progress and really good uptake with video analytics. And as Steve talked about that does inch up the ARPU a bit. But again, I think we're benefiting from a faster if you will V-shaped recovery in North American residential, being a main driver, that's helping offset some slowdown and international. We have a number of new dealers internationally that are proceeding is just at a slow ramp given the COVID pandemic. And then commercial, of course, has been impacted a bit. But I think the main driver has been strong new subscriber ads in North American residential. The retention rates have been rock solid, even, compared. Basically at the same level prior to the pandemic. And so, we're getting a boost from new subscriber ads, and at a faster rate than we anticipated, with a same level of retention and ARPU inching up.

That's helpful. Please continue.

That's really driving the SaaS growth.

Fantastic. All right, guys. Again, great quarter, solid results and I appreciate the time. Thanks.

Thanks, Jack.

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