Alarm.com Holdings, Inc. Q1 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Alarm.com First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Zartman, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone and welcome to Alarm.com's first quarter 2022 earnings conference call. I want to remind you that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO; and Steve Valenzuela, our CFO. Before we begin, a quick reminder. Management's discussion during today's call will include forward-looking statements, which include among other projected financial performance, the impact of emerging market dynamics, trends and anticipated market demand, the impact of the COVID pandemic and challenging global supply chain dynamics. Our business strategies, plans and objectives and integration of recent acquisitions, continued enhancements to our platform and offerings, opportunities for growth and expansion in our current and new markets. These forward-looking statements are based on our current expectations and beliefs, and on information currently available to us. These statements are subject to risks and uncertainties, including those contained in today’s earnings press release and in the Risk Factors section of our most recent annual report on Form 10-K filed with the SEC on February 24, 2022 and in subsequent reports that we file with the SEC from time to time, including our quarterly report on Form 10-Q for the quarter ended March 31, 2022 that we intend to file with the SEC 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 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. Let's now turn the call over to Steve Trundle. You may begin.

Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report solid Q1 results to begin the year. Our SaaS and license revenue in the first quarter was $123.2 million, up 14.8% over last year. Our adjusted EBITDA in the first quarter was $29.9 million. In the first quarter, demand remained steady for Alarm.com products and services and we saw stronger sales than expected, but we also absorbed increased component and freight costs that pressured our hardware gross margins. As a result, we are currently facing a second price increase of the year on select products. We expect hardware margins to strengthen from Q1 levels as the year progresses but not to reach our historical levels during 2022. On today's call, I want to update you on several new commercial product initiatives that are good examples of the ongoing collaboration between our OpenEye and Alarm.com R&D teams. I will also share some takeaways from my time at ISC West, the largest security industry trade show of the year, which was held in late March. Starting with our new commercial products. We recently introduced the Pro Series commercial stream video recorder or SVR. It's designed for small and medium-sized commercial installations with support for up to 16 cameras on a single recording device. The SVR is accessible from anywhere through an intelligent interface that includes a timeline view of all video feeds in the property. The timeline displays an overlay of activity detected by video analytics, security and access control systems, and other sensor-based events. This functionality streamlines forensic video searches and provides a unified interface for subscribers to monitor their property and view important activity. Importantly, the Pro Series SVR was developed via collaboration between the OpenEye and Alarm.com product teams. The effort has allowed us to introduce to mid-tier commercial customers a set of enterprise-grade video management capabilities that are typically available only to the large-scale customers that OpenEye serves. OpenEye also had a productive quarter. During ISC West, they demonstrated a new analytic solution that was recently introduced into their SaaS offering. OpenEye worked with Alarm.com's video analytics team to advance our AI architecture and deploy a new neural network that is optimized for the high demand environments of OpenEye’s enterprise commercial customers. This new video analytics engine can simultaneously analyze the large volumes of data generated by hundreds of cameras. It is also relatively open and supports retrofitting of existing third-party camera deployments into OpenEye’s enterprise video ecosystem. One functional benefit of this new architecture is highly accurate activity detection that reduces false motion events that can be caused by background movement and other image noise. More precise detection of important activity will allow subscribers to create more actionable alerts and quickly find recorded video associated with an incident. Another benefit is the opportunity for customers to reduce video storage needs and related costs. Today, most enterprise commercial customers receive too many nuisance, false alerts that waste valuable video recording space. OpenEye can now dynamically trigger alerts and camera recordings only when important activity, including the presence of a human or vehicle, is detected. During testing of this new capability, OpenEye saw a reduction in false positive alerts reporting that led to a 20% to 40% improvement in video storage efficiency. When we acquired OpenEye in the fourth quarter of 2019, I discussed the opportunity we saw to leverage technology and domain expertise across Alarm.com and OpenEye. Developing and deploying advanced video analytics capabilities in the OpenEye channel was a key part of this vision and an important step in our strategy to build a strong and durable recurring revenue business model at OpenEye. The OpenEye team is doing great work and has become a strong contributor to our business. Let me next turn to ISC West, where Alarm.com recently had a great presence. We highlighted our residential security and video products, especially new partner-facing capabilities that drive operational efficiency and increased subscriber satisfaction. We also showcased our expanding set of commercial services. During the conference, we engaged with a broad cross-section of our service providers in direct meetings, training sessions, and hosted events. These activities always create a valuable opportunity to take the pulse of our channel and hear direct market feedback. Our service provider partners continue to see a positive demand environment for professionally installed security services. Consumers increasingly view security systems as the platform for an intelligent multi-device smart home. Alarm.com and our service providers are driving this trend and leading the industry, particularly in deploying video solutions. In 2021, our service provider partners attached video to nearly half of all new security and smart home accounts. Industry-wide Parks Associates recently estimated that about 30% of residential security systems installed in 2021 included video. Overall, my sense was that our partners see a positive year development. Most of their concerns were focused on supply-related issues, inflationary pressures, and labor constraints rather than market challenges, competitors, or product gaps. To conclude, I'm pleased with our Q1 results and the progress we made to expand our platform during the quarter. 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?

Thanks, Steve. I will begin with a review of our first quarter 2022 financial results and then provide our updated guidance before opening the call for questions. SaaS and license revenue in the first quarter grew 14.8% from the same quarter last year to $123.2 million. This includes Connect software license revenue of approximately $7.1 million for the first quarter, down as expected from $8.7 million in the year ago quarter. Our SaaS and license revenue visibility remains high, with a revenue renewal rate of 94% in the first quarter, which is at the high end of our historical range of 92% to 94%. Hardware and other revenue in the first quarter was $82.2 million, up 26.3% over Q1 2021. We continue to see strong sales of our video cameras, driven by increased adoption of our industry-leading video solutions and video analytics capabilities for both our residential and commercial subscribers. Total revenue of $205.4 million for the first quarter grew 19.1% year-over-year. SaaS and license gross margin for the first quarter was 86.3%, up approximately 20 basis points quarter-over-quarter, mainly due to product mix. Hardware gross margin was 11% for the first quarter, which was flat quarter-over-quarter and down from 22.3% during the same quarter last year. Hardware gross margins were lower than expected due to additional cost increases for components and higher shipping costs. We continue to ship more products by air freight to meet demand and shipping costs increased due in part to increasing fuel prices. As a result of these additional costs, we announced our second price increase this year on some of our hardware products. The pricing changes will mostly take effect later in the second quarter. Barring any additional economic impacts or supply chain disruptions, we expect hardware gross margins to improve from Q1 levels each quarter this year. Total gross margin was 56.1% for the first quarter, down from 57.8% last quarter, mainly due to a higher mix of hardware revenue in the quarter. Turning to operating expenses. R&D expenses in the first quarter were $51.5 million compared to $42.5 million for the first quarter of 2021. We ended the first quarter with 892 employees in R&D, up from 797 employees in the same quarter last year. Total headcount increased to 1,565 employees in the first quarter compared to 1,414 employees a year ago. Sales and marketing expenses in the first quarter were $23.2 million or 11.3% of total revenue compared to $19 million or 11% of revenue in the same quarter last year. Our G&A expenses in the first quarter were $24 million, up from $22.9 million in the same quarter last year. G&A expense in the first quarter includes non-ordinary course litigation expense of $1.1 million compared to $5.3 million for Q1 2021. Non-ordinary course litigation 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 first quarter was $29.9 million, down from $35.6 million in Q1 2021, mainly due to the lower hardware margins. In the first quarter, GAAP net income was $9.1 million compared to GAAP net income of $14.8 million for Q1 2021. Non-GAAP adjusted net income was $21.3 million, or $0.39 per diluted share in the first quarter compared to $25.8 million or $0.50 per share for the first quarter of 2021. Turning to our balance sheet. We ended the first quarter with $671.8 million of cash and cash equivalents. During the first quarter, we used $23.3 million of our cash to repurchase 354,123 shares of our stock. Turning to our financial outlook. For the second quarter of 2022, we expect SaaS and license revenue of $126.2 million to $126.4 million. For the full year 2022, we expect SaaS and license revenue to be between $512.7 million to $513.3 million, up from our prior guidance of $508 million to $509 million. We are projecting total revenue for 2022 of $822.7 million to $853.3 million, an increase from our prior guidance of $808 million to $819 million, which includes estimated hardware and other revenue of $310 million to $340 million. We are maintaining our guidance for non-GAAP adjusted EBITDA for 2022 at $149 million to $150 million given the very challenging global supply chain dynamics and unusual geopolitical concerns among other factors. We expect adjusted EBITDA in Q2 to represent approximately 22% of our annual guide. Non-GAAP adjusted net income for 2022 is projected to be $104.3 million to $105 million, consistent with our prior guidance. Our EPS is estimated to be $1.87 to $1.88 per diluted share compared to our prior guidance of $1.86 to $1.88 per share. We currently project our non-GAAP tax rate for 2022 to remain at 21% under current tax rules. EPS is based on an estimate of 55.8 million weighted average diluted shares outstanding. We expect full year 2022 stock-based compensation expense of $50 million to $52 million. In summary, we are pleased with how well our service providers and internal teams continue to perform during these challenging times. We are focused on executing our business strategy and investing in our growth opportunities while continuing to deliver profitable growth. And with that, operator, please open the call for Q&A.

Thank you. Our first question comes from Adam Tindle with Raymond James. Your line is open.

Okay. Thanks. Good afternoon. I want to start with Steve Trundle just kind of an observation that a lot of consumer subscription companies are seeing major challenges right now, whether it's Netflix, etc., yet your subscription metrics are still solid mid-teens growth. I know your B2B but end consumer is the ultimate customer. Wondering why you think this is, is there some sort of lag effect because you're B2B2C or are you not expecting impact, and any metrics that you can give us to kind of support your view on why this business seems to be a lot more durable than some of those other consumer subscription models out there?

Hey, Adam. Yeah. Good question. I think a lot of it is our market. We serve is that security and safety are fundamental consumer needs. We're not selling an entertainment service and we're not competing with a variety of other sources of new entertainment, whether it'd be TikTok or otherwise. So I think in our case, fortunately, we're going after a market that is fundamental to the consumer, and they don't want to part with safety and security and our service providers have a long, long history of knowing how to address the needs of each locality. So perhaps the B2B2C aspect gives us a little bit of a shield, but I think it's probably more basic than that, which is that the market is generally growing, we're delivering the technology that renders what we believe to be the best smart home and security experience. And the consumer need is not going away even during recessionary periods. We normally see that security holds up very well. People are moving less and there is usually a heightened concern about property protection. So I think it's probably a trend that's not going away. I think we'll hold up fine.

Got it. That makes sense. Just a follow-up for Steve V, on EBITDA margin, obviously a really challenging environment, but you're executing well in Q1. Just under, I think 15% this quarter, but if I look at the full-year guidance, I think it's closer to 18%, so sort of this lift as the year progresses. Wondering if you could maybe unpack some of the key factors that you're considering in that assumption to kind of climb up EBITDA margin and the timing for those margins to normalize? Thank you.

Yeah. Adam, good point. Certainly, the hardware margins, we expect to improve with the price increases. So, Q1 hardware margin 11%. We expect Q2 to probably be around 13% and then Q3 could be closer to 17% to 18%. So that's certainly a big factor. Also keep in mind, seasonality-wise, typically Q4 is our seasonally strongest quarter, especially with Energy Hub contributing that incremental amount of revenue. So those are really the main factors I would point you to for the improvement in EBITDA margins.

Okay. And just quickly clarify, since we're just in such an uncertain supply environment, hardware for Q2, I mean we typically see summer months, you got a sequential uptick, but I'm just not sure if we've got kind of a different type of a year and would hate to be missing something on how to think about hardware revenue for Q2?

I think, Adam, this is Steve T speaking, I think, yeah, it's a little bit of an odd year, so we can’t absolutely be certain that we're going to see that sequential uptick in Q2. We also, as Steve V mentioned in his prepared remarks, we put forth or put through a second cost increase on the price increase on the hardware. So while we don't expect that to dampen demand much, there hasn't really played out yet; it comes into effect May 1. So I wouldn't go crazy with the second quarter hardware. I think I'd anticipate sort of a flat quarter-over-quarter hardware number. Thanks.

Thank you. Our next question comes from Michael Funk with Bank of America. Your line is open.

Yeah. Thank you all for taking the questions, really, really appreciate it. So first on the commercial side. I know in the past you've given us some quantitative commentary about the quarterly additions, I think last quarter you said you're kind of running around 25,000 a quarter if I remember correctly. So I hope you just update there, if you're seeing any kind of acceleration and then I have a follow-up after if I could.

Hey, Michael. This is Steve. Just to make sure I've got it right, you're referencing, on the 25K per quarter you're referencing, which part of the business?

I believe it was commercial, you said last quarter was 25K, if I remember correctly.

Commercial momentum continues to be strong and is becoming an increasingly significant part of our SaaS revenue. Last quarter, I mentioned that our commercial account base had exceeded 400,000 active subscriptions, and that number is still growing at a rate faster than our overall SaaS growth. I also discussed the OpenEye business and the recent integrations we've implemented to enhance video analytic opportunities in the enterprise sector. For instance, in the first quarter, our OpenEye team activated over 50,000 new connection points, which represent new cameras in the commercial area. Overall, business is performing well, and unless there is a major recession, I believe we will continue to experience solid commercial momentum.

And then one more, if I could. So at a higher level you commented on the second price increase on the equipment side earlier, that's understood obviously, passing on some of your own increase in pricing, but how are you thinking about increase in your subscription pricing and we're seeing pretty broad-based price increases walk to convenient store today, got with increasing prices and everything I kind of shrugged my shoulders like we're all seeing it, kind of conditioned to that at this point, we would expect it not that you're trying to push it out to your customer but everyone else is doing it. How you thought about the ability to increase pricing on the subscription side in the current market environment? It might help to offset some of the other pricing pressure, kind of cost pressure that you're seeing?

Yeah. That's a great question. And one, we spend time on historically. We have really wanted to be stable on the pricing of the subscription services that we offer through our service providers. Everyone's planning their business around a certain amount of cost on each subscription and our service providers are oftentimes funding account creation costs using debt, making assumptions about certain levels of margin on each account. So a stable environment requires that you not be too quick, I would say, to drive up the subscription cost. That said, the reflections you just sort of made in terms of what we are experiencing in day-to-day create a dynamic where, at some point, you simply have to be ready to increase the cost of the subscription. And our service providers will have also increased the cost of the subscription. So we're not saying that we absolutely will never increase subscription cost. I think at some point that becomes a necessary part of our business model if we don't see some tampering down of kind of a current inflationary pressures, but we're not going to be quick on it, is what I would say. We're probably the last to move in that direction.

I want to start AT&T increased price in wireless has been deflationary, cyclone for the last 20 years. Nobody wanted to be connected wireless price increases, just a data point that the company that should have been last just raised their prices on the (indiscernible)?

Anyway, hardware, I mean even hardware, we expected a couple of years ago. I think our view was hardware costs would always be, we always be driving those costs down and just not happening right now. So yeah, the world is a little different right now. I think I like the old way better, but we'll react to the world we live in.

Understood. I really appreciate the time. I'll yield the floor back to the next participant.

Thanks, Mike.

Thank you. Our next question comes from Matt Pfau with William Blair. Your line is open.

Hey, guys. Thanks for the questions. Wanted to follow up on the discussion around higher prices and inflation. And I think in terms of a new customer, probably the bigger impact from a pricing perspective would be increased hardware prices and also most likely labor cost for the installers which I assume would be getting passed back to the homeowner to some extent, but your demand environment has remained robust. So it doesn't really seem like that price increases around the sort of initial install and set-up are impacting demand. Maybe if you could just sort of comment on that and how price-sensitive consumers have been historically to changes in the initial install?

We haven't seen a decline in demand so far and we don't expect one. The cost of our service, particularly regarding security and Smart Home experiences, remains relatively affordable for most people, typically around $50 per month for essential safety services, which may drop to $40 depending on the extent of video services chosen. This is an essential need for many, and I don't believe we are among the first targets for those looking to cut expenses. Regarding new account creation, advancements in technology are enhancing the value we offer, which helps to counterbalance rising costs, largely due to our improved video analytics services that now perform well on residential-grade cameras. We've added significant value, and on the financing side, there's been a shift over the past few years toward using consumer financing mechanisms to cover the costs of acquiring new customers, utilizing the consumer's credit rather than the service provider's balance sheet. This approach alleviates pressure as seen in other consumer markets, allowing the incremental costs to be spread over several years, which benefits both providers and consumers.

Got it. And just one more on the commercial video analytics functionality that you have released. You've had some out there for a while obviously making improvements. What are your expectations in terms of attach of video analytics to commercial customers relative to residential? I assume the percentage of commercial customers with video would be higher, so would you also then expect the analytics to be higher as well?

Well, I would say absolutely yes, except that, on the residential side, we have seen very, very high attach of analytics. At this point 75% of the customers who are activated with analytic capable cameras are being activated with analytics on the residential side. So that's a pretty high attach rate, which is great. That means we're rendering the most sort of value and the most functionality we can to the consumer. I would expect on the commercial side through time as the offering becomes well adopted by the service providers that we will see at least that level and perhaps a bit higher, but it's not as if we have, but we're starting with sort of a 75 numbers is not that much higher, we can go on attached to analytics in the commercial side. Does that make sense?

Thank you. Our next question comes from Brian Ruttenbur with Imperial Capital. Your line is open.

Yes. Thank you very much. First of all, I want to go to a macro question, a lot of the nuts and bolts already been asked about margins and things, but recessionary environment, let's just play that out, let's hope that doesn't happen, but you guys have been doing this for 22 years. Can you talk a little bit about your business and what you anticipate happening if there is a downturn? And then what your plans are for the cash if that changes at all, if there is a downturn in the economy?

All right. Yeah. I can spend a moment on that. I think obviously depends on the severity of the downturn, but our expectation would be that revenue retention would probably increase some. We know that when people are not moving that we see, we generally see less, our dealers see less attrition. So that tends to be a positive. We also know from prior experience that during a recessionary period that people are more concerned, particularly if they're layoffs; they are more concerned about the safety and security of their property. They begin to wonder about folks wandering through the neighborhoods during the middle of the day and that sort of thing. So, there is probably even a heightened desire for safety and security that again I think supports customer retention. Those are the positives. On new sales, some of those same positives will drive new sales activity. At the same time, you see a slowdown typically in new home construction. Now you have probably fewer new homes being initiated, so that creates a bit of a headwind right now about 10% of home sales in the U.S. are coming from the builder trade, our new home. So I have a little bit less there. And so a little bit of a headwind, perhaps on new account origination offset some by greater retention. In terms of what it means, in terms of way we think about our cash position. Yeah. I think that in a recessionary period that softens the point in time when your cash takes on more value, you can find more opportunities to deploy your cash efficiently and with reasonable expectations for returns. So in some ways, if we saw a recessionary period, I think you would see us maybe a little bit more active on the Corp Dev front thinking about how to leverage our cash position most effectively.

Great. Thank you very much.

Sure. Thanks.

We have a question from Darren Aftahi with ROTH Capital. Your line is open.

Hi. Thank you. This is Austin on behalf of Darren. Thanks for taking my questions. Just had two if I may. The first one, I think it's been asked. I'll try to rephrase it a little bit differently. But with again on the theme of inflation and rising interest rates. I'm just curious what kind of changes you have seen or would anticipate to see on the residential side, with regard to the new home builder program as well as second homebuyers?

Good question. On the residential side, for new home buyers, we monitor national data to understand trends in new home purchases. I recall there has been roughly a 10% to 11% decline in new home sales compared to the previous quarter, indicating a slight tapering. However, we are not deeply penetrated in the market, as we have partnerships with most of the builders but haven’t fully explored all builder opportunities. This gives us room to expand our attachment to the number of newly constructed homes. I hope that even if new homes potentially decline, we can still increase our penetration. It’s worth noting that new home sales make up only about 10% of overall home sales. If new home construction decreases, we can still work on expanding our reach. There may be a slight shift in home prices because of higher interest rates, but I don't foresee a significant downturn even if new home sales drop further. Regarding second home sales, I don’t have current data on that. From our viewpoint, there is a positive trend towards increased rentals and second homes. When people rent a property, it benefits our PointCentral business, as our technology helps property managers swiftly transition rentals between guests. If this trend continues, with people preferring domestic vacations over international travel or developing a habit of visiting places like the beach or lake instead of big cities, it would be a promising trend for us, and it currently seems to be moving in the right direction.

Great. I appreciate that. And then just last one from me, just curious how your Flex IO initiative is going?

Sure. A little color on that. So Flex is underway. We've got some dealers that are beginning to deploy that in various situations, probably the most common is use right now would be for gates that are remote from the home, whether that be driveway gates or swing toll gates we're not at the point where Flex is by itself driving any sort of material change in our numbers. It's still fairly early days, so we are still working out a few feature requests that service providers have had, so it's moving, but it's not a dial-mover at the moment.

Got it. All right. Appreciate it and congrats again.

Thank you.

Thank you. Our next question comes from Jack Vander Aarde with Maxim Group. Your line is open.

Great. Hi, Steve, appreciate the update. Thanks for taking my questions. I'll just start with a question, in case you haven't gotten enough on the price increases. Just for clarity, did you say you already rolled out that new round of price increases in hardware products or are these new works?

Yeah. Jack, we so we rolled out, really didn't want to have to do a second one, but we did a first one that really went into full effect in late February, early March. And then on the heels of that we announced a second increase that goes into effect beginning on May 1. So it's already been announced and deployed and we'll sort of begin to show up in the second half of this quarter.

Got it. Okay. And then separate topic, just on the premium services front. So it's fun to kind of hear those patents in an idea what might be coming down the line. So it seems stuff of drone patents filed I think over the last few years. I imagine those big ARPU drivers, but just are we close to something big, big looking ARPU driver that's unique and innovative like that you have the connected car as well that came out recently, but anything like a drone or anything kind of fun you can talk about?

We are discussing some exciting topics beyond inflation and price increases. The connected car offering is gaining traction, and we're seeing increased demand from our service providers, particularly in the SMB and commercial sectors. We are enhancing our capabilities to better support this area, which should positively impact our average revenue per user if the trend continues. Regarding research and development, we don’t provide detailed updates on our various projects. However, there has been some patent activity related to our drone initiative, and we are committed to advancing that program. While we do not have a specific timeline for market results, we believe that this solution could significantly enhance our residential and commercial video offerings and potentially drive ARPU. It is still early for us to project outcomes. R&D sometimes has to be conducted for its own sake, and we will determine how to monetize these developments as they near completion. Currently, we do not have any projections for this new initiative in our current year forecast, but we remain enthusiastic about the progress being made.

Okay. Great. And then just one more on the international business. Can you maybe just provide an update on that overall TAM opportunity and where you're at today? It’s clearly still a relatively untapped opportunity? You’re still doing at this massive untapped long-term growth driver. Is there anything changed in your plan or view?

No, nothing has changed; it's on a relative basis. I think at the end of last year, we mentioned having around 8.4 million customers, and at that time, I noted that international subscribers were nearing 0.5 million. During the quarter, we exceeded that milestone, which is fantastic. This indicates that we have a real business, with over 0.5 million installations outside of the U.S. and Canada, and we are reaching new milestones nearly every quarter. We still believe that the rest of the world presents a significant opportunity and that eventually, the number of global subscribers could be a third to half of our domestic figure. The key question is when that growth curve will truly accelerate. I will add that the costs associated with entering and operating globally are substantial, requiring support for varied environments and the different types of hardware needed for each market. We are actively working through these challenges, and we continue to develop products that will cater to large portions of the global market. We remain optimistic about the total addressable market and the progress we are making, and I don't think our outlook has changed at all.

Okay. Great. Well, I appreciate the time. I'll hop back in the queue.

Okay. Thank you.

Thank you. We have a question from Mike Latimore with Northland Capital. Your line is open.

Hi. This is Adithya on behalf of Mike Latimore. Could you tell me how much did your largest customer contribute as a percentage of revenue?

So, largest customer is ADT and they are a little over 15% of our revenue and there is no other customer that's greater than 10% of our revenue.

All right. And could you give some color on the gross margins, how should we think about the gross margins in Q2 and for the rest of the year?

Yes. So obviously, Q1 was 11% for hardware gross margin, 86% for SaaS. SaaS has been very stable as you've probably seen. It's been 86%, 86.2%, 20 or 30 basis points. But in terms of the hardware margins, that's where the price increases of course are taking effect. And so we see probably in Q2 around a 13% gross margin for hardware. Q3 probably going up to let's say 15% to 16%, and then Q4 probably closer to 18% hardware margins, and that's of course dependent upon what we know today and no other changes occurring and so we have to caveat that, but that's our current expectation.

All right. Thank you.

Sure. Thank you.

Thank you. And that's all the time we have for questions. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.