Good day and thank you for standing by. Welcome to the Alarm.com First Quarter 2023 Earnings Conference Call. 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. Please go ahead. Good afternoon, everyone, and welcome to Alarm.com’s first quarter 2023 earnings conference call. Please note that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, our CEO; Steve Valenzuela, our CFO; and Jeff Bedell, President of our Ventures Business and Corporate Strategy. During today’s call, we will be making forward-looking statements, which are predictions, projections, estimates or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly after this call with the SEC, along with the associated press release. This call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. In addition, several non-GAAP financial measures will be used in this call. A reconciliation of the GAAP and non-GAAP measures can be found in today’s press release on our Investor Relations website. I will 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 first quarter results that exceeded our expectations. SaaS and license revenue in the first quarter was $135.4 million, resulting in a non-GAAP growth rate of 14.9% over the last year, excluding Vivint. Our adjusted EBITDA in the first quarter was $30.6 million. I am going to touch on a couple of things in the core Alarm.com business, and then I am excited to have Jeff Bedell, the President of our Ventures Business and Corporate Strategy, joining the call today. I will be looking to include Jeff or Dan Kerzner, the President of our Platforms business, in future quarterly updates so that we can provide a deeper review of some areas of the business. I’ll start things off with a few takeaways from our recent presence at ISC West, the largest trade show for the physical security industry. Alarm.com’s presence this year reflected our increasingly diversified business profile, with Alarm.com, OpenEye, and Shooter Detection Systems each having a dedicated presence. Overall, attendance at the show returned to pre-pandemic levels. The commercial market was a significant theme during ISC West. Most of the Alarm.com service provider partners that I met were expanding their use of our commercial services. Recently released products have also helped our partners become better at targeting our platform as specific verticals where they are developing expertise. One of the things we highlighted was our expanded range of third-party camera support. Our video solution will be able to support 80% to 90% of third-party cameras that have been installed in midsized and large commercial settings since 2018. With a more flexible video solution, our service providers can support businesses that want the benefits of our integrated video solution without the cost of replacing existing installed video cameras. As we have expanded and enhanced our access control solution, it continues to gain momentum. During the first quarter, access control door installations increased 45% over the first quarter of last year. At ISC, we introduced a new access control product called Cell Connector. Cell Connector is a door controller that leverages our work with 4G LTE cellular networks to connect directly to the Alarm.com platform, where system data is aggregated. Bypassing the customer’s local network reduces installation complexity and enables an affordable and effective access control system. For example, larger, more sophisticated commercial customers and corporate accounts typically have rigorous approval processes for third-party devices to connect to their local area network. Cell Connector significantly streamlines the sales and installation process and makes it easier for these customers to acquire an Alarm.com system. In the residential market, our service providers continue to report steady demand. Despite the macro environment, we’ve also continued to expand our partnerships with builders. New RMR creation from our homebuilder program increased 14% during the first quarter as compared to last year. We also continue to expand our services to fully address the long-term opportunity we see in the residential market. A recent report by Strategy Analytics estimated that about 40% of households with an active, professionally monitored security system are still limited to traditional system capabilities that do not include any smart home capabilities like those that Alarm.com service providers offer. Our goal is to maintain and build on our service providers’ strong competitive position so they can steadily expand their account base as the market continues shifting to smart home systems. Shifting to our operations, during the first quarter, we continued to focus on driving increased efficiency and focus, which will allow us to perform against our corporate EBITDA objectives for the year. We did this without undermining the R&D investments that drive future opportunities and feel like we have struck the right balance overall. We will continue to invest in innovation to continue to build the company for the future while also maintaining discipline through profitability. Overall, I am pleased with our first quarter results. Our performance reflects our continuing momentum and the significant and diverse opportunities that we are addressing. 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. Now, I will hand things over to Jeff to provide a little more detail on two of the areas he oversees.

Thanks, Steve. It’s great to speak with everyone today, and I look forward to getting to know many of you. I’ll start with an update on OpenEye and their cloud-managed video surveillance solution for the commercial market. Video surveillance is a critical system for commercial businesses. Today, many businesses have deployed video systems, but are using legacy analog devices. A major technology shift is underway, moving from these older on-premises analog systems to digital devices at the edge, coupled with cloud-based solutions that form the foundation for delivering robust AI-powered video analytics. We continue to invest in the expansion of OpenEye’s platform and business to capture share as this technology shift unfolds. Our recent acquisition of Vintra expands our AI program and will accelerate the development of video analytics capabilities across our platforms, beginning with delivering innovative models to the OpenEye platform. This quarter, OpenEye launched a few new solutions enabled through its open ecosystem architecture. The OpenEye platform allows data from third-party devices to be married to OpenEye video data to generate alerts and enable forensic search capabilities. This allows users to find video content based on external data inputs. The first new offering is OpenEye’s point-of-sale solution called Sales Connect, which integrates transaction data from leading suppliers of point-of-sale systems. Sales Connect triggers real-time alerts for point-of-sales exceptions such as voids, refunds, and overrides, and retrieves the corresponding video of the transaction. Sales Connect is sold as an additional SaaS module and significantly strengthens OpenEye’s position in the retail, grocery, and quick-serve restaurant verticals. Next, OpenEye launched an integration with third-party environmental sensors, which detect smoke from cigarettes and vapes, monitor temperature, humidity and air quality, and detect sound anomalies. This integration enables OpenEye to associate video with more environmental events, generating, for example, vape alerts and providing valuable capabilities that have been heavily requested by secondary schools. Shifting to EnergyHub, I want to touch on a recent milestone. Recall that EnergyHub provides a SaaS platform for electric utilities that is known as a Distributed Energy Resource Management System or DERMS. The EnergyHub solution allows utilities to manage grid load by controlling demand-side management, leveraging smart thermostats, EVs, connected EV chargers, and other grid edge devices. EnergyHub’s proprietary artificial intelligence and machine learning models allow utilities to fine-tune load shape on the grid and to balance energy demand with supply. EnergyHub recently announced that it is the first DERMS platform to exceed 1 million devices under management. Collectively, these devices provide 1.35 gigawatts of flexibility to North America’s electrical grid, which is greater than the generation capacity of a medium-sized nuclear power plant. Extreme weather events like heatwaves, the rising adoption of EVs, and the intermittent nature of many renewable energy sources are making grid stability increasingly challenging and complex. Utilities around the country are actively developing load flexibility strategies and investing in DERMS technology. EnergyHub’s platform is directly addressing these macro trends. To sum up, we have made continued progress with OpenEye and EnergyHub’s businesses. They are important to the expansion of our addressable markets and are two key components of our overall growth strategy. Steve Valenzuela will now cover our financials.

Thanks, Jeff. I’ll begin with a review of our first quarter 2023 financial results and then provide our updated guidance before opening the call for questions. First quarter SaaS and license revenue of $135.4 million grew 9.9% from the same quarter last year. Excluding Vivint license revenue, first quarter 2023 non-GAAP SaaS and license revenue grew 14.9% year-over-year on a comparable basis. SaaS and license revenue includes Connect software license revenue of approximately $6.2 million for the first quarter, down as expected from $7.1 million in the year-ago quarter. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 93% in the first quarter, in the middle of our long-term range. Hardware and other revenue in the first quarter was $74.3 million, down from $82.2 million in Q1 2022, mainly due to fewer cellular module sales from the end of the 3G upgrade cycle and fewer camera sales as service providers work down their inventory levels. Total revenue of $209.7 million for the first quarter grew 2.1% year-over-year. SaaS and license gross margin for the first quarter was 85.5%, down slightly from 86.3% in the year-ago quarter. Hardware gross margin was 23.9% for the first quarter, consistent with historical trends and up from 11% in Q1 2022, mainly due to improving supply chain dynamics and favorable product mix with more commercial offerings. Total gross margin was 63.7% for the first quarter, up from 56.1% for Q1 2022, mainly due to the improvement in hardware margins and a mix shift to SaaS revenue. Turning to operating expenses, R&D expenses in the first quarter were $61.9 million compared to $51.5 million for the first quarter of 2022, mainly due to an increase in headcount and related compensation expenses and reflecting the cost of acquired teams. We ended the first quarter with 1,042 employees in R&D, up from 892 employees in Q1 2022. Total headcount increased to 1,858 employees for the first quarter compared to 1,565 employees in the year-ago quarter. Sales and marketing expenses in the first quarter were $26.6 million or 12.7% of total revenue compared to $23.2 million or 11.3% of revenue in the same quarter last year, mainly due to increased headcount and more employees traveling with the easing of COVID restrictions. Our G&A expenses in the first quarter were $28.5 million compared to $24 million in the year-ago quarter, mainly due to acquisition costs, increased personnel costs, and accounting fees. G&A expense in the first quarter includes non-ordinary course litigation expense of $800,000 and acquisition-related costs of $800,000. 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. In the first quarter, GAAP net income was $14.4 million compared to GAAP net income of $9.1 million for Q1 2022. Non-GAAP adjusted EBITDA in the first quarter was $30.6 million compared to $29.9 million in Q1 2022. Non-GAAP adjusted net income was $22 million or $0.41 per diluted share in the first quarter compared to $21.3 million or $0.39 per share for the first quarter of 2022. Turning to our balance sheet, we ended the first quarter with $606.4 million of cash and cash equivalents, down from $622.2 million at December 31, 2022, mainly due to payments for estimated federal tax, acquisition costs, and employee annual bonus payments. Turning to our financial outlook, for the second quarter of 2023, we expect SaaS and license revenue of $137.2 million to $137.4 million. For the full year of 2023, we now expect SaaS and license revenue to be between $555.9 million to $556.5 million, up from our prior guidance of $551.5 million to $552.5 million. We are projecting total revenue for 2023 of $855.9 million to $881.5 million, increased from our prior guidance of $851.5 million to $877.5 million, which includes estimated hardware and other revenue of $300 million to $325 million. We estimate that adjusted EBITDA for 2023 will be between $120 million to $125 million compared to our prior guidance of $115 million to $125 million. We expect adjusted EBITDA for the second quarter of 2023 to represent approximately 23% to 24% of our annual guide. Non-GAAP net income for 2023 is projected to be $84.6 million to $87.5 million or $1.55 to $1.60 per diluted share, up from our prior guidance of $79.7 million to $86.5 million or $1.44 to $1.57 per diluted share. EPS is based on an estimate of 54.7 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2023 to remain at 21% under current tax rules. We expect full year 2023 stock-based compensation expense of $54 million to $56 million. In summary, we are focused on executing on our strategic business plan and investing in our long-term strategy while continuing to deliver profitable growth. And with that, Operator, please open the call for Q&A.

Hi, yes. This is Matt Bullock on for Mike Funk. Thanks for taking the questions. It was great to hear all that detail about some of your AI products. I was hoping you could give us a little bit more color on how we should think about the artificial intelligence roadmap. And then any additional detail on future monetization in terms of whether or not you’re going to leverage it as primarily a product enhancement or as a vector for new logo additions.

Michael, this is Steve speaking. Well, I think it’s one of the reasons we actually did the Vintra acquisition during the quarter, that was recently announced where we picked up basically an expansion on our AI video analytics team of about 35% in terms of headcount. So in terms of the overall roadmap, I think any company that’s not sort of looking universally at everything they are doing, both from an operating standpoint, but also from the perspective of user interfaces that they provide to the customer, would be sort of not looking at things the correct way. We’re looking at essentially everything we do, both internally in terms of processes, but also in terms of the way we present UIs to the customer. And of course, we’ve got a pretty long history though on the video analytics side of using AI to improve the insight that we deliver to the customer, and we would expect to continue to expand that. Obviously, the more insight, the more intelligence we can deliver to the consumer, the more valuable the experience, and so it’s sort of right in our crosshairs, I would say.

That’s helpful. Thanks. And then just one quick follow-up. Have you noticed any material changes or subtle changes in the competitive environment following some of the M&A activity of competitors?

I haven’t really noticed any changes in the competitive environment. I’m imagining probably what you’re referring to is one of the recent more significant acquisitions where a utility or an energy company acquired a service provider that competes with many of our dealers. I haven’t heard yet that there has been any sort of change though in the overall competitive dynamic and it is sort of business as usual so far.

Okay. Great. Hey, good afternoon, guys. Thanks for taking my questions here. Steve Trundle, maybe for you, just always appreciate kind of just updated thinking that you have on ADP and them as a customer and how things are changing there. And so maybe the question for you is, can we just talk a little bit about any revised thinking on how you’re thinking about command control and ADT subscribers kind of starting to roll in? Anything that you can give us just on how that’s sort of rolling into the model, if at all?

Sure. Yes, Saket. Good question. And first, just at a macro level, we continue to collaborate with ADT on multiple fronts. We have I think a great relationship there. I’m very pleased with the record sort of attrition levels that they are getting as a higher and higher percentage of their base are on a smart platform like command control. Things are generally going, I think, relatively well. We watch, of course, exactly what they are – as much as we can, what they are presenting to the public markets about their internal plans related to their work with Google. And I think we commented publicly at the end of Q4 that we anticipated an increased use by ADT of their new platform. At the end of Q2, that was based on what Jim and the team had presented, and maybe we’re being a little conservative in the model, but they have had a couple of reports since then. And I’d say we’re probably now looking really more for that to be something that maybe happens towards the end of the year in Q4. And I want to remind people, of course, that there will be lots of areas, but the partnership with ADT is pretty broad. There is commercial, there is SMB, there is something called custom home. There are lots of different areas and no single solution is a fit for every area. But we expect, based on their most recent report that we’d begin to see some transition there in the Q4 timeframe, and we’ve updated our models accordingly.

Got it. That’s super helpful. Steve Valenzuela, maybe for you. Great to hear just the operational rigor, right, of the company. I think there was a reference made just to some cost savings. I was just wondering if you could just talk about some of the cost savings that you folks started this quarter, how much do you sort of expect to save annually, and whether we should think about those being reinvested or maybe falling to the bottom line?

Yes, Saket, good point. I mean, we did a little cost rationalization really. And if you think about it, most companies actually look at their cost structure, look at their headcount every year and kind of make adjustments. It was fairly minor on our side, and we’re continuing to invest, so we’re continuing to hire employees. The savings from that small reduction really is going to translate into continual hiring. We’ve reflected that into our guidance. We’re going to continue to hire, especially in the R&D area, and so that’s really factored into the guidance we provided for the quarter, for the year.

Hey, great. Thanks for taking my questions. First wanted to you ask on the commentary around access control and that 45% year-over-year growth rate of door installations in the first quarter. I’m guessing that’s higher than what you’ve been seeing, and that’s why you called it out. But maybe if you could just give us some context around that number? And then if so, you’ve been clearly improving that product for some time. If you’re seeing an inflection there, what’s helping to drive that? Thanks.

Cell Connector.

Great. And then on the commercial opportunity more broadly, you mentioned at ISC West that partners were expanding the use and partly you’ve released new services that help target specific verticals, some of the ones you called out with OpenEye. Is that an important piece of the strategy going forward to gain more traction in commercial? Is that maybe something you feel you’ve been missing as some of those vertical-specific functionality to help drive adoption in that market?

I think so. And Jeff spoke about it a little bit when we talked specifically about OpenEye, but I feel like the closer you get to a ready-to-install sort of vertical solution that has a set of key integrations, the more sort of differentiated your service provider can be in the sales process. We’ve seen that in the MDU business. For example, PointCentral. We have an integration with an entity called UTour, and that helps create some pull-through there where we can do self-guided tours Day 1. On the OpenEye side, they made some strides during the quarter to add certain retail analytic integrations that – really not just retail, quick-serve restaurant integrations that really make the solution sort of a better fit for that segment of the market and give them a story they can talk to. There was an earlier question about AI, and as we move forward, I think the more we can leverage some of the capabilities that we’re developing to tailor solutions for specific use cases and be more relevant to a given vertical. A, it’s a great problem for it to be if you’re in the software business. You want to have really solutions that are vertically inclined. And B, I think it will just make the offering more relevant, so it is a focus.

This is Mark on for Adam. Thanks for taking our questions. Maybe first starting with Steve T., and if Jeff wants to weigh in on this, but considering the macro and the growth opportunities, first, how are you allocating resources across the four key growth areas of commercial, video, software international, and new venture? And as part of that question, you had plans to expand the support for security control panels internationally this year, so how is that coming along? And would you say you have integrated the ones that really open up the opportunity at this point?

Yes. Good question. You said, Steve. There is one Steve that tends to speak probably too much, but I will take it. In terms of the allocation of resources across the different growth areas, we are basically looking at the long-term SaaS growth potential in each domain, modeling that out, looking at what we need to do to either compete or remain more sticky with our service providers and allocating resources accordingly. In terms of some of the efficiency shaping we did earlier this year, I would say there was generally a move to taper some of the investment we are making in some of the areas that aren’t growing as fast and reallocate some of that investment to commercial, to video, to international, and then to our other segment businesses, especially EnergyHub. So, we are favoring these growth areas. We are willing to live with negative cash contribution for a meaningful period of time so long as we are getting or we can see daylight on 25% plus growth rates in these domains, and that’s what we are seeing so far. So, as they come to scale, we would expect them to continue to contribute to the overall company’s growth. And therefore, they warrant sort of excessive, if you will, excessive resource allocations. With regard to the international piece specifically and the comments I made last quarter about a desire to support a wider array of equipment there, we did complete in the first quarter an acquisition of a company called EBS based in Europe that has been in the business for some time of building universal communicators that work with a lot of the legacy control panels that are already installed by our international dealers. That’s always been a soft spot for Alarm.com. We come in, they love the solution, but they may have a base of 100,000, 200,000, whatever number of customers that are working on older equipment. So, what we are doing there is really taking that universal communicator technology and integrating that into the platform so that we can get back to some of those legacy customers where the cost to replace all their hardware would be prohibitive. So, I think that’s – we are not, in terms of timeframe for that, we just finished that in Q1, finished sort of the deal. And now there is a lot of wood to chop, and we are probably into the third quarter before we are actually able to go to market and say we are supporting all the controls that we would like to. That was the purpose.

Okay. Great. And as a follow-up, last week ADT pointed out seeing impacts from customers not paying. So, I guess first, are you seeing that through your partners? And secondly, could you just comment on the makeup of the business today versus previous macro spending pullbacks like say in ‘08 and the resiliency that you see now in the business?

Sure. The first part of the question is, are we seeing an impact from customers not paying. So, obviously our customer is the service provider, not the end consumer. Most of our service providers are pretty robust, and I don’t think we have seen any kind of uptick in bad debt. Have we – at least not at a meaningful level.

Not on a meaningful level.

Yes. In terms of are we hearing anything anecdotally? I mean ADT is really the only company that reports publicly on a routine basis. So, we obviously would look to what they say, but I have not been hearing from our other service providers that that’s been a material issue. And everyone goes to market differently, so it can be where you are geographically or what type of customers you serve, whatever. With regard to the second question, I am trying to remember, it was…

Kind of the makeup of the business today versus like an ‘08 when the big pullback happened.

The housing prices. Yes, good question. I don’t think we have seen kind of things being quite as dire as maybe they seemed in 2008. I will just remind folks that generally in a bad market or in a bad macro environment, security tends to be pretty resilient. People tend to get more focused on protecting their assets and protecting their home. They become worried about strangers wandering through the neighborhood and maybe unemployed. So, we didn’t see a huge problem in ‘08 or ‘09 either. You generally get fewer moves, and that results in less attrition, you just get fewer – you may get a slight headwind in terms of new accounts created at the same time. I would say we are seeing about the same. I mean we were pleasantly surprised. The housing market is very hard to figure out how bright now and that there is a shortage of housing stocks. So, builders continue to do relatively well in our universe. I have commented on that. And things look, generally, I would say less at the moment, a little less compressed than ‘08 or ‘09.

Hey guys. Thanks for taking my questions. First one, I don’t know if you mentioned, what were the growth rates on the commercial business and international in the quarter? And I guess, Steve, your comments about ISC West, like are you more positive, neutral sort of coming out of that conference as it relates to commercial business?

Darren, it’s Steve Valenzuela. I will take the first question. The growth rates, both for international and commercial, continue to do really well in the mid-25% range. Last quarter, we gave those metrics. We don’t typically give it every quarter, but they are still running at about both at around 25% growth year-over-year, doing quite well.

Yes. And the second question, coming out of ISC West, how do we feel about commercial. I think we have been feeling – there is definitely a sentiment now where a wider and wider array of service providers have at least a portion of their business allocated to commercial and small business. There seems to be a bit more of a greenfield there. Those – a lot of those entities, I would say we brought sort of the mobile and smart experience to the residential world 3 years, 4 years, 5 years before it really hit in the commercial world. A lot of the stuff we have been doing for a while, putting control of your home, or now in the case of commercial, control of the enterprise in your hand with the mobile app, is a little bit newer in the commercial space. So, there are more folks looking to be in the market, be upgrading commercial customers, be upgrading SMB customers. And then I am enthusiastic because I thought our teams executed pretty well at the show or had good things to show, had good booth traffic. So, I am not – I would say I was on overall just pleased with the sentiment and the momentum on the commercial side and the feedback that we were getting from service providers there.

Hi. Thanks for taking my questions. This is Jack Codera calling in for Jack Vander Aarde. Lot of great color on the commercial side of the business, last quarter you guys mentioned how ARPUs are a lot higher. I was wondering if you could give any color longer term for expectations of revenue mix between residential and commercial? And then I have one follow-up.

The commercial this quarter was about 8.5% of total SaaS. It was about 7% a year ago. Commercial certainly is growing faster than residential. We haven’t really given a longer term projection. But if you continue to see the trend, certainly commercial is growing at a faster rate, will be a larger and larger percentage of our SaaS revenue going forward. We haven’t really broken out what that would be though.

Okay. Understood. That’s helpful. And then given the macroeconomic effects, I think the explanation you guys have given makes sense, although a little jarring. But I was wondering if you could share any other anecdotal evidence. Is there any effect on residential attachments or any regions that you are seeing different products or different changes in the market dynamics being affected by macro at all? Thank you.

Yes. I mean, regionally, there are definitely areas of strength, those being Texas and Florida. I mean you visit – as examples, there are probably more, but those are two where when I go visit a service provider, they are basically as busy as we can be in these markets. So, they are continuing to sort of see robust – good robust macro conditions. We have also seen strength in the last quarter in Canada. We are not exactly sure yet why, but Canada has performed well. Some of the markets you might expect, where you have either declining population or whatnot or maybe not quite as strong, but we haven’t seen any really dramatic macro-level impacts thus far. I would say probably the biggest thing is a slightly smaller footprint in terms of the number of devices that the consumer is choosing to purchase at the time of new account installation. Where maybe they are watching sort of their – we haven’t seen a decline in activations, but we have seen them put slightly less hardware on each installation than what we were seeing a year ago. And that’s probably the biggest takeaway on the residential side that I think we have noticed.

Thank you. I am showing no other questions in the queue. This does conclude today’s conference call. Thank you for participating. You may now disconnect.

Thank you.