Alarm.com Holdings, Inc. Q2 FY2025 Earnings Call

Thank you, Kevin. Good afternoon, everyone. Joining us on today's call are Steve Trundle, Alarm.com's CEO; and Kevin Bradley, our CFO. 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 these risk factors discussed in our quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly with the SEC, along with the associated press release. This call is subject to these factors, and we encourage you to review them. Alarm.com assumes no obligation to update these forward-looking statements or other information that speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website. I'll now turn the call over to Steve Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report financial results for the second quarter that were above our expectations. SaaS and license revenue in the second quarter grew to $170 million and adjusted EBITDA was $48.4 million. A significant highlight of the second quarter was the celebration of our 10th year anniversary as a publicly traded company. We were invited by NASDAQ to ring in the opening of the market on June 30. A few of our investors have been with us throughout our entire public journey, and I am thankful for their continued support. While going public is a big deal for most tech companies, I'm even more pleased with what the team has achieved in the 10 years since. At the time of our IPO, we forecasted total annual revenues of $195 million, including $139 million in SaaS and $56 million in hardware, and nearly all of that was coming from the North American residential security market. We were a good single-line business. The mission I set for the company early on was to deliver a cloud-based sensor into every property in the world. We decided to go public because we believe that we could continue to build the company and expand the business in pursuit of this mission. We wanted to create more opportunities for our employees, expand into new markets, and deliver safety, security, and energy efficiency to the world. Since our IPO, we have saved dozens of lives and have kept millions of people safer than they would be in a world without Alarm.com. And we have grown the business significantly and profitably without any material dilution to our shareholders. As Kevin will present, our current revenue run rate is more than 5x greater than when we went public and places us on an annual pace of $1 billion in revenues. The diversity of the revenues that we have built across the North American, international, residential, commercial, and energy markets provides tremendous durability for the future. But we're here today to report on our quarter, so let me turn back to the business at hand. The major components of our business performed well during the quarter and all contributed nicely to our better-than-expected results. Revenue outperformance, particularly in hardware revenue, resulted in stronger adjusted EBITDA. Our residential business continued to deliver steady growth and strong cash flow during the second quarter. We remain committed to the large residential market in the United States and Canada. Millions of potential subscribers have yet to adopt integrated video solutions and security-based use cases continue to be the primary driver of the adoption of smart home products and services. Most consumers in the market for security desire professional services, including a professionally designed, installed, and serviced system. These tend to be the more serious customers and they typically engage with one of our 12,000 professional service provider partners. We are well positioned to serve the continued demand in the residential market as the provider of choice for those who are serious about security. Our channel partners serve as the sales and marketing engine for the business, enabling a highly efficient customer acquisition model. Our sales and marketing spend has remained around 12% of total revenue in recent years, well below peer averages. At times, we will also invest into our channel to strengthen our national sales and service footprint and enable greater adoption of the full ecosystem of Alarm.com products and services for residential subscribers. We're pleased to have completed a couple of minority investments consistent with this strategy during the second quarter. Shifting to our growth initiatives. The most prominent drivers of performance continue to be the commercial, international and EnergyHub businesses. Their collective contributions to our consolidated SaaS revenue approached 30% in the second quarter. Their combined year-over-year growth rate held at around 25%, in line with what we have articulated in prior quarters. The commercial business continues to progress as our service provider partners and commercial integrators adopt increasing components of our unified video access control and commercial intrusion platform. One element of our commercial business is our subsidiary, OpenEye, which provides a cloud-based video surveillance platform designed for multisite commercial and enterprise customers. OpenEye delivers enterprise video compatibility and integration with many different products in the market. The OpenEye team recently introduced new AI-powered tools to accelerate and simplify forensic video review. Subscribers can now search video footage across multiple locations and multiple cameras by visual characteristics, such as a red jacket or a white pickup truck. They can also select their reference object in a video feed, and the AI software will search for similar matches. These capabilities are designed to help commercial users respond faster and more effectively to security incidents. The new features are included in OpenEye's premium services tier. I also want to quickly touch on tariffs, which Kevin will cover in more detail when he discusses our financials in a moment. Like other companies, we continue to monitor framework announcements and watch for the details in any form of trade agreements that are reached. Based on the frameworks that we've seen to date, we feel that with our current U.S.-based and in-transit inventory positions, we're able to manage through the rest of 2025 on our plan and provide a predictable environment for our service provider partners. In closing, I'd like to thank our service provider partners and our Alarm.com team for their dedication and our investors for their ongoing support, particularly as we celebrate our 10th year as a public company. With that, I'll turn the call over to Kevin Bradley for a review of our financial performance. Kevin?

Thank you, Steve. At the halfway point of the year, we continued to see good momentum during the quarter. New account origination activity during the quarter slightly exceeded our expectations despite uncertainty due to tariffs and economic conditions. SaaS and license revenue grew 9% year-over-year to $170 million, exceeding the midpoint of our guide for the second quarter of $167.1 million. Broad-based contributions from across the diverse components of the business contributed to our overperformance. Our growth initiatives, which consist of our commercial, EnergyHub and international businesses continued to deliver year-over-year SaaS revenue growth within the range of our past disclosures. Their contributions to our total SaaS revenue during the quarter approached 30%. Total revenue grew 8.8% year-over-year to $254.3 million during the quarter. As Steve noted, this marks a milestone as the first quarter with an annual run rate in excess of $1 billion. Total gross profit grew 9.4% year-over-year to $166.8 million and gross margins improved by 40 basis points, while revenue mix was consistent. I want to spend a moment to frame our hardware business and its financial and strategic value to our business model. As an IoT-based software business, our SaaS revenue is primarily associated with the installation of physical products and our solutions are often based on the integration of software and hardware devices. This model creates higher barriers against end customer defection and technology disruption and distinguishes Alarm.com from typical vertical software companies as it relates to AI replacement risk or otherwise. Our hardware business can also be thought of as a structural contributor to our highly efficient SaaS revenue acquisition model. Based on our historical financials, gross profits from hardware sales cover over 50% of our sales and marketing customer acquisition costs. Along with the generally low levels of sales and marketing spending that Steve noted, the sale and installation of physical hardware products adds to the efficiency of our go-to-market model, the quality and capability of the services we enable, and the value of our service provider partnerships. Total operating expenses were $134.8 million during the second quarter. Excluding stock-based compensation and other items we adjust from G&A for non-GAAP purposes, total operating expenses were $118.3 million, a 9.1% increase year-over-year. R&D expense in the quarter, inclusive of stock-based compensation, was $69.1 million, up 5.1% year-over-year. Excluding stock-based compensation, it was $63.2 million, up 8% year-over-year. We saw strong EBITDA and operating leverage performance in the quarter, primarily due to revenue growth and quality. GAAP net income grew 3.1% year-over-year to $34.6 million, and our GAAP EPS per diluted share was $0.63. Non-GAAP adjusted EBITDA grew 13% year-over-year to $48.4 million. Non-GAAP adjusted net income grew 6.5% year-over-year to $34.1 million. Non-GAAP adjusted EPS grew 3.4% year-over-year to $0.60 per diluted share. We ended the quarter with $1.02 billion of cash and cash equivalents and produced $18.2 million of free cash flow during the quarter. This includes what was our final domestic Section 174 cash tax payment of $33.5 million in April. I want to speak for a moment about tariffs. We implemented a price increase in early June to reflect the 10% baseline tariff. This pass-through will slightly dilute margins, but gross profit dollars will remain roughly unchanged. We have also been closely watching the recent announcements of trade frameworks with various countries and multilateral groups. As you know, these are simply frameworks for further negotiations. Once trade agreements have been finalized and we understand the fine print, we can fully evaluate potential impacts and our options. In the meantime, we have taken steps to shield ourselves and our service provider partners from the uncertain environment. The uncertainty around tariffs likely prompted some of our service provider partners to build their product inventories during the quarter and minimize near-term tariff risks. Despite this demand, we were able to maintain our inventory levels. We believe that between our current inventory and products in transit, we have largely insulated our 2025 outlook from further tariff exposure based on the framework agreements we've seen so far. We also continue to have a healthy balance sheet and strong cash flow from our growing base of durable recurring revenue and efficient go-to-market model. Steve discussed our strategy of deploying capital to support some of our technology and channel partners and the recent minority equity investments we executed during the quarter. These strategic investments are designed to help us solidify our long-term service provider footprint while also delivering strong return characteristics on a stand-alone basis. As of July, these non-operating assets are generating just under a 9% cash flow yield on an annualized basis. Given the partnership structure of these businesses, these cash distributions are not characterized as taxable income for tax purposes and when received by us, will simply be net against the new investments line item on our balance sheet. Medium term, there is another structural tailwind to our cash flow outlook given the recent change to the R&D capitalization and amortization requirements in Section 174 of the U.S. Federal Tax Code that I'd like to mention. The federal budget signed into law in early July includes a provision that allows companies to transition back to immediately and fully deducting all domestic R&D expenses incurred during the year for tax purposes. Like most companies with intensive R&D business models, we're still evaluating the full benefit and timing, but we currently estimate that this change eliminates what would have been a little under $200 million in total cash tax payments over the next 5 years under prior law. This will provide additional balance sheet strength for our long-term capital allocation planning horizon. More broadly, we believe this change reinforces the long-term attractiveness of capital-efficient R&D businesses like ours. I'll turn now to our financial outlook. For the third quarter of 2025, we expect SaaS and license revenue of $171.4 million to $171.6 million. For the full year of 2025, we are raising our expectations for SaaS and license revenue to between $681 million and $681.4 million. This is an increase of $5.2 million over our prior guidance at the midpoint. Our raise is also a flow-through of our second-quarter beat of 180%, reflecting the confidence we have in our second-half outlook. We are now projecting total revenue for 2025 of between $990 million and $996.4 million, which includes estimated hardware and other revenue of $309 million to $315 million. We are also raising our estimate for non-GAAP adjusted EBITDA for 2025 to between $195 million and $196.5 million, an increase from our prior guidance of between $190 million and $193 million due to the beat from the second quarter. Non-GAAP adjusted net income for 2025 is projected to be $136 million to $136.5 million or $2.40 per diluted share. This is an increase from our prior guidance of $131.5 million to $132.5 million or $2.32 to $2.33 per diluted share. EPS is based on an estimate of 60.3 million weighted average diluted shares outstanding, down from our estimate last quarter due in part to the buybacks we executed during Q2. As a reminder, this share count includes a full year of dilution associated with our outstanding convertible notes on an if-converted basis of 9.125 million shares across 2 issuances. We currently project our non-GAAP tax rate for 2025 to remain at 21% under current tax rules. We expect full year 2025 stock-based compensation expense of $37 million to $38 million. In closing, I'm pleased with the broad-based momentum in the business that we've seen so far this year. We believe that we're well positioned to deliver continued revenue growth and profitability in the second half while investing to expand our long-term growth opportunities.

This is Matt Bullock on for Koji Ikeda. I wanted to drill down a little bit more on the growth levers here. Can you just help us understand what's driving the sustainability of the commercial, international and EnergyHub? It feels like we've been chugging along at 25% plus for some time now and particularly choppy software demand environment. So help me understand what's driving the success there and how sustainable that 25% growth rate is for those elements of the business?

There are really three different areas to consider. First, in the energy sector, there's a significant trend occurring with the explosive growth of AI data centers and the reshoring of manufacturing, which is leading to increased demand and capacity needs among our utility customers. EnergyHub is capitalizing on this trend. Additionally, we are broadening the range of devices we support and enhancing our DERMS solutions, which appears to be a lasting trend. On the commercial side, two factors are at play. We've completed the build-out of the commercial platform, both organically and through acquisitions, such as the recent purchase of CHeKT to enhance our remote video monitoring solution. This growth is also influenced by current events, underlining the importance for commercial customers to prioritize security and improve their protective measures for customers and employees. We believe this need will remain strong. There's also a technology shift occurring, moving many solutions from on-premises to the cloud, which benefits us. Internationally, growth is still in the early stages compared to the North American market. Our team is actively working market by market to establish relationships with service providers, while our tech team navigates each market's specific requirements to introduce a comprehensive smart security solution, moving away from legacy systems. Each of these areas has its unique dynamics, but we are confident in our performance. The overall growth rates remain robust, and as these SaaS components evolve, they are becoming increasingly significant.

Super helpful. And then just one quick follow-up, if I could. Are all 3 of those businesses growing around 25%? Or is there an outlier driving the growth there of the consolidated 25% growth? And given all those tailwinds you just outlined, is there any consideration of accelerating investments in those areas? Or is it really steady as we go in terms of how you're allocating capital?

The combination is growing at about 25%. The individual components are within a range of plus or minus 500 basis points from that. One or two may be slightly above the average, while one could be slightly below, but overall they fall within that range. We use a consolidated number as our planning tool for investments, then we make decisions based on the growth potential and what kind of investment we think is appropriate for each area. If we identify further opportunities to increase investment, we may do so. We are currently focused on 2025 but are already beginning to consider decisions for 2026 and may find chances to further enhance growth with additional investment in some areas.

Steve, I just wanted to maybe start with a very high-level question. I've got a more tactical one for Kevin after this. But given we're celebrating sort of the 10-year anniversary on this call and you talked about investors who have stuck with you during that time, it might be an appropriate forum for investors thinking about the next 10 years for you to maybe just touch at a high level as you sort of think about that, how you would describe your vision to the investors today signing up for the next 10 years.

I believe that our fundamental vision of having a cloud-connected sensor in every property worldwide remains intact. It's still an ambitious goal for us. We have various paths to achieve it, and we need to ensure that we do so profitably. My hope is that when we look back in ten years, we can feel as enthusiastic about the past decade as we do now. We are now more established in certain areas that will likely continue for the next ten years. Ten years ago, we operated with a single line of business and had a solid foundation, but we lacked the revenue diversity, knowledge of acquisitions, and the financial strength we possess today. Currently, our markets are more clearly defined; we focus on commercial and residential security, as well as energy, and I don't anticipate a significant shift away from these areas. We're in a better position to expand and develop these markets over the next decade.

Got it. That's helpful. And maybe just a follow-up, Kevin. Obviously, hardware is strong. It sounds like you're aware that there may have been a slight increase in demand from some of the service providers. I have a two-part question regarding this. First, as we look at hardware for the remainder of the year, we typically expect Q3 to perform slightly better than Q4 due to weather. However, I'm curious if this increase in demand affects the revenue split between Q3 and Q4 this year. Second, I know you're not providing guidance for 2026, but we need to consider it conceptually. As we think about 2026, you're obviously secured through year-end, as you've wisely mentioned. But once that coverage ends, how do the economics change when we look beyond year-end?

Yes, sure. Adam. So based on our guide, you can see we're implying somewhere between $150 million and $150 million of hardware revenue in the second half. I think that's likely to be mostly ratably split between Q3 and Q4. If you were to divide that by 2, I'd probably add a couple of million dollars above that average for Q3 and then put the residual in Q4. So still a little bit of a skew towards Q3, but maybe a little bit less than historical seasonality suggests. I think as we look forward to 2026, there is the potential for higher tariffs if the framework deals get codified into HTS codes. Putting that aside, I think what you do is you'd probably say, hey, Alarm.com talked about rolling through $7.5 million of higher hardware revenue in the second half of the year related to the baseline tariffs. And if you annualize that, it'd probably be growth in 2026 of about $7.5 million on top of what we guided to for 2025 and assume that besides that, demand and sales are probably roughly equal to what they had been in 2025. So yes, probably somewhere between $5 million and $10 million higher for 2026 than now.

Got it. Just real quick to wrap up on that. In your prepared remarks, you talked about how the hardware and the profit dollars that you get from that help to cover the cost of acquiring a subscriber. And I just wonder if you're kind of thinking about the framework and the current differences in the economics in the hardware business, are there things that you might think about differently from a business model going forward? Perhaps maybe it doesn't make sense to acquire as many subs, for example, just how you're thinking about that impacts the overall business model?

I don't think our perspective is really changing on this. If tariffs are implemented and we simply pass them through, we expect to have about the same gross profit from hardware next year as we do this year. I believe we will continue to budget for sales and marketing as we usually do in light of this. I don't foresee any significant structural changes to the gross profit contribution from hardware. Therefore, we will approach our revenue planning and sales and marketing budgeting much like we have historically.

This is Billy Fitzsimmons on for Samad. Maybe I'll ask this. We're midway through the year and it's been a busy week for software earnings, and we're hearing very different narratives from different companies where some are citing a weakening consumer, slowdowns and other names are citing strength and improvement for the back half. So can you just level set for us what assumptions and considerations went into the back half guide? Just remind us what you're thinking about around macro deal volume, top of funnel renewals and kind of the visibility over the next couple of quarters?

Sure, Billy. We do not expect a significant change in the macro environment in the latter half of the year. Our experience indicates that while the macro situation has not been perfect in the first half, it hasn't been terrible either. We stand out from many other companies because we operate in a sector that addresses a fundamental need for many people, which is security. Regardless of whether the economy is strong or weak, people view this service as essential. Consequently, our performance tends to be less volatile during macro-level shifts. One macro aspect we monitor closely is new home sales, which have been weak since 2023, and I haven't observed any dramatic changes recently. If new home sales increase, we anticipate two effects that may offset each other. First, there will likely be higher demand and the creation of more new subscribers as they move into homes and seek protection services. On the residential side, though, we might also see slightly lower revenue retention since customers often cancel service when they no longer occupy their homes. This remains an important macro metric for us. Overall, we believe our service providers are performing well, and we expect the outlook for the second half to be similar to that of the first half.

This is Alyssa Lee on for Saket at Barclays. Kevin, I think you touched on this briefly, but I was wondering if you could give us any color on retention rates for the quarter and then maybe for the back half of the year, how should we think about the puts and takes here under different scenarios of the housing market? And maybe as a follow-up after that, what does retention look like here for commercial versus residential for the quarter?

Sure. Thanks for the question. Yes, as we noted after our call last quarter, the retention rate for the consolidated company was inching towards 95%. It rounded actually up to 95%. It was 94.7%. We, at the time, noted that we didn't anticipate that perpetuating for each of the rest of the quarters for this year and that we thought it would actually return back down towards our historical range. That for the most part, played out. We rounded to 94% during the second quarter. It was actually 94.1%. So it came down about 60 basis points. That's still at the high end or slightly above our historical range that we've seen. So a little bit better than we had actually anticipated. And for Q3 and Q4, what we're expecting is that, that will kind of be hovering around that same area, somewhere between 93.7% and 94% is how we're thinking about it. The things that could shift that from a macro perspective are things that Steve touched on, on the prior question. Obviously, if activation rates fell and the housing market sort of somehow seized up more than it is now, that probably leads to higher retention than what we're modeling and vice versa. They'll probably roughly balance each other out from a revenue perspective over those 2 quarters, but those would be the puts and takes.

Okay. Great results, guys, and I appreciate the detailed update. Steve, touching on the core North America residential business, you mentioned new home builds and sales as those pick up eventually, it could drive a pickup in new account activations, maybe a near-term headwind on retention rates. But just to pick your brain, do you see home sales? Do you see an environment where home sales do end up picking up again in 2026, probably going to be very sensitive to the rate discussion. But is that sort of a fair assumption that you guys are thinking about? And then just also curious how many Alarm residential customers own multiple Alarm connected residential properties?

Let me start with the overall housing market. We're all observing the ongoing discussions about what the Fed should do regarding interest rates in the future, and how that might influence home sales. It’s still early, but from my conversations with our service providers, especially those working with builders, there seems to be a bit more optimism now in August about the next six months compared to what they felt in January. It feels like there’s some pent-up demand and people who were previously hesitant are now adjusting to the higher interest rates and beginning to plan accordingly. Overall, there's a slight increase in positivity about the upcoming six to nine months. The second question you asked was about the percentage of our subscribers who own multiple properties, is that correct?

That's right. That's right.

Yes, that's always been a significant strength for us. Our subscribers with multiple properties, both residentially and particularly in the small business sector, stand out. While I don’t know the exact percentage, I would guess that in the commercial sector, a considerable portion of subscribers is affiliated with multiple accounts, likely over one-third. On the residential side, it's probably less than that but still notable, as many individuals have second homes or multiple rental properties. This capability sets us apart and requires robust backend support to ensure quality service across various properties. While I can't provide the precise percentage, it's a sizable portion of our subscriber base.

That's very helpful color. I appreciate that, Steve. And then maybe just a follow-up for Kevin. You mentioned in June, you rolled out a 10% price increase on the hardware. Have you thought about or are you actively thinking about potential general price hikes on the base monthly ARPU rate on the residential or commercial SaaS service side of the business?

Yes, Jack, just a quick clarification. We have absorbed most of the 10% tariff costs, which translates to about 7.5% in pricing for service providers based on our gross margin profile. At this time, we do not have any plans for broad-based service price increases, whether in the second half of this year or next year. This is not something we are currently considering.

And I appreciate the clarification on the gross margin or the cost of the tariffs pass-through on the hardware there. And then maybe just internationally, which countries or regions are the largest installed base of Alarm customers? And are there any just particular regions that are growing faster than others more so now than that might just jump out at you?

You said countries or states, Jack?

Countries and regions outside of the U.S.

Outside of the U.S. Yes. I mean, this year, so far, Lat Am has been a faster-growing region or area than most. And then in the Middle East as well, we've seen some growth and particularly very fast adoption of the remote video monitoring capability that we recently brought to market. So those are 2 areas where we're probably seeing a little more growth than what we expected on the international side.

Our next question comes from Adam Tindle with Raymond James. And I'm not showing any further questions at this time. This concludes today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.