Alarm.com Holdings, Inc. Q4 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Alarm.com Fourth Quarter 2025 Earnings Conference Call. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Zartman, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Alarm.com's fourth quarter and full year 2025 earnings conference call. Please note, this call is being recorded. Joining us today are Steve Trundle, our CEO; and Kevin Bradley, our CFO. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates and 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 annual report on Form 10-K and our Form 8-K both of which will be filed shortly with the SEC, along with the associated press release. The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update 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 fourth quarter and full year results that exceeded our expectations. Our SaaS and license revenue in the fourth quarter was $180 million, up 8.8% over the last year. Our adjusted EBITDA in the quarter was $55 million. I want to thank our service provider partners and our employees for their contributions to our performance in 2025. During the year, we reached a significant growth milestone generating more than $1 billion in annual total revenue. Achieving this scale reflects the strength of our technology and the business model that we have engineered. Our business is grounded in the long-term partnerships we have with our service providers. Those partnerships are based on our commitment to both innovation and strategic alignment, where our growth is predicated on our partner's success with our technology. Our service providers integrate our technology platform across their business to deliver the best possible residential and commercial security solutions to their end customers. During the year, we continued to execute on our long-term growth strategy. We are leveraging our R&D program and delivery channels to expand into additional markets. As a result of these efforts, we have created a more diversified and durable business. Today, we provide mission-critical IoT-based solutions anchored by physical products that protect homes, businesses, enterprises, multifamily properties, and critical grid infrastructure worldwide. I want to spend a moment reminding our investors of how our business model and value creation engine are unique compared to most other SaaS companies. The equity markets have recently become fearful that all SaaS businesses will be pressured by AI, impacting seat-based pricing models and performing tasks that could relegate incumbents. Alarm.com's SaaS software is priced around a different set of value drivers. Our service providers already use our back-end software essentially for free if they install our customer sites with IoT devices in our ecosystem that enable our software. We have no material seat-based pricing models. Instead, our SaaS revenue is driven by each connected device that is installed by our service provider partners. And once these connected devices are installed at a customer site, they typically remain in service for nearly a decade. Our service providers benefit from efficiencies that are gained by having a single management platform for servicing all of their connected devices. The value drivers in our business are the number of connected devices that we enroll on our platform and at some level, particularly in the case of video, the data that these IoT devices generate. We produce insights from these rich proprietary data streams to benefit the subscriber and the service provider. Additionally, in many cases, we create value by offering and managing cellular and tightly supervised Internet connectivity to the devices and locations we serve. We will continue to leverage AI for both internal productivity gains and to augment our capabilities with products like the AI-based deterrents and monitoring capabilities we already have in market. However, we do not see AI driving a change to our fundamental business model structure. Next, I want to walk through the major components of our business and discuss the strategic drivers that support their continued growth. I'll start with our core residential business which serves the smart home security market in the U.S. and Canada. We have a strong market share for professionally installed smart home security solutions in these markets. Our leading position is built on the scale of our platform, the breadth and quality of our solutions and our trusted service provider relationships. We have consistently invested more in this market than our competitors. Revenue growth in our core residential business continues to be driven primarily by ARPU expansion. Our service providers are particularly effective with our residential video solutions, including video analytics, and increasingly remote video monitoring that is augmented by the central station. Our residential customer tends to be the person who wants real and serious security with everything done right by a professional, delivered and regularly serviced in a manner that protects the subscribers' privacy. We recently introduced a new premium video doorbell, which allows customers to enable 24/7 continuous onboard recording via SD card. It's also designed to enable our full suite of advanced analytics and drive adoption of our higher-tier video subscriptions. We launched our first battery-powered camera, the 731. Its flexible, completely wireless installation enables video coverage in locations that are difficult to wire. The 731 can be installed with automatic solar-based battery charging. It also supports premium video capabilities, including AI deterrents, perimeter guard, and remote video monitoring. On the software side, we recently released new AI capabilities that improve automation and personalization for subscribers. These enhancements make it easier to identify and respond to important events. Over time, we believe it will help support increased retention and adoption of premium video subscriptions. We have also continued to diversify the business. I'll start by focusing on our expansion into adjacent markets through our commercial security and energy businesses. These two businesses alone contributed 25% of our SaaS revenue for the full year of 2025 and grew about 25% year-over-year. Our commercial business serves small- and medium-sized businesses and enterprise customers with integrated intrusion, video, and access control solutions. Growth remains solid in 2025 despite some economic uncertainty that slowed some larger scale deployments. We believe that the underlying demand environment in the commercial market remains solid. With the range of functional advantages our platform offers the market, we believe that we can drive increased adoption of the Alarm.com and OpenEye commercial platforms amongst both our existing and new service providers. We have continued to enhance the platform to fully integrate video, access control, and intrusion protection to enable our service providers to standardize on Alarm.com for the full range of commercial subscribers that they serve. A recent platform enhancement is the introduction of a new lineup of commercially targeted Alarm.com video cameras called the Prism Series. The new product line is designed to give our service providers a more robust offering for SMB and mid-market installations. The series offers high-resolution imaging, clear color video at night, and 2-way audio. It also supports our premium video analytics services, including AI-driven proactive deterrence and integrated central station remote video monitoring. It has also been encouraging to see that many of our commercial end subscribers continue to add to their systems with more components of our platform well after the initial installation. Today, more than 2 million active video cameras and devices are deployed across our commercial property base. This base has grown consistently driven by increasing attach rates as more of our service providers incorporate our video solutions into their standard offerings. Shifting to our Energy business. EnergyHub remains a strong contributor to our growth. The EnergyHub platform provides mission-critical distributed IoT management solutions that help utilities address long-term structural pressures on grid reliability and infrastructure. Forecasts point to the strongest sustained growth in U.S. electricity demand in more than 2 decades. Electrification and the growing footprint of data centers are among the primary drivers of demand-side pressure. At the same time, electricity generation is also becoming increasingly diversified and thus more variable. EnergyHub orchestrates large networks of connected devices, including thermostats, electric vehicles, batteries, and water heaters, to provide on-demand virtual power plants, also called VPPs. Utilities call on VPPs to reduce peak demand and to increasingly manage load more dynamically across the grid. EnergyHub can stand up a VPP far faster and more cost-effectively than building new generation infrastructure. EnergyHub is the clear market leader in this space. In 2025, the number of connected devices under management increased by more than 50%. During the year, utilities increased the number of times they called on EnergyHub VPPs by 25%, reflecting the growing importance of its programs to grid stability. To accelerate EnergyHub scale, we acquired Resideo Grid Services, or RGS, late in 2025. Similar to EnergyHub, RGS provides demand response aggregation and program management solutions for utilities, but it has been primarily focused on supporting smart thermostats. With the acquisition, EnergyHub can introduce its multi-device platform to RGS clients, enabling them to manage a broad ecosystem of distributed energy resources and deploy VPPs with greater capacity and capability. Looking ahead, EnergyHub will remain focused on growing its base of utility clients, expanding the diversity of devices enrolled in programs, and increasingly applying AI to provide load shaping solutions that address a growing range of grid challenges. Lastly, we continue to develop international markets as a natural extension of our platform strategy. We are deploying our core residential video and increasingly commercial technology into these new markets to leverage our core R&D investments and drive scale. As we've expanded our core video offering, our solutions, including remote video monitoring, are being increasingly introduced and adopted by our international partners. In 2025, we saw a continued uptick in the video attachment rates to 33%. In summary, I'm pleased with our 2025 results, and the continued growth we see across the business as we roll into 2026. 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. I'll now turn things over to Kevin Bradley, our CFO, to review our financials. Kevin?

Thanks, Steve. I'll begin by reviewing highlights from our fourth quarter and full year 2025 financial results, then cover key elements of our capital allocation framework and conclude with our guidance for the first quarter and full year 2026. I'm pleased to report another quarter of execution against our financial plan. Our quarterly and annual performance reflects continued broad-based contributions across the business's diverse components. As Steve just mentioned, one of the areas that outperformed was EnergyHub. EnergyHub's results were driven by higher-than-expected program participation as well as a modest contribution in the latter part of the quarter from the RGS acquisition. Growing the number of programs and increasing the number of enrolled devices in each program are among the multiple long-duration levers supporting EnergyHub's growth. There are network effects in the business that accrue with scale. The more programs and DERs that EnergyHub manages on behalf of utility clients, the more valuable they become to ecosystem device partners. And the more ecosystem device partners EnergyHub works with, the more capacity the virtual power plants can provide utility clients. The acquisition of RGS expands our number of managed programs and enrolled devices and deepens our relationships with ecosystem device partners, accelerating these effects. For full year 2025, SaaS and license revenue for the overall consolidated business grew 9.2% year-over-year to $689.4 million. Total revenue grew 8% year-over-year in the fourth quarter, and as Steve discussed, exceeded $1 billion for the full year. Total gross profit in the quarter was $172.6 million, an increase of 8.8% year-over-year, including 13.4% year-over-year growth in hardware gross profit to $19.1 million. Higher-than-expected hardware revenue and gross profit were driven by OpenEye's sales of enterprise-grade video cameras and devices as well as a favorable product mix of Alarm.com residential cameras. As Steve described, the physical installation of hardware plays a critical role in value creation across the business, regardless of whether it's one of our products or those of an ecosystem partner. But when it is one of our products, as is the case with substantially all video cameras that connect to our cloud, that sale contributes to our highly efficient subscriber acquisition model. In the fourth quarter, gross profit from hardware sales offset approximately 55% of GAAP sales and marketing expense and more than 60% for the full year. That leverage allows us to direct more capital toward organic R&D and innovation, enabling our service providers to deploy a wider array of solutions across our mutual customer base. During the fourth quarter, total operating expenses, including depreciation and amortization, were $137.7 million. Excluding depreciation and amortization as well as stock-based compensation and other items we address from G&A for non-GAAP purposes, total operating expenses were $121.7 million, a 9.5% increase year-over-year. R&D expense in the quarter, inclusive of stock-based compensation, was $66.2 million, up 6.8% year-over-year. For the full year, R&D expense increased 5.6%. GAAP net income in the fourth quarter was $34.7 million or $0.66 per diluted share. Non-GAAP adjusted net income grew 19.2% year-over-year to $38.9 million and non-GAAP EPS increased 24.1% to $0.72 per diluted share. Adjusted EBITDA for the quarter grew 18.3% year-over-year to $54.9 million. For the full year, adjusted EBITDA increased to $206 million, representing 16.9% year-over-year growth. I do want to point out that our adjusted EBITDA number was a tad inflated by a $4.7 million mark-to-market gain on a security in our treasury portfolio. While substantially all of our balance sheet cash is held in money market funds, our policy allows for a small allocation to other marketable securities. The business generated $35.1 million of non-GAAP free cash flow in the quarter and $137 million for the full year. As we previously indicated, free cash flow declined year-over-year as the exceptionally favorable working capital dynamics we saw in 2024 normalized. Turning to the balance sheet, we recently retired the $500 million of convertible notes that matured in January 2026. These bonds carried 3.4 million shares of potential dilution that we began removing from our diluted share counts midway through Q3 2025. They will not be in our diluted share counts for the entirety of 2026. Our operations fully fund their own capital requirements, which allows for a higher degree of opportunism and flexibility as it relates to capital allocation, further supported by the 3-year timeline remaining on our $500 million of outstanding convertible notes due May 2029. In 2025, the business generated returns on invested capital from its ongoing operations well in excess of that capital's cost, reflecting the durability of our competitive positioning and the discipline with which we allocate capital. We have historically and will continue to primarily allocate capital to organic R&D with an emphasis on long-term value creation. Our commitment to domestic product development has contributed to some meaningful tax efficiencies in the form of ongoing R&D tax credits. Our cash tax liability for 2025 was $12.1 million, which reflects the benefit of those R&D tax credits as well as changes to Section 174 of the tax code that restored the full deduction of domestic R&D expenses in the year incurred, which will provide us with a multiyear tailwind to net returns on invested capital. We also leverage our strong balance sheet to supplement organic investment, whether in the form of M&A such as the $113 million we spent in 2025, acquiring businesses that support our commercial and energy initiatives, returning cash to shareholders via opportunistic buybacks, or investing strategically into the ecosystem in the form of nonoperating assets. Looking ahead, we will continue to deploy capital to reinforce our competitive position and leverage our scale. We will prioritize high-return organic investments and selective acquisitions that support growth opportunities while maintaining the financial flexibility to act opportunistically elsewhere. I'll switch gears now to provide our 2026 financial outlook. For the first quarter of 2026, we expect SaaS and license revenue of between $175.8 million and $176 million. As a reminder, the sequential decline in SaaS revenue from Q4 reflects EnergyHub's normal seasonal dynamics. EnergyHub revenue is typically annual in nature and weighted towards the second half of the year. The fourth quarter represents the largest contribution. This pattern is reflected in our guidance. For the full year 2026, we expect SaaS and license revenue between $743 million and $745 million. This is a bit higher than previously expected and reflects contributions from RGS as well as continued healthy expectations for organic growth. We now expect total revenue between $1.058 billion and $1.065 billion, implying hardware and other revenue of $315 million to $320 million, which includes the assumption that we pass through the current tariff cost dollar for dollar and that tariffs don't become incrementally larger from here. We are also implementing non-GAAP adjusted EBITDA guidance above our first look of between $213 million and $215 million, implying margins of 20.2% at the midpoint. This outlook reflects the inclusion of RGS, which we don't anticipate will contribute to adjusted EBITDA this year. Over time, we expect to realize more synergies from the acquisition, and we continue to expect to exit 2027 with a 21% adjusted EBITDA run rate margin, as I discussed in more detail on our last call. Non-GAAP adjusted net income for 2026 is expected to be between $150.5 million and $151 million or $2.78 to $2.79 per diluted share. This is based on approximately 57.2 million weighted average diluted shares outstanding, down from 60 million weighted shares outstanding during Q4 2024. We expect our non-GAAP tax rate to remain approximately 21% under current tax rules, and we project full year 2026 stock-based compensation expense of approximately $40 million to $43 million. In closing, we're pleased with the broad-based momentum in the business that we saw throughout the year. We believe we're well positioned to deliver continued revenue growth and profitability while investing to expand our long-term opportunities. With that, operator, please open the call for Q&A.

Our first question comes from Adam Tindle with Raymond James.

Congrats on 2025. Kevin, I wanted to maybe just start with the raise of SaaS guidance. It's a little bit more meaningful than in the past. I know you guys tend to kind of outperform over time and inch that up. But this is a little bit of a bigger bump than we've seen in the past. I understand there might be some RGS contribution. And if you could maybe just break that out a little bit. And then also the organic assumption sounded like you were still expecting healthy organic growth. What are you seeing in the business to underpin that? I think that's obviously not consistent with what the stock has been doing, what kind of the general view on software that Steve outlined. So what's underpinning the organic assumption improvement as well?

Sure, Adam. Yes, as you noted, since our initial look, the SaaS guidance at the midpoint increased by about $21 million. This includes two components. First, we added RGS in late Q4 of last year, so most of the revenue from that will be reflected in our year-over-year perspective in 2026. Additionally, we outperformed in Q4 when excluding that. The best way to think about it is that we had an implied year-over-year SaaS growth rate in our first look, and I would say things are slightly better than that. If you exclude RGS, it’s about 10 to 20 basis points above the growth rate we projected. The remaining increase in absolute dollars is primarily from RGS.

Got it. Okay. Maybe just a follow-up on RGS and EnergyHub in general, since I think it's becoming even more topical for Steve. You described some of the network effects that essentially that are kind of going on in that business. Wonder if you might just take a step back for investors that might be a little newer to this and talk about the competitive environment and EnergyHub's position with RGS, and have you taken a look at like sizing that total market? How big could that be over time? Sort of your vision for that business, especially now with the RGS acquisition?

Adam, that's a great question. Regarding network effects, we aim to be the most attractive partner for companies making devices for our ecosystem. For instance, if you manufacture thermostats and partner with a company that enables virtual power plants (VPPs), you would want your thermostats to be utilized in as many locations as possible. With our recent acquisition, we now reach a broader range of utilities, which enhances the value of each device. Looking at the market size, there are approximately 130 million meters in North America. We are currently engaged with electric utilities covering about 50 million of those meters, but we are still at the beginning stages of enrollment. Right now, we have about a 5% enrollment rate on those 50 million meters through our EnergyHub offering. We see growth opportunities in three key areas: first, increasing enrollment levels with our utility partners; second, adding more utilities—where we currently lead the market; and third, expanding the number of devices and categories related to energy consumption. In terms of competition, while there are smaller players in this space, it’s challenging for them to meet all the needs of utility partners looking for VPP providers. If someone were to enter the market today, they might focus on specific segments like EV charging stations or swimming pool pumps. However, it may be too late for that approach. Utilities prefer a single partner that can offer reliable solutions across a wide range of devices, and we believe we are well-positioned to fulfill that role.

Our next question comes from Samad Samana with Jefferies.

This is Jordan on for Samad. Congrats on the strong quarter. Steve, you touched on kind of the primary concern we're hearing from investors around AI and software, which is the risk that software poses. Obviously, your business model seems to be in a position of strength relative to many others. I wanted to just double-click on how you're pivoting R&D internally to capture the opportunity here with AI and the strong SaaS guide you guys gave, how does that embed either a material demand or monetization that might come from the newer AI features that you're layering into the product?

Yes, that's a good question. We are focusing on two main areas. First, we are working on enhancing our internal capabilities to make our solutions more accessible and to derive greater intelligence from our data streams. We have already made progress with our AI-based deterrence solutions, which have been on the market for over a year, and we have been leveraging AI in analytics for about five years. Our capabilities are improving daily, and we are making efforts to streamline the consumer interface for all our features using large language models. For instance, we have introduced a feature called attribute search that enables users to interact with large volumes of video data in a text-based, efficient manner. We will continue to enhance our functionality. On the monetization side, we are exploring ways to increase productivity and expand our offerings. While we are in the early stages of this, there is significant potential for what we can achieve, and we are working to determine how many of these capabilities we can effectively implement today. Over time, we expect to enhance productivity in some areas.

Got it. That makes a lot of sense. That's great to hear. Maybe a quick call for you, Kevin. You mentioned the implied hardware guidance accounts for tariff cost pass-throughs, obviously, a positive for margins for the business. But I'm curious how you're thinking about how those pass-throughs impact demand broadly? Any feedback from your customers? And then, are you seeing any increase in manufacturing costs related to hardware and how are you thinking about managing those if those are coming up?

Yes, Jordan, thank you. We experienced a similar type of cost inflation during COVID on the hardware line. Last April, when tariffs began to be released, we looked back at what happened during that time and found no significant change in demand. Our expectation when we first implemented tariffs last June at the 10% level was that there would be no impact on demand, and that was confirmed for most of the year. We exceeded our initial guidance, which included about $7 million or $8 million from tariff pass-through revenue. Even without that, we would have surpassed our projections. There has been no noticeable decrease in demand. The pass-throughs increased on January 1 to reflect the full tariff, doubling in amount, and we anticipate no decline in demand from that. Regarding other manufacturing costs, we are monitoring the DRAM market, which does affect us to some extent, but we haven't yet seen any cost increases in that area. We are likely to extend our inventory on hand by about 30 or 40 days early this year to reduce supply chain risks. This will require a greater investment in working capital at the beginning of the year, which will materialize over the next few months. However, we have not encountered any cost increases related to potential memory shortages. Fortunately, our agreements allow us to pass through third-party costs, which provides us some protection, and we will manage any issues as they arise.

That makes sense. Congrats.

Our next question comes from Saket Kalia with Barclays.

Great to see the results.

Thanks.

Steve, maybe for you. That was a helpful walk-through earlier on kind of the combined EnergyHub business. And I get the vision in terms of having more devices only makes each other device more valuable to a utility. That makes a lot of sense. Maybe more of a medium-term question. How do you kind of think about synergies there? Whether that's from a revenue or expense perspective, just as we think about that combined EnergyHub business becoming maybe a bigger, more strategic part of Alarm's overall business. Does that make sense?

Yes, it does make sense, Saket. In terms of synergies, we are currently managing two different platforms that provide capabilities traditionally offered by RGS and EnergyHub. As of now, the synergies are not very significant, although we do have some customer synergies already in place. However, we anticipate that over the next 12 to 24 months, we will start to integrate the unique capabilities of RGS into the EnergyHub platform. Over time, we expect to see synergies emerge from merging these two platforms, benefiting customers by providing a more comprehensive solution supported by a larger R&D engine and a wider range of devices, ultimately adding more value. Our model indicates minimal synergy this year, especially concerning EBITDA, but we foresee more substantial synergies developing in the 12- to 24-month timeframe. This will assist us in realizing the potential of EnergyHub as a standalone platform, as we need to see more tangible cash production capacity to build confidence. We believe these synergies will help us achieve that goal.

That makes a lot of sense. Kevin, maybe for my follow-up for you, just on a slightly different topic or a broader topic. I was wondering how you kind of think about the emerging areas growing in 2026. I think Steve Trundle said, the commercial plus energy, I think that's about 25% of SaaS, it grew about 25% in '25, of course, international would be additive on top of that. If we think about those three businesses sort of in aggregate, how do you think they kind of grow in '26 as we think about the different components next year?

Sure. Thanks, Saket. I would expect that they grow between 25% and 30%. Now that obviously includes a little bit of inorganic growth, but that's how we're thinking about it going forward. And by implication that if they grew at that rate, they'll wind up becoming more like 1/3 of total SaaS revenue, if not maybe slightly more.

Our next question comes from Stephen Sheldon with William Blair.

First, it seems like you're getting a lot of traction with commercial video solutions. I guess, so if you look at that, has there been anything surprising about how your video capabilities are getting utilized across end markets, property types, use cases, etc.? And specifically, are there any notable pockets of strength to call out on the broader commercial video side? And then I think you also talked about expansion motion there as one of the factors supporting growth. So yes, I guess, I'd just love some more color on the growth you're seeing in commercial video.

Sure. This is Steve speaking. The best areas for our video solutions tend to be those with high crime rates and significant assets. So, locations where both factors coexist are where we see strengths. For example, Los Angeles is an excellent market for our commercial video solution. The strengths are becoming apparent, and while I wouldn't describe them as surprising since we anticipated this, our recent acquisition and commitment to Central Station enhanced our remote video monitoring capabilities, which is strengthening the commercial video market. This approach really improves our ability to prevent crimes before they happen, rather than just analyzing incidents after they occur. It represents a significant change in how we view the role of cameras and their societal value with a focus on deterrence. This push towards deterrence has been the main driver, and we've prepared with the right product lineup. Additionally, there is a smaller factor at play, which is the gradual uptick in international markets on the commercial side. International efforts always follow North America, but over the past six months, we've made notable progress in deploying commercial solutions, especially in Latin America and gradually in other regions.

Got it. That's helpful. And then as a follow-up, I guess, high level on spending plans. Can you talk more about areas where you're stepping up reinvestment across the business in 2026? I know R&D is always a major focus. So I guess, any color on kind of where you're maybe stepping up the investments in R&D in any other parts of the business where or maybe reinvesting more than you have historically?

Yes. Generally speaking, we believe that our R&D spending as a percentage of revenue is where we want it to be, so we don't plan to significantly increase R&D expenses. Instead, our focus is on enhancing productivity within R&D. We've previously discussed our goals for operating margins by 2027, and we remain committed to that. In the short term, assimilating a couple of different platforms or a new platform on the EnergyHub side will require some additional effort and capacity. Currently, we find ourselves in a situation that many companies are likely experiencing, where we have R&D commitments that were made 12 to 24 months ago and are still ongoing, while also working to leverage advancements in AI. If there is an area requiring increased effort, it would be in managing both of these initiatives simultaneously, and that's currently in progress.

Our next question comes from Adam Hotchkiss with Goldman Sachs.

I wanted to follow up on EnergyHub. Steve, could you elaborate on how your EnergyHub business would benefit from the demand driven by AI in data centers? Additionally, what should investors be monitoring as we evaluate that business throughout the year? Is there anything in the market beyond quarterly results that we should be paying attention to in order to understand the direction of that business?

The data center phenomenon is driving demand for EnergyHub. This is due to the rising need for more electricity, primarily fueled by the growth in data centers, along with the fact that the energy supply on the grid is becoming more variable. A smaller portion of power is sourced from stable facilities like nuclear plants, while a larger share is now generated from more variable sources such as solar and wind. The combination of the growing data center presence and the variability in energy supply is increasing the need for utilities to explore new power sources. Consequently, utilities are more receptive to our work with EnergyHub and the development of virtual power plants that generate energy when demand is highest. This is a significant growth driver for us. Regarding tracking our progress, I would suggest referring to our updates as the best way to monitor EnergyHub and its business trajectory, as I can't readily identify another source of information.

Okay, great. That’s very helpful. Kevin, regarding the margin question, we have historically viewed a significant part of our R&D spending as opportunistic, focusing on future growth, ROI, and opportunities. How should we consider the flat margin trend for next year? How do you view the trade-off between achieving scale in revenue growth and improving margins more quickly versus focusing on investments? I’m trying to understand our progress towards a medium-term margin target.

Sure, thanks, Adam. I want to point out that our adjusted EBITDA margins in 2025 include $4.5 million in unrealized gains from a security in our treasury portfolio. If you exclude that and focus on pure operating results, you'd see an adjusted EBITDA margin of about 19.9%. This suggests there is some progression in our initial guidance from 2025 to what we expect at the end of 2027. Additionally, I want to emphasize that we completed an acquisition in the fourth quarter, which does not contribute to EBITDA margin, as it starts at 0%. We are still working to absorb that and show some improvement in our bottom line.

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

Okay. Great. Congrats on the strong finish to the year and a strong outlook as well. A couple of questions. Maybe, Steve, two-part question on the competitive environment within Alarms or North America residential business. Just first, in general, any notable trends or changes in the competitive environment that you'd like to speak to? And then two, how has Alarm's core business performed relative to that original like 200 basis point headwind that you guys were initially I think forecasting for ADT? Anything you could speak to there and how the business performed up against that?

Sure, Jack. I don't think there has been any significant change in the competitive landscape in our core business. There are always competitors, but we have spent the last 15 years establishing strong relationships with our service providers. Many of them are running substantial parts of their business on our platform. While we are not completely shielded from competitive threats, we are in a strong position, especially if we continue to enhance our offerings and meet our commitments. So, I feel quite positive about the competitive environment right now. Regarding the 200 basis point headwind, it did not materialize as completely as we expected. I refer you to ADT's comments about their transition, where they mentioned that in the third quarter, about 25% of their business had transitioned. This provides some insight into how things have progressed. The impact in '25 has not been as significant as initially thought, but we are still accounting for it in our projections for 2026.

Got it. Okay. That's very helpful. And then maybe just another one for Kevin, maybe on the core business as well. The outperformance in growth sounds like it's been heavily ARPU expansion driven. Certainly, strong video attach rates, can you maybe just touch on anything you're seeing in the installed base for the North American business? Has that performed? Is it up? Or is it kind of in line with your expectations? And then does that play a role at all in your raised SaaS guidance for 2026 for the installed base lever?

Yes, Jack, thanks. As Steve mentioned, much of the growth in that segment comes from ARPU dynamics, with a split of about 70-30 or 75-25 between pricing and ARPU. This growth is primarily driven by organic product-led feature adoption rather than just pure price increases, although there is a small amount of that. Most of it is about product adoption, mainly led by video. Over the past several years, it's consistently been the case that 20% to 25% of the cameras we sell go into the installed base. There is steady movement through the installed base, which has been true for about five years. Customers begin using video, increase their number of video cameras, and purchase cameras that offer more capabilities, leading to package upgrades. This pattern is a consistent feature of our model.

Excellent. That's a great data point. I appreciate the time, guys. Solid results.

Our next question comes from Ella Smith with JPMorgan.

This is Bella on for Ella. So first, I wanted to ask, can you frame EnergyHub's growth using a few incremental operating KPIs such as total DER assets under management, gigawatts under control, opt-in or retention rates or the mix shift?

Yes. The primary way we illustrate their growth is likely through the percentage of the market they are capable of serving. I previously mentioned that there are approximately 130 million meters in North America, and EnergyHub can now service about 50 million of those residences. This is a key figure we monitor closely regarding how many homes we can leverage with the EnergyHub offering. Additionally, as we consider the number of homes we can reach, we look at the percentage of those that we are actually enrolling in a program. Currently, we are enrolling roughly around 5% of the homes we pass, and we would like to increase that number. It is not unrealistic to think that we could raise that to 10%. Thus, when assessing growth drivers, it is important to consider what percentage of homes in North America we can serve based on our utility relationships and, of those, what percentage we can enroll in our program. These are the two main factors. The third factor is the variety of power-consuming device categories we are servicing simultaneously, such as thermostats, EV chargers, batteries, pool pumps, and water heaters. The greater the diversity of devices, the better.

Got it. That's very helpful. And just as a follow-up, penetration among large utilities is often cited at about 30% to 40% and is expected to increase over time. Where do you see the next step in adoption to raise that penetration rate, and how are sales cycles and integration backlogs progressing?

Yes, I would say that today's penetration is somewhat dependent on what we define as penetration. If we reference the metric of 130 million meters, and we note that we are currently at 50 million, we are approaching the range mentioned. So I would estimate it to be around 30% to 40%. There are several factors driving this. First, there's an increasing demand from many utilities for additional supply due to the electrification of vehicles and the growth of data centers. This will likely continue to be a driving force. Regarding the sales cycle, it tends to be very long. It often begins with a pilot program, and sometimes a regulatory body must be involved or approve the program, which can lead to sales cycles lasting years in some cases. However, the current supply shortage is helping us to shorten these sales cycles somewhat, which has given us some optimism for the latter part of this year and next year.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.