Look at this nice full room.
Yeah.
Right?
That's awesome.
Thanks everybody for joining. My name is Adam Tindle, and this is part of my connected devices coverage here at Raymond James. Very happy to have Steve Valenzuela, CFO of Alarm.com. Don't let the slide fool you, we're not gonna go through a slide deck today. It's just a fireside chat, and would love to keep it very interactive. You know, some of you may be customers of Alarm.com, investors of Alarm.com. So please, let's keep it very interactive if we can. So Steve, thanks for being here.
Great to be here.
Let's maybe start at a high level-
Yeah
... for investors not as familiar. Provide us with a little bit of color on the company overall, help us understand the market opportunity and some of the key growth vectors.
Sure. So we started the company back in 2000, and really started in North America residential, and really focused on security first, and we still focused on security. We expanded that to be a smart property solution, where we expanded into international, we expanded into commercial, energy management with demand response, first responder response with Noonlight. We acquired a company in Poland, EBS, which got us into a solution for connector, which will allow us to expand international faster. But the whole idea here is that we've grown the company significantly by really diversifying the business and really expanding it into multiple markets. Again, focused on smart property solutions. So, and also back in 2017, we acquired a company that got us into AI, before people were talking about AI.
And we actually developed our neural network, where we fed in millions and millions of clips to make the system very, very smart. So both for residential and commercial customers, they get customized alerts that they can actually set to their parameters, and they can actually customize, like when they want certain alerts. Our system actually can identify people, animals, and vehicles. We're not at the point yet where we can identify if it's your vehicle, but we're getting there.
Mm-hmm.
We have certain alerts, like for example, Perimeter Guard. So when someone comes around your property, you can get an alert. Let's say you're a business owner, and there's somebody lurking in the back of your restaurant, you can get a smart alert that'll tell you that there's somebody there that has been loitering for a period of time. Also, for a commercial customer, we have line counting. So imagine you're a restaurant chain, you have five or six different restaurants in an area, and all of a sudden you get an alert from Alarm.com saying the line is taking 20 minutes.
You could send employees to that store from your other store. So there's a lot of smart features that we've developed over the years to really make the system very, very smart and very intelligent, and it actually learns along the way. One thing that's really cool is being able to have auto alarming. So for a lot of residential customers and even commercial customers, you forget to set your alarm. You can actually set auto alarming, and then you set what sensor will actually shut off the alarm when you come down in the morning.
So think about that. So many people have alarm systems, and they accidentally activate the alarm because they forget to turn it off. So that's a very cool feature. I use that myself, by the way, so my kids don't open the door. But, so that, that's kind of an overview of the company. Probably a pretty good, pretty good start. And I know we're gonna touch on each of these.
So the summary would be, you know, started in core residential. This is a smart property platform. The business is really focused on SaaS and software
Yes
and delivering this platform that we see here on the screen, through a unique go-to-market. Maybe you could just-
Yes
for investors that are not familiar with Alarm.com, talk about delivering that SaaS platform and how the go-to-market works.
Yeah. So, the go-to-market is definitely unique. Early days, we tried DIY, and it was very, very difficult, and we hit on this idea of having these service providers actually become like delivery agents for Alarm.com. So we signed up service providers over the years. Now we have over 11,000 service providers. These are independent businesses like ADT, CPI Systems, Brinks, many others, who actually are the ones that do the installation. They also do the marketing to the end consumer and the business. So Alarm.com, we built the SaaS system, and so our focus is really on technology and automation, whereas the service provider is the one who's actually doing the marketing, who's doing the installation, doing the support, doing the first response. So when there is an alarm, it actually doesn't go directly to 911.
A lot of people think it does, but it first goes to a central station, where the central station operator, that's typically operated by the service provider, will then determine whether or not to contact 911 on your behalf. So again, we provide the technology, we provide the SaaS operating system. We also have some hardware we sell, mainly cameras, that's grown pretty well over the years, and those cameras are AI-capable as well. And being able to develop that and expand those camera solutions, you know, by many, many different features, both for commercial and residential.
Okay. And so, relationship primarily through dealers or service providers, and you've got significant scale-
Right
... with them. Just maybe, discuss how the pricing model works with them and why they choose to partner with Alarm.com.
Sure. So from a pricing point of view, for a residential customer of the service provider, the service provider may charge you, as a residential customer, anywhere from $45 to, say, $75 per month. For Alarm.com, we charge the service provider a monthly amount, depending upon that configuration. Think of it like a cell phone plan. So it may be as low as $5.50 we charge the service provider for a simple solution, to as much as $8 or more for a more enhanced, with video, video analytics, with the thermostats and the sensors. And, and what we've done over the years is we've added more features like video, video analytics, that actually allowed us to charge the service provider more, and then they charged, residential customer more as well.
Today, about 50% of new subscribers actually have video, and about 98% of them have video analytics. That's for residential. For commercial, we charge 2-4 times the monthly SaaS to that commercial customer, to the service provider, who then charges the commercial customer anywhere from $100 to more per month. Commercial obviously has a higher amount of SaaS, more cameras, more integration with the system.
And it's kind of a peaceful coexistence, it sounds like.
Right.
Because, you know, for an individual dealer to develop a software platform like this is probably not very economical.
Yes, yes. It would be a... Yeah, we developed this over many years ago. There's only been one service provider who's also developed it, and that was Vivint. I'm sure we'll talk about them a little bit later, but
Mm-hmm. Yep, absolutely. So, help us understand how that manifests itself in the financial profile of Alarm.com?
Yeah
... and how that's evolved over the years.
Yeah, sure. So, you know, I joined the company back in 2016, and our revenue then was $260 million. We reported our 2023 calendar year results just a couple of weeks ago, and we grew the revenue to $880 million. We have $154 million of EBITDA last year and $125 million of free cash flow. So the company is very profitable, good amount of cash flow. So we're a rule of thirty company, which is great. Obviously, we'd like to get that even higher. From a balance sheet point of view, we have about $700 million of cash. We did a convertible offering about three years ago.
Actually, very good timing 'cause we have a zero coupon convertible, so we're making 5% on money that we don't pay anything on. So we're enjoying that quite a bit. But so we have net cash of $200 million, which is great. And from a profitability point of view, our SaaS gross margin is 85%, so a high margin, high profitable business.
Perfect. And then maybe just touch on, cyclicality of the business. I know it was in the earlier stages during the 2008 crisis, so maybe that's not as relevant. But during COVID, you know, we've had some, you know, kinda economic shocks. How would you think about, durability and cyclicality of the business?
Yeah, one thing that's interesting about the business, during difficult economic times, typically, that's when subscribers actually keep their systems because they're concerned about security, safety around their property. And so it's kind of works well even during a challenging time, where consumers are actually going to keep their system, they're going to possibly even expand it. And in commercial business as well, if you think about it from a commercial business point of view, unfortunately, the world is not getting any safer. And so that's why commercial's grown, you know, over 25% year-over-year for the last couple of years. And so I would say it's kinda anti-cyclical, so that it actually kind of helps to offset some of the churn that might occur.
In fact, what we see is, one of the things that helps as well is when there's fewer moves, there's less churn and there's more retention. So we have an average retention now for the last few years of 94%. It's been very, very consistent. And so when you have less people moving, there's less churn, and so that also helps the model as well. So it helps to offset any kind of, let's say, lower new subscriber additions that might occur during a difficult time.
And we're, I'm gonna tackle some of the diversification that you talked about here in a second, but we'll do commercial, international.
Right.
Before we do, any brave souls with a question out there?
So you go to market through your dealer network. You also have a whole bunch of innovation you referenced that you're bringing that goes from kind of a security orientation to more of a full smartphone suite.
Yes.
How do you bring the dealers along on that when they're used to this subscription security model? How do you make sure that you're innovating quickly enough to get your share of the smartphone feedback in the market?
Yeah, that's a very good point. One of the things we do is there's a lot of education and training we do with our service providers. So, like, IEC West is coming up in a month. We have a number of sessions with the service providers, training them on new technology. One of the challenges we do have is that a lot of the service providers are very busy, and their technicians are very busy. So we have to spend time making sure that they are educated on the new technology, make sure that they're trained on the new technology. And so when we come out with new innovations, it does take a little bit longer for those really to take hold because of the fact that we're working through the service provider market.
Now, in terms of like commercial, commercial is actually broken down a little bit differently. Some parts of commercial is targeting SMB, which is going through our 11,000+ service providers. There's another segment, which is the enterprise, which is really fairly new for us. We acquired OpenEye a couple of years ago that got us into the enterprise. Think of large, like universities, McDonald's, for example, large theme parks that we can't name, that might be in this state-
Hmm
... that might be a customer.
Mm-hmm.
That's a commercial enterprise where we're actually going through, for the most part, integrators. These are large integrators who may be putting in refrigeration systems, they might be putting in fire suppression, and they bring in Alarm.com for the security system and where there might be thousands of cameras deployed. Schools are clearly a you know good opportunity for us there, unfortunately, given you know what's happened there. Universities, restaurants, commercial properties, malls are certainly opportunities for us there as well.
Others?
Yes.
I wanted to, excuse me, follow up. So 94%, is that a client number? Is that a gross or a net? Is that a dollar number? How are you thinking about it?
Yeah, that's a good point. So on the retention, it is a dollar retention, and it's over a 12-month period.
Mm-hmm.
It is basically reflecting both the churn as well as the upsell. So the actual unit churn as you know in the industry generally is around 12%, which you probably see from, you know, the public companies that report that. So that's a dollar retention, factoring in unit churn, plus the upsell. And one of the things about our solution is that we have an integrated solution, right? Integrated interactive solution. Whereas there's a lot of systems out there that are legacy, that are landline, ours are cellular-based, especially in commercial. So commercial is a big greenfield opportunity. A lot of businesses have cameras out there, but they're legacy systems where you can't use your mobile device to interact with your security system.
So there's a lot of opportunity within commercial to upgrade those, and so it gives us both a land and expand opportunity, where we can go into a business, we can start with a initial solution, and then we can expand it. We can upsell the subscribers in both on residential and commercial. For example, in residential, we really encourage the service providers to upsell their legacy subscribers to interactivealarm.com, and once they're interactivealarm.com, if they didn't have cameras initially, upsell them with cameras and then add AI-capable video analytics capabilities. Which today, again, about 50% of new subscribers have video, which is surprising, should be 100% in my opinion.
Mm.
But 98% of them have video analytics, meaning that the ARPU we get then is gonna be on the higher end of what I described before. And gives that system a lot better usage, if you will, 'cause you think about the legacy systems, you know, you have an alarm system, you would just turn it off and on. Well, now, people are actually using their alarm system to see what, what's happening around their property.
Some people use it to see what animals are coming around their property, to see when their kids come home from school, you know, and see also, make sure there's nobody prowling around their property as well. And what's nice about it is, you don't need to sit there and look at your cameras. Our system is so smart, it'll tell you when there's an unexpected event that occurred, and it'll give you that alert, and then you can look at your camera and see what's going on.
So when a commercial client decides to refresh their outdated systems, then what kind of drives decision? Is it a service not being supported anymore? Is it, oh, just one day decide, "I'm gonna upgrade this," how that kind of discussion starts?
Yeah, it's really... What really triggers that upgrade or that initiation, if you will, contact to the enterprise solution, you know, for Alarm.com is really just like in residential. One of the main drivers is your neighbor's property is broken into, or, you know, there's something that occurred in the neighborhood there, or a commercial property, or your commercial property had, you know, a bad event. And so that will trigger the commercial business to contact the service provider integrator. But a lot of it, too, is to more efficiently run their business.
'Cause if you think about the capabilities of being able to, you know, see smart activities that are occurring around your property, access control is another solution that we have that we added many years ago, that the restaurant owner or the business owner can provide access to their employees through their app, through a mobile app, that they can allow the employees, and they can give them certain times that they can access the property.
Delivery personnel, a lot of people don't realize this, but because of all the traffic in the cities, a lot of the deliveries to restaurants occur at nighttime. So the restaurant owner can provide access for a certain period of time for that delivery personnel to bring in equipment, put it in, or bring in supplies and put it in the refrigerator. You know, it's only allowed for that period of time. There's a lot of capabilities that make the business owner much more efficient, as well as secure.
Maybe you can touch on, you know, how that's manifested itself in financial results for commercial specifically.
Yep.
How big is that business? How do you think about the overall opportunity over time?
Yep. Yeah, so commercial is today about 9.4% of our SaaS. It's grown about 25% year-over-year, and the opportunity is very large. We think there's about 5 million properties just in North America that would target. That's the targets for us. We think the TAM there is quite large. And then you have international as well, where there is commercial opportunities in international that we're exploring as well, and we're continuing to expand our AI system to make the systems much more smarter. We actually acquired a company called Vintra that was located in Silicon Valley, but had engineers in Spain, that had a unique capability, AI capability, to be able to track for commercial solutions when there's a potential bad person throughout a property without facial recognition, 'cause facial recognition has some bad connotations.
It basically can classify that person, and then you can see where that person went throughout the property, and that's really helpful for both preventative as well as forensics. If something did bad occur, then the authorities can determine where did that person go. And so that's some really interesting technology that we brought on through an acquisition.
Just about 10% at this point-
Ten percent.
-% of SaaS?
Yep.
It's becoming obviously much more material to the business.
Yep.
You mentioned the balance sheet, you know, and-
Yep
... and the cash position. Maybe talk about how you can further accelerate growth of that 9.4%. Are there inorganic things that you would consider to
Sure. I mean, with Vintra, for example, we acquired that capability for AI to expand the commercial solution. So we've actually done, probably in the last seven years, 14 acquisitions, I think. Now, a number of those were tuck-in technology acquisitions, but some of them were fairly, you know, good size, like OpenEye in Spokane, Washington, that got us into the enterprise commercial business. So, you know, having a strong balance sheet is great, having availability to that cash.
And so, you know, selectively, we're pretty careful about acquisitions. We're not looking at doing acquisitions just to do an acquisition. We need to make sure that there's the right chemistry with the business owners, and we like to have an entrepreneurial type structure for the companies that we acquire. For example, EnergyHub has its own president, OpenEye has its own president.
They still have their brand. They, they've got the, the benefit of being part of Alarm.com, having access to the combined, you know, HR, finance, facilities, teams, to be able to provide them support, have access to our cash, but then to be able to innovate and be able to focus on the market and grow their markets very quickly. So we believe in that model
. So where there are opportunities for acquisitions, we will pursue those. Again, we've, we've been pretty selective and pretty careful, so we haven't done any large acquisitions. Not to say we wouldn't in the future, if there was the right fit, the right chemistry, the right capability, where we could provide additional capability for our service providers to sell, or that's something that, that works well with our technology. It would have to be complementary to what we do. It wouldn't be something that's outside of our, you know, area of expertise.
Okay. So commercial 9.4%, the other, you know, big growth vector is international.
Right.
Maybe kind of similar question, just, you know, set the stage for the opportunity, current size of the business-
Right.
and how to potentially accelerate that.
Yeah, so international, we reported in our 10-K is about 4% of revenue. That's up from about 3%. Again, that's pretty small, but it really should be 25%-30% if we think about the opportunity. One of the challenges with international is that you've got different carriers you've got to integrate with. You've got different control panels you've got to integrate with. And so, that's one of the reasons we acquired EBS about a year ago. They're based in Warsaw, Poland, and they have a very interesting technology that will allow us to be able to connect easier to the various different country, you know, environments, different cellular carriers, different control panels, and that will, we think, accelerate international.
We already have a number of large international dealers, like in Europe, Australia, New Zealand. There's some opportunities in Japan we're pursuing now. So we think international will continue to be a good growth driver. It's grown about 20-25% year-over-year for the last few years. So we think there's quite a bit of opportunity internationally.
I'm gonna go into kind of core residential and Vivint, some of those things here in a second.
Yeah.
But any questions on commercial, international, other growth vectors and diversification for Alarm? Yep.
On the commercial side, in the U.S. in particular, are there competitors that you're coming up against or large companies like ADT and... Sorry, ADT and what other players, they have their own systems?
Well, ADT is a customer of ours.
Yeah.
Verkada is probably, I would say, the number one competitor that we see out there. And then also on the SMB, it's Resideo, which was spun out of Honeywell, which also we compete with on the residential side. There's a number of others as well, Vintra, and a number of others out there, but I would say probably Verkada is probably the number one competitor. 'Cause our solution, again, is SaaS-based. There's some legacy systems out there that are perpetual systems, on-premises systems, that we don't really necessarily consider to be a competitor.
Good question. Others? You mentioned ADT, so, it's, you know, kind of two nuances to the story in core residential, both Vivint and ADT being large customers and going through some changes. Maybe you could just summarize for investors that are not as familiar with them.
See how much time we have. So let me start with Vivint. The good news is that we've settled the matters with Vivint. They're now paying us. We're in a long-term license agreement with Energy, who acquired Vivint back in Q4 of 2022. So we're gonna get a license payment from Energy every month for multiple years. We can't really get into the details, but it's a long-term agreement, longer than 5 years. But the history there is Vivint was a service provider, Alarm.com, back in 2013. We were working with them on a control panel, and unbeknownst to us, they all of a sudden came out with their own solution.
To make a long story short, instead of litigation, we entered into a license agreement with them back in 2014, when we had about, you know, 200 patents. They agreed to pay us a license fee because of all the patents we had. Then at around 2015, they decided to sue us to try to get out of that, and, you know, the litigation's been going on. We're very happy to have settled that litigation in December, actually, of 2023, just recently, where we now are continuing, as I said, to continue to get a license payment every month from Vivint, at Energy Vivint. It really solidifies our portfolio of IP.
We now have, I think, over 1,000 patents issued and pending, so we have a lot of technology in this area. And again, we're pleased to have that resolved. By the way, Vivint still has many subscribers on Alarm.com, even 10 years later. One of the things about our solution and our business is they're a very long lifetime value.
Subscribers typically are on the solution for 8-10 years, and that's the legacy, you know, back systems before we had the video and video analytics. We think the video analytics, it actually makes it even more sticky. So very long lifetime value. The LTV to CAC is probably 8-10 times. I haven't looked at it recently, but it, there's a high value there, given that we have a low amount of marketing, but a high, high lifetime value. It's the economics are very good. Then ADT?
ADT, yeah, you go.
Yeah, so ADT is-- Do we have time?
You got 5 minutes.
Okay, five minutes. Okay. So ADT is one of our largest customers. ADT, we have a great partnership with them. They've been around, you know, they've been a customer of ours since 2017, when we acquired iControl Connect business that was based in Silicon Valley. And since that time, we came out with the Command and Control solution for ADT that came out in 2019. It's our system that ADT has, you know, customized to some extent for their look and feel. That's done really, really well. But back in, I think it was August of 2020, Google decided to invest $500 million in ADT, and then they decided to come out with ADT decided to come out with their own solution, ADT Plus.
That's still evolving. So three and a half years later, they're starting to come out with some parts of that DIY solution, and they said on their last quarter call that that's gonna be coming out. They've started to roll out that solution. But it just shows you how long and how difficult it is to come out with a competing solution. Only one company has done that, and that was Vivint back in 2013, when the technology was a lot more, you know, basic technology back then.
So, but, you know, ADT is a good customer of ours. We have an agreement with ADT that we will continue to operate their millions of subscribers for their natural life that are currently on Alarm.com command and control, which means 8-10 years. And then when ADT does come out with ADT Plus, which is their new solution, they will pay us a license fee as well. So ADT is a good customer of ours, a good relationship.
Got it. Okay, perfect. Well, I think we're just gonna wrap up with final thoughts here. We do have time for a breakout session downstairs after this to go more in detail on these topics, but we've covered a lot. I know the story has gotten a lot more complicated over time. What's the key message that you'd like to leave with investors here as they think about Alarm.com now and over the next 3-5 years?
Yeah. Key message is we're a SaaS technology company with a very large TAM, probably over a $10 billion TAM. A company that's been growing really well, very profitable company, a strong dealer channel that's fairly differentiated, very strong competitive dynamics that we have significant barriers to entry, I would say, and very long opportunity for growth. We see many, many years of growth opportunities ahead of us with all the different diversified businesses we have, all kind of centered around security, smart technology, and we're an innovator in AI.
Perfect. Exciting times ahead. Thanks, Steve.
Yes, thank you.