To get started here, thank you all for joining us today at the BofA Technology Conference for 2024. I'm Mike Funk, one of the SMID cap software analysts. You know, I'm very pleased to have Steve Valenzuela with us again from Alarm.com. If you don't know Alarm.com, it, it is one of the leading innovative technology companies with the operating system for the connected property. Go-to-market is primarily through, I believe it's what? 12,000-
Twelve thousand.
-service partners, out in the marketplace.
Yep.
Servicing both the residential and the business customers. And once again, if you're not familiar, you know, a lot of good material on the website. They always have updated presentations. But I did want to invite Steve first, maybe kind of, you know, set the ground for us here.
Mm-hmm.
Maybe some more details on the company-
Yep.
and the recent performance.
Yeah, sure. First of all, it's great to be here. Thanks for having us. It's always a great conference. So Alarm.com was started in 2000, really, with the idea of taking the security system that was landline-based, and if you cut the wire, you would have no security system. So the company came up with a number of innovations really to make it cellular based, and then we were one of the first apps on the App Store for Apple. But we made the security system interactive, so you could actually use your smart device outside of your home, inside of your home, instead of just coming home in the plain security system, where you plug in the, you know, your code, and you activate or deactivate.
Around 2011 or 2012, we got to 1 million subscribers, and then the next year, we got to 2 million, and we've grown up since then, and we've expanded from ... North American Residential was our starting point, to commercial, to international, and we've added much more feature sets, and we've actually expanded the offering to include energy, multifamily apartment houses. So the idea is really that Alarm.com focuses on innovation in terms of technology. The service provider, where we have over 12,000 service providers, they're really focused on the customer acquisition, the marketing, the actually servicing the customer, actually installing the security system, managing the security system. And when there is an alarm, it's not Alarm.com that responds.
The service provider uses our software to see what's happening around the property and dispatch 911 or a first responder if it's, if it's needed. So over the years, we've grown a lot. I mean, when I joined the company about 7.5 years ago, we had about $260 million in revenue, about $25 million adjusted EBITDA. This year, we've guided for over $900 million in revenue, so we've had good growth. I think that's a CAGR of over 20-some percent and over $160 million of adjusted EBITDA we've guided to this year. Actually, about $165 million at the midpoint. So good growth. We've done about 14 acquisitions in the last 7 years, and we've been pretty acquisitive. Most of those have been small to medium-sized companies.
Some have been more technology acqui-hires, where we've added some technology, and we've added, you know, different functions. We've also expanded the services through the acquisitions, and we were one of the early innovators of using AI in the security system, which I'm sure we'll talk about. So that's probably a good-
Yeah, I definitely want to touch on that.
Yeah, that's probably a good overview, I would think.
Yeah, no, it's a great overview. Thank you, Steve. And yeah, I want to start with maybe a higher-level question everyone cares about today is, you know, characterizing the macro environment-
Right
... today versus maybe 6 or 12 months ago. We have heard from software companies this last quarter that service more of the enterprise, that perhaps they were feeling more macro pressure last quarter. Obviously, your customer, your end market-
Yeah
... is very different than that, but framing the macro would be helpful.
Yeah. So, we reported our Q1 results. We saw solid growth with our SaaS revenue growing 11% year-over-year. So we're seeing good subscriber additions. We're seeing actually good EBITDA. We reported in the quarter. I would say on the hardware side, where hardware is about one-third of our revenue, that's a little bit hard to predict because it's not recurring. And typically, what we see sometimes in a challenging environment, customers may buy fewer cameras. Instead of four cameras, they might buy two. On the commercial side as well, we've seen where some of the large commercial customers have deployed fewer cameras or they're deploying them at a slower rate. But overall, we're still seeing very good growth. The other thing that's really interesting about the business is that it's somewhat countercyclical.
We've seen very good retention, so our dollar retention has been 94%. That's at the higher end of our range. Part of that is there's fewer moves, and moves accounts for the number one reason for attrition. It kind of helps that there's fewer moves. There may be, you know, less new subscribers, but then that actually helps to offset that. So that tends to be, you know, somewhat countercyclical from that point of view. The other fact, too, is the world is not getting any safer. Both residential and commercial customers, you know, look at the the environment around them, and typically, when we have challenging environments or, you know, looks like, you know, there's... The economy is not performing as well, there's more people out of jobs, and then people tend to want to keep their security system.
And when you think about the security system for, like, a residential customer, they might be paying the service provider, you know, anywhere from $45-$75 a month, and they've invested, you know, thousands of dollars in their cameras. They're not gonna cut the cord. Most of those are under 3- to 5-year subscription agreements anyway, versus a streaming service like YouTube TV. You know, you can easily cut at $75 a month. I think service is much more important. Security is much more important to have than a streaming service. So it's very, you know, highly predictable, highly recurring and high renewal rates. It's like the gift that keeps on giving, I like to say.
No, it's a great, it's a great point. Great point, Steve. And, you know, you touched earlier on AI. I remember last year sitting here with you, and we had just finished doing our big AI primer and talking about companies that had opportunity in AI.
Right.
I was really struck by the comment that you made that, you know, you really had a tangible monetization opportunity with AI-
Yep
which most software companies today haven't really articulated that opportunity as well as, as well as you have.
Yep.
Maybe, maybe remind us, you know, where the opportunity is for Alarm.com, and if you have the product roadmap going forward.
Yes, we certainly do. And in fact, we were an early innovator in AI. If you look back in 2017, we acquired a company in Reston, Virginia, ObjectVideo, that was doing a lot of AI work for the government. We took that team of PhDs in video analytics and repurposed them to look at security systems, and we fed in millions and millions of clips into our system, into our neural network, and we came out with an AI system for residential right around the end of 2018. And so what that did actually was to make the security system very smart. So it actually will give you smart alerts, and you could characterize or customize whatever the alerts you want, but it's like being able to detect person, vehicle, and animals.
And you could even, you know, use it to detect, you know, is your family coming home from school, you know, when are your kids coming home from school? So that's for residential. We've expanded it now to be able to do more for commercial as well. So both for SMB as well as for large enterprises, there's a number of feature sets like line counting. Line counting, that is, where if you have, like, multiple different restaurants in a location or coffee shops, and you can get smart alerts as the owner telling you that one shop has a longer line, longer wait than the other one, you can dispatch your employees to that location. So that's something we came out with.
About a year and a half ago, we acquired a company in Spain, Vintra, that actually had some really interesting technology, we thought, for commercial, especially for large commercial enterprises, where you might have hundreds or thousands of cameras, and if you have potentially a bad actor, how do you track all that, and how do you classify that one, you know, that one potential individual and see where they've gone throughout the establishment? So they have technology that we've now employed, deployed in our commercial solution that actually tracks and can identify that person without using facial recognition, 'cause there's some negative connotations of facial recognition, but they classify that person, and then that security officer can track that person across thousands of cameras. So we think that's pretty innovative technology. And we have a number of new innovations coming out.
We have a full team that's focused on AI, a number of, you know, PhDs and engineers that are really focused on new, various different innovations in AI. I won't name all of them 'cause we don't want the competition to know about them, but we are continuing to innovate here and coming up with new solutions, both for residential as well as for commercial.
Can you frame the revenue opportunity from AI?
Yeah
... maybe whether it's residential or commercial separately? And then, you know, if you can, even talk about the attach rate of-
Yep
... AI. And I presume that is in part contingent upon penetration of video, with a lot of the solutions being video-enhanced, correct?
Yes, that's right. So for AI, for residential, give you a sense of kind of ARPU res versus the service provider. So for residential, for a base system, we might charge the service provider $5.75 a month. They would charge the end subscriber, let's say, $45 a month or $50 a month. If you have video and AI, so we charge separately for video, additional for video and additional for AI. So a subscriber, a residential subscriber that has AI system with video, we would be charging the service provider more like $6.50-$8.50 a month. They would be charging the end subscriber more like $65-$75 a month. But we actually charge more for AI. And the attachment rate...
So for video, the attachment rate's about 50%, which I'm surprised it's not 75% or 80%, but I guess there are some subscribers who are still not adapting to video, but I think over time that'll increase. But the attachment rate for those who have video, that get AI, is 99%. So in other words, when subscribers get video, almost all of them get AI, so we get the higher ARPU as a result of that. That's residential. On the commercial side, we also charge more for AI. The attachment rate there is probably a little bit less on AI 'cause it's still new. The interesting thing about commercial is there is a higher penetration of security systems for commercial customers, but most of those are the old plain landline-based systems, where you don't have the interactive capability.
We're going in and obviously in the commercial establishments and replacing those systems with Alarm.com. Our service providers are doing that and putting in the AI-enabled interactive security system, where the business owner can see what's happening around their property, as we talked about. Also, we have access control for commercial. There's a lot of AI technology that we've deployed, both for residential and commercial, and that actually increases our ARPU overall and increases the SaaS recurring revenue.
Why do you think the video attach rate is 50% in residential and not the 70%-75% you mentioned earlier? Is that going back to the macro comment, or is there something else that causes that resistance in residential?
Yeah, it's a good, good question. It's hard to say. It might be a little bit of both, actually, because, you know, we try to price the cameras as low as possible, so we don't make much of a margin on hardware. Our hardware margin is about 20%-25%. Our SaaS recurring margin is 85%-86%. The pricing of cameras is not that high, but when you add four or five cameras, you're talking, you know, potentially thousands of dollars. And so it could be related to initially getting a system and not wanting to spend the upfront costs, as much of the upfront costs.
It may also be that, to be fair, it may also be that the subscriber, in some cases, where our service providers go into a home, the subscriber might have, you know, a different doorbell than Alarm.com, or they might have a camera that they're using, and they want to continue using those other cameras, DIY cameras, but they want a complete security system from Alarm.com. And so that may be as well. But we think over time, as we continue to innovate with AI, continue to provide the feature sets and expand the feature sets, we think that video attachment rate will increase for sure.
I wanted to touch on DIY.
Yep.
You just mentioned it there, and I can't remember the exact stats, but I mean, I think DIY now accounts for 40%+. So, you know, of home security itself, I think from 10%-15% 4-5 years ago. I may be slightly off, but the magnitude, I think, is about-
It's really hard to say.
Yeah
... 'cause there's various different, different thoughts out there, of, you know, opinions.
Mm-hmm.
Like, let's say somebody has a video doorbell, right? Is that, you know, is that a full... It's not a complete system. So what you find is, like in apartment houses, you tend to see more DIY, which makes sense, right? So you have an apartment, you may want a video doorbell, you may want to have one camera, and so, but it's not a complete security system. So it is a little bit of apples and oranges comparisons.
Sure.
Yeah.
But are you still seeing a segmentation in the market, though, where, I mean, I think generally it was the kind of the higher-end consumer, the middle-income consumer, wanted the full monitored security solution that Alarm.com would-
Yep
... would support, and maybe DIY was, was more attractive or appealing, you know, to other segments-
Yeah
... of the economy. Is that still true today, or is that shifting, do you think?
I think it's still true today. If you think about our subscriber for residential typically is a middle to upper income homeowner, mostly. They may have a vacation property as well, that they have secured. And, whereas DIY, again, it may be more. Like, when I talk to some folks, like investors who have apartments, they tend to have DIY, maybe a camera or two. So I think there is still that segmentation. Of course, there are some DIYers out there that want to spend their weekends, you know, on their, on their home and actually climb ladders to put up cameras. I don't know many of those. So I think, I think that segmentation is still there.
I think that, you know, what we see, too, is that people will progress from DIY to a complete security system. So they may initially put in a doorbell from another provider, and then they realize, you know, there's something happening in their neighborhood, and they want to get a complete security system, and they reach out to one of our service providers to have a complete security system installed. But they may still want to keep that doorbell.
That's a great, that's a great point, Steve. And, you know, I think a lot of investors characterize Alarm.com as a very predictable revenue growth, you know, high margin-
Yep
... dominant market share company in its respective industry, but maybe overlook the growth opportunity internationally.
Yep.
With international being much lower penetration-
Yep
... for professional monitoring. Maybe bring us up to speed on the progress internationally and where you see the opportunity.
Yeah. So international now is about 5% of our revenue. A year ago, I think it was about 4%, so it's still, you know, less than 10%. However, it's growing over 20% year-over-year. I think now we're in about 70 different countries. We have a number of opportunities in Asia. We're expanding in Europe, South America, and so we do see quite a few opportunities internationally. And part of that is that there are different, you know, competitors internationally, different providers. But again, most of the, most of the incumbents are plain old security systems, you know, where it's not interactive.
And so these providers, service providers, are looking at Alarm.com in a make-versus-buy situation, where do they want to spend the money to try to, you know, invent an interactive security system, or they want to partner with Alarm.com, where we would actually come in, and we would provide them, you know, the technology. We would host the subscribers like we do for the U.S. customers, and they can quickly retrofit their existing subscriber base and get a quick uplift. The reason they would do that is because if they don't change to interactive, they will lose those subscribers to other competitors. It really is a greenfield opportunity. We think international, you know, at some point, can't say if it's gonna be, you know, five years or sooner, should be 25%-30% of our revenue.
Are you ramping up your efforts to sign more partners internationally? Are you changing anything there?
Absolutely, yes. We definitely are making an investment in international. So actually, we acquired a company, EBS in Poland, about a year and a half ago. They have some technology, mostly hardware technology, a communicator that we're gonna be coming out with very soon, actually, that's gonna allow us to get into more countries internationally at a lower cost and actually enable the configurations to be adapted quicker. One of the challenges in international is each country has different control panels. We don't make the control panel that's part of the security system. They're made by third-party providers, so we need to interact with those control panels. And then also, there's different cellular providers.
So EBS, the acquisition we did, again, about a year and a half ago, is going to allow us, enable us, to be able to, we think, penetrate international, various different countries faster than we have in the past.
I wanted to shift topics here a little bit, Steve. You know, last quarter, you mentioned the move into fleet management. I think- Connected Fleet was the product that you-
Yep.
-that you talked about last quarter. I was a little surprised by that. It seemed a little maybe outside of your, you know-
Yeah
-historic wheelhouse, you know, relatively fragmented market-
Right
with fleet monitoring and management. Can you walk us through the thought process and the analysis that went into deciding to enter that market?
Yeah. Part of it is we get feedback from our service providers. So it's interesting, on the Connected Fleet, one of our customers, of course, would be the service provider because they have fleets, and so it is a fragmented market. It's not something that we're including in our guidance. It's not something that we're expecting to have, you know, initially a big uplift in revenue. It's more adding more feature set, if you will, to our app. So if you think about it, you know, like I have, you know, six different pages of apps on my phone, trying to find the app sometimes is not easy. So part of our strategy is to have as many features in one app as possible.
So with an Alarm.com app, you can actually see your security system, you can see your cameras, you can see your cars with the car adapter we have, and now, as a business owner, you can see your Connected Fleet, you can see your, where your employees are. So it's, again, having that, that ease of use and then allowing our commercial service providers, not only to use it for themselves, but also sell it to their subscribers and their customers, HVAC customers or, you know, different commercial customers. And so that's part of our strategy, has been to expand Alarm.com. You know, initially, we started North American Residential, then we added Commercial, then we added International, and now we've added... You know, we added Energy, and now we've added Connected Fleet.
And so it's, again, providing the Alarm.com not just inside the home, but outside the home and around the area as well.
So is the plan or thought then, since you think so many could be existing customers, that the customer acquisition cost will be relatively low for Connected Fleet? And if so, I mean, how do you envision the customer acquisition cost as you move into that new market?
Yeah, I would say it's too early. I would probably downplay Connected Fleet now. I don't want to set expectations too much. It's, like you said, it's a fragmented market. It's something that's not in our guidance. We're going to see how that goes. We're not, let's say, making a huge investment in that area just yet. We want to see how the uptake occurs. Typically, when we come out with a new solution, it does take time because the service providers have to be trained on it. The beautiful thing about Alarm.com is we have 12,000 service providers, and they have, you know, many, many salespeople out there every day selling Alarm.com, installing Alarm.com.
But it also means that we have to have all these folks trained, and so when we come up with a new feature set or new service, it takes longer for the uptake. So I would downplay Connected Fleet for now. I think it's a nice new offering. We'll see how it actually gets attached. But for right now, we're not including it in our guidance, and we're being cautious to make sure that we don't set expectations there that's going to be a large revenue driver. We'll be surprised if it is, but for now, it's simply another feature set that our service providers can use and can sell.
Understood. That's very clear.
Yeah.
Thank you. Yeah, I wasn't sure after last call.
Yeah.
Now, now I'm very clear on what the strategy is ... on that, so that's helpful.
Yeah.
Another question we get a lot, and it's been hanging out there for years, is the ADT situation. There's been the fear that they might start to peel away some of the subscribers, you know, based on their new partnership with a large technology company.
Yep.
Can you just tell us or remind us where we are in that process, and then, you know, your view of the competitive threat?
Yeah. ADT is a very good customer of ours. You know, just to give everybody a little bit of background, ADT became a customer of Alarm.com when we acquired iControl, the Connect portion of iControl, actually based in Redwood City here, back in 2017. So that got us a relationship with ADT. They were working with iControl for the Pulse application, which is an interactive solution, but not as interactive as Alarm.com. And so ADT was supportive of Alarm.com acquiring iControl because Alarm was ahead of iControl. So, we worked with ADT after that acquisition. We continued to actually support the Pulse application for ADT, which is a, you know, a legacy system.
Then we worked with ADT using Alarm.com's software to come out with ADT Command and Control, which is Alarm.com that we actually host the subscribers. We actually manage that software for ADT, and ADT now has, you know, millions of subscribers on that solution. And so they've been very happy with Alarm.com, you know, got a very good relationship there. But what happened in August of 2020, Google invested $500 million into ADT. A little bit of history of Google is they acquired Nest about, I think, eight years ago, based in Silicon Valley. They paid, you know, many millions, billions of dollars for Nest, and there's been a history there where Nest has not really worked very well.
So I think Google is looking at how do they get more devices in the home and compete with Amazon Alexa. And so, I think as part of that relationship with ADT and Google, Google announced... ADT announced that they would be coming out with their solution at some point in the future, what they called ADT Again, that was back in August of 2020. I think the last earnings call, ADT publicly discussed that they've started to roll out some, some of the solutions, a small amount of solutions, you know, of this ADT Plus.
Part of the agreement we have with ADT is that Alarm.com will continue to operate the existing subscribers on the ADT Command and Control for their natural life, and so we will continue to have subscribers for ADT for at least 8-10 years, and, if they're, you know, when ADT does come out with their new solution, they would then pay us a license fee for every new subscriber they put on that, on that service, what they call ADT Plus. But again, we, you know, we also will continue, we believe ADT will continue to have, use Alarm.com for high-end homes, for custom home builders, for commercial, and so, while they're, you know, we have factored into our guidance that ADT would start to, transition new subscribers beginning in the third quarter of this year to their new solution.
We've put that into our guidance. We've factored that in. But again, it's the existing subscribers will stay on for a long time.
To your earlier point, churn rates are incredibly low-
Yep.
in the home monitoring business
Yep
-monitoring marketplace. You're talking about 10-15-year potential-
Yes
lifetimes of the
That's right
-subscribers.
That's right.
Even if there could be degradation in the sub base, it would be a very long cycle.
Yep, exactly, yeah.
Right.
Exactly, yes. And again, it's, you know, it just shows you how difficult it is, what, you know, what Alarm.com does. ADT announced this Google relationship almost four years ago, and it still hasn't been widely deployed. So it's not easy what Alarm.com-
And I'm sure you're tired of answering the question, so I-
Yes.
I apologize, but it does come up a lot with investors.
Yeah.
I wanted to-
Yes.
I wanted to get it out there. You know, even more in your wheelhouse, and you mentioned it earlier as well, is the M&A strategy-
Right
and how you've done a number of bolt-ons
Yep
over the years. So, Steve, how should we think about capital allocation?
Yeah.
And then specifically, M&A, where there may be opportunity to enhance the offering, accelerate growth, move into new markets.
Yeah. So we've definitely done a number of acquisitions where we've either done acquihires, where we get the technology, like we talked Vintra, a feature set like EBS in Poland. And so we do have an active business development team that is looking at various different opportunities. We're pretty selective. We wanna make sure there's a cultural fit. We wanna make sure it's going to be something that's gonna, you know, be able to bolt on to an existing solution that we have. Either our service providers will be able to resell it, or there's some value add there that we can actually deploy. And so M&A is definitely part of our strategy. Another part of our capital allocation has been share buybacks. You know, we have, over the last couple of years, bought back over $100 million of our shares.
As part of our recent convertible we did last week, we actually bought back about 75 million of those shares related to that convertible. That was part of the convertible structure, and then the board authorized another 100 million of share buyback on top of that. So share buybacks is part of the capital allocation strategy, and then, you know, we, we like having a, you know, a good amount of cash. Of course, we're investing that cash today by 5%+, but the goal is not to just keep it in the bank. The goal is hopefully to be able to deploy it, you know, if we find the right acquisitions that are gonna add a lot of value to the company. And, you know, they could be smaller acquisitions, they could be medium to larger acquisitions. But, we're pretty selective. We need to make sure... We wanna make sure that, again, that it's the right fit for the company.
That's, that's perfect, Steve. And, you know, same, same line here, you know, but we're very predictable revenue growth, high margin business. What, what's your view on the right amount of leverage for the business? And could we potentially, over time, with predictable growth, maybe slower growing market as we mature, see incremental returns to shareholders beyond the share repurchase?
Yeah, today we're investing, I would say, you know, in R&D, 28%-30% of our revenue, which, you know, to be fair, is, you know, is a high amount, probably the high-water mark right now, because we see all these different opportunities, and we publicly said, Steve Trundle, our CEO, has said that 18% EBITDA margin is the target for right now. And so, you know, if we look at that, given all the different investment opportunities, you know, it makes sense today. But, you know, I would say at some point, there certainly is a lot of opportunity for leverage in the business at some point. I can't say when that would be.
If you look at the history of the company, before the company went public or even in the early days, the EBITDA was quite a bit higher than what it is today. And so we've invested in all these different areas, and certainly at some point, it certainly would make sense for the R&D investment as a percent of revenue. It would not be 28%-30%, but I can't say when that would be, and if that comes down, it would come to the bottom line and EBITDA would increase. But for today, it's 18% as our EBITDA target, going forward.
You just mentioned the convert. What was the thought process behind issuing the convert versus, say, issuing straight debt? I'm sure you probably went through many iterations-
Yes
About how you thought about that.
Yeah.
What was that thought process?
Yeah, well, a couple of things. One is, we did look at straight debt. Straight debt is gonna be a coupon of 7%-8%, and the, the converter was 2.25%. The other thought process, too, is we have an existing convert that we put in January 2021, that is a zero coupon that is gonna mature in about a year and a half from now. So we're gonna have to retire that coupon, and so that's part of the thought. And also just taking advantage of the convert market is very attractive these days. We didn't get a zero coupon, but 2.25%. You know, in the meantime, we're, we're investing that money at 5% until we find, you know, if we find the right, right opportunity. So we felt that the convertible was a reasonable way to go, and-
Still a very attractive coupon, to your point.
It is a very attractive coupon, and there is some dilution, but again, we did buy back shares as part of that convertible, so we retired about 1.1 million shares. There are some shares that were on an as converted basis. When you do a convertible, you have to include in your equity, you know, in your share count, but that goes away once the convert is, you know, paid off. It's a five-year convert, right? So, net-net, you know, it's there is a little bit of extra dilution there, but we feel it was the right thing to do compared to trying to do a, you know, a follow-on offering, which would have been dilutive, or to do straight debt, which would have been at a very high coupon rate.
Absolutely. I think we're actually about out of time.
Oh, yeah.
That went quicker than I thought. But Steve, thank you so much again-
Thank you
... for the time. I really appreciate you being here.
Thanks for having me. Thank you.
Of course. Thank you.