Thanks, everybody, for joining. My name is Adam Tindle. That's a hot mic, and as part of my connected devices coverage here at Raymond James, very happy to have a longtime participant, Alarm.com. Now, we usually have Steve Valenzuela, who is the CFO to my left, but we're very honored to have CEO Steve Trundle here today. In terms of our format, and part of that is because this will be Steve Valenzuela's last IIC, unfortunately. We'll miss you. He announced his intent to retire here on the last earnings call, so very happy to have a little bit more exposure to Steve Trundle. In terms of our format, just an open-ended fireside chat, no slides, no presentation. I'll start at a very high level because I know we've got some that are less familiar with the story.
But if you do have questions as we go, please feel free to raise your hand and ask those. So Steve and Steve, this will be interesting to try to navigate that as always, right? But Steve T, we'll start with you. We've got a diverse audience here, as I mentioned, many of which are likely entirely new to the Alarm.com story. So for those less familiar, probably no one better to take us through the original idea and founding the company.
Sure. Well, good morning. Yeah. When we started the company, we you know the genesis for Alarm.com was we looked at the state of the residential security system. This was you know almost 20 years ago or thereabouts probably 20 years ago. The systems were very very vulnerable. They're all connected out to a central station with a wire. The wires could be cut or disabled by an intruder. We looked at the fact that the sensors that go onto a security system were producing data all the time but the data was only being used almost entirely to generate false alarms. So the data wasn't being captured in any way and used to generate any sort of value to the subscriber. My background prior to Alarm.com was I was the Chief Technology Officer at MicroStrategy so which was a data mining company.
And so we're very intrigued with the ability to capture data from all these sensors that are going up into homes or businesses. And then the third thing was, we looked at the state of the systems and they were just a pain in the rear to use. You were having to program them through an alphanumeric keypad. A lot of consumers didn't know how to do things like add user codes or change a delay on a sensor or things of that nature. So we thought about, you know, how could we make these systems much easier to use? And we created web interfaces and then mobile interfaces to allow people to control their home via their security system. And that became the Alarm.com invention. It really created the category of cloud-based smart home capabilities.
We've built the company out, obviously, quite a bit since then, but that was the genesis for the business.
Perfect. That's a great start. And Steve V, maybe just tell us how the story manifests itself in the financial model. If you could just introduce us to Alarm.com's primary financial metrics and talk about your very predictable recurring business and the KPIs you focus on internally.
Sure. Yes. The business is very predictable. The good news about recurring SaaS, it's the gift that keeps on giving, what I like to say. You've got high renewal rates. Retention rates have been running around 95%. Historically, they've been 92%-94%. So we're benefiting from fewer moves. We're also benefiting from the growth of the industry and also the value of the system. More and more subscribers are using the system every day. More AI features really help that renewal rate, retention rate. We also look at our SaaS margin. The SaaS margin has been running at 85%-86%. Very good gross margins. We look at the inputs that go into that. We also look at the EBITDA margin too, especially EBITDA margin dollars. And we look at the free cash flow.
Those are some of the key metrics that we've been looking at really to help drive the business.
Perfect. And Steve T, Alarm.com is a B2B 2 C model. So just, you know, kind of going into the business model and how you go to market, meaning you go through a dealer channel to reach the end customers. Maybe help investors understand that dealer business model and how Alarm generally prices its solutions and the resulting business model to Alarm.com.
Sure. Yeah. So we go to market, exclusively through service providers, through professional service providers. Sometimes they're called dealers. We have about 11,000 of them right now, maybe more than that, haven't checked lately. But, we made a decision early on, when you start a company, you choose whether you want to disrupt an existing channel or whether you want to attempt to leverage an existing channel. And, when we considered things and looked at where the best customers were being created, we felt like the professionally serviced side of the market was the best side of the market. Therefore, our strategy became to leverage these third parties who do the installations, roll the trucks to the home or the business, go out.
And the big thing from a financial perspective is they absorb the cost of customer creation and the cost, most of the cost of customer service. So, our dealers do all of our sales and marketing, and the companies run, you know, fairly lean on sales and marketing at around 12% of revenue for a long time. We do the R&D for all these service providers and keep them highly competitive with everything else that's out there. And that model has, you know, stood the test of time and worked well for us and allowed us to keep the business efficient.
Yep. And on that point, technology in the home is a massive market. If you think about just the units out there with room for various business models. One of those that has also experienced strong growth in recent years is the do-it-yourself or DIY model where Big Tech companies like Amazon and Google have invested. Maybe help investors understand the DIY versus the do-it-for-me or DIFM markets that you play in and how you think about the opportunities and potential threats from DIY.
Sure. So, you know, there are going to be. There's a myriad of DIY products. If you order a camera from Eufy and you stick it on your window to watch your driveway, you're a DIY customer. Now, in that case, you have, you know, a wire hanging down into your plug. Some set of customers are going to install a Ring doorbell themselves, and they're, in a sense, a DIY customer. Our customer tends to be a person that is serious about security. So they're not just looking for awareness. They might have three, four, five cameras on their property. Certainly, if they're a business, they may have more. And they don't really have the choice. I mean, when we say do-it-for-me, it sort of implies that I could do the installation myself if I wanted to.
But most people, when you get into installing a fairly serious security system where you're pulling wire through attics, out into the eaves underneath the roof, and you're projecting the field of view in the right way, and you're putting all the sensors in the right place, that's really an investment in your home or in your business property and not something that most sensible people that are serious about the solution are going to do themselves. So there is a DIY market. It's a big market. It's a very, very crowded market. I think we're happy that we've sort of sidestepped the crowd there and that we've remained focused on the professionally serviced part of the market. Our customer tends to be the person that's probably not mowing their own lawn.
They tend to be the person that wants to have their house, if it's a residential customer, look very polished, and they want to have someone that they can call if something's wrong to fix the system. That's really where we play, and sort of stay out of most of the DIY activity. Back to your last question, Adam. I forgot to mention pricing because you asked about pricing.
Our basic pricing model for those that are sort of new to the story, and I'm going to focus just residential here to sort of give you an idea is we charge the dealer for every property that the dealer installs, on a monthly, per month fee in the $5-$6 range on a residential account, sometimes a little higher, sometimes a little lower, but in that range. That revenue is our, becomes the basis for our SaaS. It's at in the 80% sort of GM range. The service provider who's incurring all the commissioning costs, the marketing costs, rolling the truck out to the home, putting the customer on a contract, and then managing the first response to the property normally is going to offer the customer a system in the high $40s, low $50s range, depending on what's on that system.
So that kind of gives you a feel for how our pricing works and then what the economics are to the consumer. And you just have to remember when you say, well, gee, you're only getting like 10% of that. You do have to remember the capital intensity of the other part of the business. If you're running trucks out, you're running salespeople out, you're designing these systems, that's where the capital intensity is. So we're happy with our share of that revenue stream.
Yep. That's helpful. I'm going to ask one more and then pause for audience questions. So please, get your questions ready. But Steve T, we were talking about the DIY versus do-it-for-me markets and, you know, how Google has historically and Amazon historically played in that DIY space. But more recently, Google has made significant investments in the, DIFM market through a strategic partnership with one of the largest dealers.
Yeah.
You know, creates obviously a little bit of fear, but, you know, on the other side, arguably validates your business model. Maybe just help investors understand this dynamic and how you think about the potential for further partnerships like this and what it could mean for Alarm.com.
Sure. So yeah, we had some time ago now, actually, Google made about a $650 million investment in total in one of our service provider partners. And they did that at a time when the Nest product sort of had topped out in terms of the volume of sales that they were getting through the DIY markets. They were looking for ways to sort of grow and keep those products relevant, particularly on the camera side. And yeah, that has created a bit of a, you know, we have a service provider that still is primarily a very good Alarm.com partner, still a heavy user of Alarm.com, but now incented by their ownership to install a product from Google. Is it a concern? Well, of course, any company can be bought at any time.
I couldn't really represent that big tech will never buy another company. But I think you have to sort of look at where things are today. And, you know, that was five years ago at this point. That was in August of 2020. So, four and a half years, I guess, is how long that's taken. We still have a great relationship with that service provider, and I think are probably in, you know, getting the bulk of the business at the moment. And it hasn't happened again in that amount of time. And if you sort of look at the world today and you look at the threat, you know, if you're in their shoes, you have this golden goose, which is the search engine, sort of threatened by all the evolution around AI.
I think you're going to deploy most of your capital to try to keep that position.
Any questions so far? Please.
Like your initial comments, you talked about like the assumption sensors were delivering data.
Right. Sure. Yeah. Yeah. Good question. So sensors would generate data. That data would go to a control panel. And then if the control panel were armed, it would generate an alarm. But that's pretty much all the sensors would do. So a very simple example. Suppose you've left your home and you left your door open. Your alarm didn't go off because it bypassed that sensor when it armed, but you would still want to know your door's been open for more than five minutes. Or maybe you didn't even arm your system. That's probably the biggest one. When we looked at how frequently are people arming these security systems, we found that, you know, 25%-30% of people arm every day. The rest arm much less frequently. So if they're not arming, those sensors are still doing things.
And I want to be able to tell you that, you know, your back window's open or that there's unusual activity in your home. There's someone moving through the home, that a door's been left open. A myriad, pretty much, pretty much anything you can imagine. We build a profile of the property, with all that data. And then we know when unusual things are happening and we alert the customer when those unusual things are happening. And the big one, like just to really simplify it, it's like an old-fashioned system, if it's not armed, is doing nothing for you. A modern system, a smart home system, if it's not armed, is still monitoring the property all the time. It's just not escalating the events, except in rare cases, up to a central station for a police response. Yep.
Other questions? Yep.
You make all these acquisitions in different areas. He's, you know, working together and is the go-to market going to be under a different[audio distortion] backlog?
Yeah, so we've been making acquisitions across the business, but probably with a bit more focus on building out our commercial and SMB solutions. So over time, our business has evolved some and is now, you know, 25% or so commercial, and I think, you know, each one you study and you think about, do I want to pull this in under the Alarm.com brand or do I want to leave it on its own? It's oftentimes very much in our interest to have a company we've acquired continue to work with people who may perceive themselves as competitors to Alarm.com, so in that case, let me give you an example. One of our best sort of growth businesses is in the energy sector, and that business is called EnergyHub. It's the largest demand response business in the U.S. for residential demand response.
They work with Nest products. They work with Resideo products. They, of course, work with Alarm.com products, but they're positioned as sort of a neutral entity that can collaborate with anyone they want in their ecosystem. And their brand, I mean, the brand there is EnergyHub. It sort of fits the model of what a utility might expect to deal with as opposed to sort of a security-sounding brand. In other cases, on the commercial side, if a brand has some equity with the service provider channel that we think is good equity. So Alarm, because of where we started, is perceived, whether justifiably or not, as a residential brand more than a commercial brand. That's evolving, but it's still sort of perceived we invented the space of the cloud-based sort of smart home.
And we have the most subscribers on that platform of any residential offering. People perceive us that way. So if we have a brand that works more on the commercial side, we'll often leave that in place and run it under that brand and then add some technology to the brand.
That's a good question.
Thanks for the question. A good way to dovetail into the diversification of Alarm.com. That's where I was going to go next and to markets outside of core residential, so a lot of our discussion, you know, has been kind of the founding of the business and core residential, but the diversification story is really starting to, you know, become even more relevant to investors. I guess the question would be, what was your process to deciding to enter and invest in these growth adjacencies and how might that inform your thought process on future growth factors?
Yeah, so the thought process, when we created the platform, we thought of it as a, you know, IoT-enabled SaaS platform. So our special sauce was working in a world where things are generating data and we somehow want to capture that data, get it in the cloud, and then do something with it, and if you think of that as sort of what you're good at, the range of applications is much beyond security. We just found that security was a great place to start and was one where we could see a path to monetization more quickly. But roll the clock forward a little bit and a couple of things have happened that have affected our thinking. First, we saw the capacity of thermostats, the amount of control that thermostats sort of offer one, if you're a grid operator.
So the amount of energy flowing as a result of small settings on a thermostat is pretty massive. And we were installing a lot of thermostats in smart home systems. So we said, either we're going to find a way to be a beneficiary of that, or we're going to let someone else be the beneficiary of that control that you get. And we went out and acquired a small business called EnergyHub and then built that out as a platform business. And it came from sort of, you know, it's very similar in terms of how it works to the platform that we use for security. It's just solving a different problem. Roll the clock forward a little bit further.
And all of these service provider relationships I talked about, the dealers or the people that actually roll the trucks out to the home. We realized, hey, we've built a network of people that have all the tools needed to install a residence, but more and more we saw them also using our platform to install small businesses. And in many cases, they found the small business customers to be more profitable than the average residential customer. So we started seeing some demand showing up on the commercial side. And we decided that we had, you know, the right people already under contract, the right people already trained on our platform. And now what we needed to do is sort of build out the product portfolio and the capacity of the platform to meet the product market need on the commercial side.
They've built that up as a channel, sort of a natural extension of where we started. But the goal is to build, you know, an even more sort of diverse and durable business over time and to create additional pathways of growth. So when we see an IoT SaaS arena, where that's a possibility of an earlier stage business, for example, in vehicle tracking, early stage at the moment, but it's very similar in terms of the way it works with the platform. So that's a space we may want to play in and over time build these up and try to take advantage of those assets, both technology and then channel that we have to broaden the business.
Perfect. And Steve V, maybe you could touch on the financial profile of the segment that we're talking about, the size and growth rates of the stuff outside of core residential.
Sure. Yeah. We look at the growth initiatives, including commercial, international, and EnergyHub. Last year in 2024, they accounted for 26% of our SaaS and they grew 25% year- over year. We announced that commercial was about $80 million of SaaS. EnergyHub is now over $50 million of SaaS, and international is now 6% of our revenue. I remember times when it was 3%, 4%, 5%. So it is growing, and, you know, you would think international at some point should be much larger. We would hope at some point it would be 25%-30% of our revenue. But that's the growth initiatives.
Our goal, of course, is to continue to grow those initiatives at the same time of growing North American residential, which is also benefiting from video, video analytics, but it's growing in the low, you know, single digit range, low to mid single digit range.
Do you think that's a kind of a good way for investors to think about the core residential, Steve T, kind of low single digit type of growth? What would change that?
In the near term, in the near term, I'd say at some point you lap, we've, I think articulated publicly that, with the one service provider that you've referenced, it's ADT. I don't, I'm probably not allowed to use the name, but, you know, they, they've articulated a plan to use more of the Google products through time. And we've modeled that in as a headwind, some meaningful headwind to our business. But our guidance incorporates all that. We've sort of shown we've never missed guidance. So we sort of know what we're going to do. Over time, that headwind begins to dissipate and the growth initiatives themselves begin to contribute more. So, but in the near term, that's where we have that model, right?
Yep. And Steve T., the core residential business hit an S- curve inflection whereby the first million subscribers took a significant amount of time and investment, and then the next million came at an accelerated pace with incremental improvements in profitability and so on. I wonder if you could kind of compare and contrast this to the various components that make up the other SaaS segment, which looks most similar to what I'm describing.
Yeah. So, in the other segment, I would say each of them have very, very, you know, resemble what we have gone through in residential. So there's this upfront expense, and sort of delayed ramp up. If you think about the difference in an IoT powered SaaS business versus, say, a regular SaaS business, if I'm doing enterprise SaaS, I build the software, I go sell it, I do some training, and then I send out a link and everyone downloads it. That's your install. With IoT, you literally have to get devices installed that work with your platform. And it takes a while to get all the apparatus in place, the training, the technicians, the trucks, the tools, the certified products, so that you can begin to build that ramp.
Now, the benefit of our business is once you have that working, it's like building a printing press. Once it's printing, it works for a long time. It's very hard to unplug and you don't have threats. You don't have some of these existential threats that other SaaS businesses may have where a better mousetrap comes along and someone can switch all the desks in their call center from one CRM platform to another that may be less expensive. We don't, we don't really have that issue. So, our commercial business looks a lot like the residential piece where we're making investments in the service provider channel and the training and the product. We're seeing a steady ramp. The next, you know, million customers will be easier than the first million. Absolutely.
The EnergyHub business also looks very similar in that anyone that's ever gone out and worked on sales with the utility industry knows what I'm talking about. You spend a lot of time working with electric utilities that are oftentimes subject to a lot of regulation and fighting through that, working through the pilots, working through the cost justification, getting them set up on how to do customer acquisition, but once you have that utility in place and you're embedded and you're a part of the way they control the grid, you're in a very, very good position. So we've done that with, you know, most of the largest utilities in the U.S. They're now in position. We're beginning to add more devices in that world.
So we started with the thermostat, but now we're adding EVs, we're adding batteries, we're adding other control devices on the edge that give utility a lot of control. You get that infrastructure up and then, in that case, we measured things more in gigawatts. The next set of gigawatts are going to be easier to produce than the first gigawatt.
Yep. Right. So we've got about five minutes left. I've got a couple of questions. Any final audience questions before I get into those? And we'll have a breakout session afterwards in Cordova 1, the room. So, you know, opportunity to ask more questions off the webcast. Please join us down there for that. But as we wrap up, Steve V, I do want to ask, you know, probably beginning to reflect on a long, successful tenure as CFO of Alarm.com before I get teary-eyed. What are the few things that stand out most and what are the key pieces of advice that you'd impart on a new CFO?
Yeah, that's a great question. Clearly being part of a team to take the revenue from $268 million in 2016 when I joined to, nearly, you know, short of $1 billion this year certainly, certainly sticks out. And, you know, again, being part of a team with Steve's leadership, of course, and a great team that we put together, I think that really sticks out. Building a great finance team. I feel very good leaving the company in very good finance hands. When I joined, we already had a number of good players on the team. We, we built up that team. We developed that team. And so very good team in place. I feel very good about our strong financial model and also our strong balance sheet. As a CFO, you love to have a strong balance sheet with $1.22 billion of cash.
We do have two convertibles we did. I feel very fortunate that we were able to do a convertible in January 2021 with zero coupon. I remember one of our board members was saying, I want to see that black because I'd never seen a zero coupon convertible done before. Uh-huh. So that was very good. And now we've done a second convertible in May of last year that's going to mature also in five years. And so being able to, you know, build a strong balance sheet like that makes me feel very good. In terms of advice I would give the new CFO, I believe in, don't try to fix what's not broken. In other words, sometimes CFOs come in and they want to change a lot of things.
When I joined the company, I realized quickly that there wasn't a lot of things that were broken. There were things that could be enhanced, and so I believe in that. I also believe in lead, follow, or get out of the way, so in other words, if you're going to lead, you're going to follow, or you're going to get out of the way to make sure you allow for growth initiatives to grow. Sometimes CFOs get stuck into too much of the numbers, and a lot of times you want to go by the gut feeling and, you know, the initiatives, and it may not pan out on paper, but the long-term benefit of this initiative will certainly pay back in dividends long-term.
So you have to be able to be open-minded as a CFO and really be growth-oriented and really thinking about the future and thinking strategically, not just about the numbers.
I think we're going to have to snip and save that and replay it here next year. Steve T, if you could just bring us home, what's the key message that you'd like to leave with investors today as they think about investing in Alarm.com over the next, call it five to 10 years, long-term?
Sure, so if you're a long-term investor, I think the main message right now is that we've got a nice growing profitable business. It's very durable. Our revenue sources are more diverse than they've ever been. We've got, if you want to participate in, I think, you know, the long-term trend of all homes becoming smart homes, we're probably the share leader there. That business is growing slower, but we're still the leader, and as more devices become available that make the smart home even more capable with our service provider network and with our platform, we're ideally positioned to take advantage of that. So we like that business, and then we've, I think, done a reasonable job of creating a lot of resilience in the business, with the efforts to build our commercial and our energy business and increasingly even our international business.
So, we're delivering reasonable growth, nice profitability, producing cash, and that cash can be used to drive future growth. And that's sort of how we think about things.
Makes sense. Steve, Steve, thank you so much.
Thank you.