Barclays Global Technology, Media and Telecommunications Conference

Dec 10, 2020

Hey, good morning, everyone, and welcome to Day two of the Barclays TMT Conference. My name is Saketalia. I cover software here at Barclays. Very happy to have Steve Valenzuela, chief financial officer of alarm.com with us here today. We've got about twenty five minutes here together. Let's take maybe the fifteen or twenty minutes or so for some fireside chat with Steve, which I know is gonna be fun. And then the last five or ten minutes or so, let's take this interactive. If anyone's in the audience who's got a question, just feel free to shoot me an email at saket.calia@barkleys.com. I'll be sure to weave your question in towards the end. So with maybe that as a framework, Steve, thanks so much for being with us here today. Thanks, Rebecca. Thanks for hosting us. You guys always run a great conference. I think this is almost our fourth year now, I believe. And you've given us a full day of one zero one, so you keep us very busy. No. I'm glad. I'm glad. Well, you guys do that yourself with the metrics that you folks put up, so so kudos. And and I I reiterate, I mean, glad to have you back at at at the conference. You know, Steve, just just for folks that you know, for on the stream that are maybe new to the story, sorry. It's gonna be a little bit of a high level question, but I think important to level set. Can you just sort of describe what interactive security means? What alarm.com is providing, and and how you're monetizing it? Sorry. There's a lot there. Does that make sense, though? No. Absolutely. That makes sense. And before I begin, I should mention that there is a very thorough investor presentation at alarm.com under investors. And then if you click on the few pages, there's a safe harbor, which I need to say that this presentation and our, you know, discussion and the one on ones are all subject to safe harbor. So with that out of the way, yes, very happy to share with you what interactive security means, and alarm.com really was the innovator here. So the big differential here, and again, this applies for residential and commercial customers, is that with interactive security, it's a smart smart home system that you can actually interact with your security system and all of your smart devices outside of the home or even inside of the home with your smart device. The difference being the legacy systems like Honeywell had prior to alarm.com, you would come home, punch in your keypad, and, you know, there's still a lot of customers out there that have that. You know, you punch in the keypad on the control panel, you activate or deactivate the alarm. You couldn't interact with your alarm system outside the home. Interactive security really means being able to interact with your security system through your smart device inside the home, outside the home. But the key distinction here is you can use your iPhone, your iPad, your computer to interact with your security system. And now we have a lot more smart devices, including video and video analytics that's really been a big game changer, and I'm sure we'll talk about that. But that's probably a good, I think, maybe introduction or overview. And alarm.com really focuses on the software. So we provide a cloud based software that we host for the dealers, and that's really our focus is providing the best technology for the for our customers, the dealers, who then, in turn, market and sell and install and service to residential and commercial customers. And today, we have over 9,000 service providers. We call them service providers even though they're independent businesses and dealers, we really work closely with them, in terms of go to market, in terms of training. And then we have over 6,800,000, end subscribers. Got it. That's really helpful. You know, I I think it's kinda, know, par for the course with every company that we've kinda that we've hosted here over the last couple days, you know, to ask about COVID. And so maybe the the question here for for you, Steve, is I mean, 2020 has obviously been a very unusual year. A lot of abrupt changes have happened in terms of buying habits and digital priorities. Can you just maybe give us a sense for how alarm.com's business was impacted, either negatively or positively even perhaps, by these global lockdowns and and work from home orders we all went through and are going through? Yeah. No. That's definitely a timely question. In the March time frame when the pandemic really initially hit and all the shutdowns occurred, we had talked about on our q one earnings call that the activations were at about seventy percent of pre COVID levels overall. And what we've seen since then is in North American residential, a very good recovery. As a matter of fact, in q two and q three, we saw a v shaped recovery. And in q three, you could even argue that our activations are actually higher than pre COVID levels. However, commercial certainly has impact been impacted the most, as you would expect, with commercial businesses, both small business and regional businesses who we sell to have been impacted because of the shutdowns. And even when restaurants and stores, coffee shops, and businesses were not able to weren't able to open at 25%, you know, they weren't able necessarily to install security systems. So the commercial has been impacted the most. Commercial has seen a bit of a recovery in q three over q two, and q two is a little bit better than q one. But we're probably running at about 70% of pre COVID levels or so for commercial. And then international has also been impacted more than North American residential. Part of that is we have a number of new dealers who are ramping up and launching and and, replacing legacy systems that were delayed because of COVID, especially in Europe where some of the countries were shut down, and there had there was more stringent shutdowns. And so those new dealers will be rolling out their you know, the alarm.com system to their existing subscribers, but it's just gonna take a little bit longer. So overall, I think that we certainly would would have preferred not to have COVID. Overall, I think we we we would be doing better. Without COVID, our results would be better, and we're looking forward to next year 2,021 when hopefully it's gonna be safe to move around. I do think that a little bit more in North American residential, I I do give a lot of credit to our dealers or service provider partners who have figured out how to operate in this environment. A number of them got, funds, PPE funds, and then they also use the equipment and protective equipment to be able to, you know, work in work in the homes and be able to make the customers comfortable that they were able to, you know, have technicians come in and, you know, check and make sure that that the the homeowner was not around. And so they've been doing a great job there. So I think that's really helped North American Residential. Then I think another factor is that when we think of alarm.com, you know, our systems have mainly gone into homes and homes, not so much into apartment houses. And so the trend certainly, we've seen this year, which is pretty, you know, pretty clear, is that people have either added homes in the suburbs or they moved to, the suburbs. And that is a perfect target market for us and our dealers. And so, we think we've benefited from that as well. And I think, that's the trend that's gonna continue. The great thing about the, system, the alarm.com system is once you have it, it's very sticky. You get all these benefits every single day, especially now that the system is not just an alarm system, but it's a smart system where you can, you know, remotely interact with the thermostat. You can see if your garage doors are closed, your video cameras, video analytics. So there's a lot of value out there. So we're really excited about how, how well we've done in North American residential. I'm looking forward to to hopefully recovering commercial and international next year. Yes, absolutely. That's actually a great segue into my next question here, Steve. I mean, definitely want to be able to double click on international and commercial. But I'd love to zoom in on U. S. Residential Maybe the question is, can you just broad brushes, of course, can you just talk about how big that market is and how much of that you think alarm.com has captured so far? Sure. So last time there was a market study done by Parks Associates, it's a couple years, about three or three or years old, so it is a little bit outdated. And Parks Associates is a research firm, you know, that focuses on security and, you know, that market. What they identified was there's about 24,000,000 homes in North America that have professionally monitored security systems out of about a 140,000,000 homes. So of those 24,000,000 homes, only about 8,000,000 have interactive security, meaning that's our market. And, again, you know, this about a year ago, we announced we had about 6,800,000 subscribers, so we certainly have a large market share. So the difference between that 32,000,000 are the homes that have the legacy systems that are not interactive. They're landline based. They're you know, the keypad, you punch in at home. And so there is what we've been benefiting from is is not just the overall growth of the market, but also the conversion, if you will, upgrade of systems from the legacy systems to interactive systems that we we invented, including, you know, the system as being a a cellular based. It has a lot of capabilities, a lot of smart features versus the legacy systems. And so what's driving that is all these applications that we've come out with and including, you know, better video cameras, the smart, thermostats. Video analytics has really been a game changer. We came out with video analytics a couple years ago based on an acquisition we did back in February January 2017, where we acquired a company called Object Video that was doing a lot of AI for the government. They had about 17 employees, a lot of PhDs in video analytics, and we've added to that team quite a bit and increased the amount of engineering focus there and and come out now with the system, a neural network system that can identify and distinguish between people, animals, and vehicles and a lot of activity that's occurring. So both commercial and residential customers can use that for smart alerts. And so it's been really, very helpful and very value added. Got it. Got it. You know, maybe building on that topic of of video, Steve. I mean, you know, one of the things that we've talked about in in in the in the couple years, I've been in the few years that you've been coming to the conference is sort of the importance of video. You know, the importance of video for dealers to generate higher ARPU right from their customers as well as provide customer with with richer customers with richer security services. And so maybe maybe the follow on question to that is, where are we in in in video adoption here? And and remind us, maybe, broad brushes, of course, how accretive that could be to alarm.com ARPU, if you will. Does that make sense? Yes. It does. Definitely. It's a very good point. Yeah. So starting with, where we are with video, a couple data points there and metrics. So, a little bit more than a year ago, we talked about, you know, within a quarter, the attachment rate of video for new subscribers was around 25%, 30%. This last quarter in q three, the attachment rate, meaning of the new subscribers, what percent included video, was around 40%. And about half of those had video analytics. And that's important because if you have, if we have a subscriber that has video, we're charging the dealer a little bit more. If you think about the average ARPU we charge the dealer, for residential would be in the mid $5 range. If the unsubscriber has video, then it's probably gonna be closer to $6. And, again, it depends upon the dealer, but just giving you some averages. $6 per month, we charge the dealer. I and then for video analytics, we charge an additional 80¢ to a dollar, to that dealer. Now the dealer in turn charges to the end subscriber for residential, you know, on average 45 to $55. If the system includes video analytics, they're probably on the high end of that and maybe even a little bit more. So the model that we've deployed is one of where we don't really raise prices to dealers or haven't in the past. What we do is we provide new features, new services, if you will, solutions that the dealers can then also pass on, higher value add to the end subscriber and then also charge a little bit more. And a good recent example is flex.io that we just introduced in q three that we're really excited about. This is a sensor that can now be used for sheds, for gates where you don't have, electricity and you don't have Wi Fi. So it's cellular based and battery operated. We've gotten very good feedback from dealers on that, and it's it's new. So, you know, we'll see the ramp, but we would expect that that should be very should do really well. And that's another example of where we will, be able to monetize that by charging the dealers 1 or $2 more per month per sensor, and then the dealers can charge a little bit more to the, to the customer. And these numbers are all residential. For commercial, the ARPU is closer to an average of $10 per month than we charge the dealer. And then the, dealer charges the, end customer, the portion business, on average around a $100 per month. That's for, alarm.com for business. Then on top of that, we have access control for business where if a, customer commercial customer has access control, then we charge that customer that dealer $3 per door per month, which can add up pretty quickly. And then if the, if the, commercial customer doesn't have alarm.com, they can still have access control, and we charge, the dealer $4 per month per door. And that's a new offering that we came out with a couple years ago. And it's it's it's new, so it's been relatively slow in terms of the ramp on that one because there is some training involved, and there is some hardware that has to be installed, you know, on the doors. But now we probably have over a thousand dealers that have been trained and installing access control, whereas for commercial, over 50% of our commercial, service providersdealers have installed a commercial offering in the last year. Got it. Got it. You know, it's a great segue into into the topic of commercial here, Steve. I mean, you know, know, I'm I'm not sure if it's been if it's been quite a year yet, but, you know, alarm.com acquired a company called OpenEye that really gives you more enterprise exposure, right, with a SaaS solution, if I'm not mistaken. Can you just give us some thoughts on how the integration of OpenEye of OpenEye has gone and and what benefits they bring to the table here now that you're yeah. What benefits they sort of bring to to the table, if you will? Yes. So we actually acquired a little bit more than a year ago in February. And, you know, OpenEye was not looking to be acquired. They were actually raising their round. They had been self funded. And we came across them and realized that this is a company that has the same culture of alarm.com, a focus on technology, very good customer satisfaction, you know, very much focused on customer service. They had about 400, 20, service providers, dealers, only about 15% overlap with alarm.com. And so we saw a good opportunity here to take our commercial offering, which is really targeted for small business, and expanding that into the enterprise. And so what what the OpenEye provides is a cloud based enterprise solution for businesses like Olive Garden, Gonzaga University. There's other there's other large customers we can talk about with the national franchisors. And so they sell through these integrators and also through universities and schools. But the great complement and a great expansion of the alarm.com offering and expands us into a $4,000,000,000 TAM market for the enterprise segment of commercial. And prior to the acquisition, OpenEye was really, providing, again, a cloud based solution, but they were pricing it as a term license to get the, payments upfront. We've, we've come out now with the SaaS offering to increase the SaaS revenue from OpenEye. Whereas prior to the acquisition, their SaaS revenue was fairly small. For 02/2020, you know, the SaaS contribution from OpenEye will be about a million dollars, but we expect in the future years that to go up quite a bit now that we've come up with a SaaS offering for OpenEye. And in fact, for the alarm.com, dealers, they can only sell the SaaS offering. And so, we think it's a great, great offering. The integration has done really, really well. Matter of fact, we've actually been investing in engineering. We've added more sales reps. Because OpenEye sales is more of an enterprise sale because the team at OpenEye is working with large integrators who are selling into, you know, like, franchisors, university systems. And so that does require a consultative sale, enterprise sale. We've invested, added a few more sales reps. We probably would have added more had enough in for COVID, but we'll probably add more next year. And we were we're expanding their facilities. And what's nice about OpenEye as well, they retained we retained all of the management team. And what I think that's part of the philosophy that Steve Trundle brought over from MicroStrategy. Remember, Steve Trundle incubated alarm.com and MicroStrategy for eight years when he was CTO there. And so when we acquired these companies, we we retain the management team, and that's very important to us. And we really scrutinize and look at part of our diligence to management team to make sure that they have the same motivations we do. And so the good news with OpenEye is all the management team that's been retained, they still have their identity. They get the benefit, of course, of our overall GNA and our ability to, you know, fund operations and help them grow. And so I think what the OpenEye team saw here is a company where they weren't selling out. They were joining up. And that's the kind of companies that we like to acquire, where there's they still have an identity, very much like Steve was incubating, you know, alarm.com and MicroStrategy. OpenEye still has its identity, but they get the benefit of overall g and a and overall marketing. They have, of course, their own marketing. And we actually are expanding their operations in Spokane, Washington, which is a new new regional area for us so we can tap into some of the engineering talent in the Washington, you know, Seattle area, which Spokane is a few hour drive from from Seattle. So we're pretty we're very excited about Hilton I. Yeah. Absolutely. Definitely definitely a thoughtful m and a strategy by Steve Trundle and and and the team. You know, I wanna in the time that we've got left here, Steve, mean, I wanna I wanna maybe shift and and talk a little bit about ADT. Right? Because you spent a little bit of time on this in on your last call. You know, I I believe I believe alarm.com's agreement with them was due to expire in mid-twenty twenty one. And Steve Trundle, I think, talked about the renewal and extension here. And so open ended questions to the extent you can. Anything you can share on how that contract is changing and perhaps how other parts of the business could be important as that as that contract changes, I think, in 2023? Does that there's a lot there. Does that make sense? Yes. Yes. So we talked about on the call that we we extended our agreement with ADT, which was set to expire in February. We extended that to the February, and we're excited to do that. We have a great relationship with ADT. And the way the agreement is is that alarm.com will continue to operate the the end customers of ADT both. Those ones that command and control and on connect their pulse application that we licensed to them through their natural life even after the contract expires and then, you know, subject to the the churn rate. And then for dealer for customers that ADT adds onto a system that they're hoping to come out with, they would pay us a license fee in recognition of all the patents we have. So the good news is here is we've you know, both ADT and alarm.com came together. We have a great relationship with them, and we're continuing to support them. And and, you know, in 02/2023, if they need more time, we'll be there. You know? And so throughout this whole process, it's been very, very good. And ADT has been very clear to let us know that there's the it's really more about their goal of of having, you know, having an old system, their own system, nothing that it that alarm.com did or didn't do. We've been a great partner to them. It's more of a, an initiative they have internally. And so we're happy to have renewed the agreement with ADT and extend it to 02/2023. And then in the meantime, we're continuing to invest in our growth areas. We talked about and answered your part of your question. The growth areas that we've been really investing in, you know, the large ones are international commercial video and video analytics and energy and energy hub, which is doing really well. That, overall group, represents about 22 and a half percent of our revenue and grew over 40 year over year even in a situation with COVID, and that does not include ADT. So we think that, you know, we we will see continued good growth there, especially after COVID. And so, we're excited about the opportunities there, and we're obviously investing in other areas as well just like we came out with flex.io. We came up with a smart water valve plus meter. And so alarm.com is, you know, very much a, focused on a SaaS, you know, engineering development, effort where we continually come up with new innovations, new products, new technologies to make sure our service providers have the latest and greatest technology because they're all competing against each other. And so all the service providers of alarm.com benefit from our overall r and d effort. And then also, of course, we're hosting all this data for them in our cloud. So they get a lot of economies of scale, and they get the best technology. We're continuing to invest in our AI neural network so we have the best AI system out there. And so, the alarm.com dealers, will continue to benefit from that level of investment. It'll be hard for others, I think, to keep up, quite honestly. Yeah. Sure. No. Definitely a lot of seeds planted here over over the years. We've definitely seen that. You know, Steve, maybe in the few minutes that we've got left, I've got so many more questions with, unfortunately, unfortunately limited time. You know, one of the things that's all that's always helpful that alarm.com does, particularly in their q three, is maybe give some broad brushes on what the out year guide could look like. And I think one point that that's worth calling out here is the profitability, you know, in the business, even even with with the hardware business, you know, as part of this. I guess the question is, can you just remind us what you've said about EBITDA profitability for next year? And maybe what are some of the moving parts to consider in that high level, of course? Yes. So we we started this a couple of years ago providing an initial look for the next year. So for for, like you said, in the Q3 earnings call, we gave an initial look. It's not really our guidance. It's more, hey. We're in the planning process. Here's where we are seeing q you know, 2021 at this point in q three. And part of that reason is because the time between the q three earnings release November to when we issue our financial results in February going through and out is a fairly long period of time. And, we respect analysts like yourself that need, you know, need some guidance. And we also don't want you to get too carried away with the, with the bills we have. So we like to, put out some initial feelers out initial initial numbers out there. And we talked about on the q three call, the EBITDA for 2021 would be around a 120,000,000, which is just a little bit shy of a 20% of, of revenue, and that's kind of been our target, 25% EBITDA. And that's in a situation where, you know, we still, in those initial numbers, still have to factor in that we still have COVID. We're not planning, you know, in those in those numbers that there's a full recovery. We still believe, you know, we well, we still anticipate, or plan for some headwinds in commercial, some headwinds in in international. And if we're surprised and pleasantly surprised, then we'll have some good upside. But that's that's not how we we look at it and the numbers we came out with. You know, with that 120,000,000, we generate a very good amount of cash flow. So typically around 65% of EBITDA flows to cash flow. This year, we'll do over 65,000,000 of cash flow. So we generate a very good amount of cash flow. And, at the same time, we're still investing very, very, good rate. 25% of our revenue goes into r and d. And so, you know, we're continuing to make the innovations and investments while generating a good amount of cash and EBITDA for our shareholders and providing a good return. We think that's the right model. Got it. Got it. Well, again, Steve, as I said, a lot more to dig in here, but, unfortunately, limited time. Thanks thanks a ton for for being with us here today, and, you know, look forward to being able to do this, you know, in person again in San Francisco like we have the last few years. Zach, and I definitely look forward to doing this in person next year. Absolutely. Thanks so much for taking care. Same here. Absolutely. You too. Bye now, Steve. Thank you. Bye bye.