Alarm.com Holdings, Inc. (ALRM) Earnings Call Transcript & Summary

Okay. Thanks, everybody, for joining us today. My name is Adam Tindle. I cover the IT, Supply Chain and Connected Devices here at Raymond James. Very happy to be here with the team from Alarm.com. We have Steve Valenzuela, who is the CFO of the company. We also have David Trone, who is the VP of IR, participating in meetings. We will do a fireside chat format for this presentation here. We'll kind of keep it fairly informal. If you do have a question in the audience, you'll have a button to click within your application here that you could submit a question. That will just e-mail a question to me. If you'd like to skip that step and e-mail me directly, it's adam.tindle, T-I-N-D-L-E, at raymondjames.com. And I'll be happy to get your question in for Steve.

And Steve, I know that there's going to be various levels of investor education here in the audience, so I figured we would start with a fairly high-level view of kind of the core market for this company. So for Alarm.com, for those that are not as familiar, if you could maybe set the stage for the quick history of the company, the size of that core residential market, the penetration level, how far we are along in terms of subscribers and what Alarm.com's competitive position. So I'll throw you a 4-part, multi-parter right at the beginning to wake you right up.

Thanks, Adam, and thanks for having us. This is a great opportunity to communicate with some international investors I know, and this is always a great conference. Certainly, as we were talking, I hope we can do this in person next year. Let's all hope. But again, good morning or good evening, everyone. This is Steve Valenzuela. Before I begin, I do want to say that we do have an investor presentation on our website. If you go to Alarm.com, under Events, you'll see a nice investor presentation, which gives you a good background. Also has a time line there. And also has a safe harbor, which I need to say, that this presentation is subject to the safe harbor. And so read that, of course. And then also, separately, there's a separate group of videos, and some of those are customer testimonials about Alarm.com. So that will give you some good background as well. But to answer the -- start to answer the 4-part question, let me give you a little bit of background, kind of how the company was started. Steve Trundle, the CEO, founder of the company, was CTO of MicroStrategy in the early -- and he was getting an alarm system installed. And he asked the installer, "What happens if somebody cuts that wire?" And the installer said, "You have no security system." So Steve realized that there was an opportunity here being a technologist and a CTO. And to make a long story short, he incubated Alarm.com within MicroStrategy from 2000 to 2008, then spun out Alarm.com in 2008 with ABS Capital as an investor. And then that was right around the time, interestingly, that Apple came out with the iPhone in the App store. So it was very good timing. And so the other innovation, major innovation, that Alarm.com came out with is to take the plain old security system, whereas in the past you could only go in your control panel at your home and turn off and turn on your alarm system. So the innovation, another innovation that Steve and team came out with was to make the security system interactive, meaning you can use an app. And we were actually one of the first apps in the Apple App Store, where you can use an app and outside of your home, you could disarm and arm your alarm system. So that was around 2008. Also important to mention, around that time, Alarm.com was trying to do DIY. We were trying to sell a lot of Best Buy out of the office and realized it was going to be a very, very long-haul. And so Steve and team realized that there's all these dealers out there that are providing security systems. And so he started signing up dealers, dealers started getting very good success rates in terms of signing up new subscribers, and that kind of built up to the point where, 2012, we got to 1 million subscribers, and then next year, we got to 2 million, and really went up from there. And today, we have over 6.8 million subscribers, and we have over 9,000 dealers. And so it really took a period of time to get that -- get the inflection point with the number of dealers we needed, and we call these dealers service provider partners because they truly are, even though they're independent businesses, they really are partners. We work closely with them to really come up with -- to provide them the software that they use to provide the security system and the smart home to their end customers, either residential or commercial. And so when you look at the go-to-market, if you will, for Alarm.com, again, we actually focus on technology. So we focus on the software. We provide the software for the dealers to be able to provide the alarm systems and the security system and smart property systems to the end subscriber. And then the dealers are focused on the marketing, sales and installation. So it's a great relationship. And we provide a lot of technology, that a lot of investors don't realize for the dealer as well, to be able to operate their back-end, to be able to interact with the central station when there is an alarm, the Alarm.com dealer portal, obviously, enables that connection. We don't actually handle the alarm itself. That's handled by the dealer themselves. And then there's a lot of analytics that dealers get from the Alarm.com system to be able to determine what's happening with the alarm system and to be able to add new subscribers. It's all through the dealer portal. So our solution is a hosted software that we actually host for the dealers and operate the software for the dealers. And so when you look at the -- kind of going to your next -- 1 part of your 4-part question here, is the market potential. So the market is very large because we operate in a number of different segments. So if you think about the history of the company, starting with North American residential, even today, of the 140 million homes in North America, only about 24 million to 25 million of those have professionally installed monitor security systems. And of those, and it depends upon which data point you look at, about 10 million or so probably have interactive security systems. And Alarm.com, at the beginning of this year, we said we had 6.8 million interactive subscribers. So we have a good share of the market there, and that's just North American residential. And then you think about commercial, which is an area that we really got into just in the last 2.5 years. The market for commercial is about $4 billion in terms of security systems. And commercial is interesting in that there is a higher penetration of security systems with commercial. But again, most of those are the legacy systems that are not interactive. So again, think about Alarm.com as being an app-based interactive security system, where you can interact with your alarm system outside of your property. So if you have a restaurant or you have a series of chain of retail stores, you can actually use the Alarm.com app to be able to see what's happening in your restaurants and you can manage access to your restaurants for your employees and you can monitor what's happening around your property. So that's -- those are really -- commercial is a big opportunity for us. International as well is a big opportunity. We started investing in international right around the time we went public in 2015. And today, we have a number of partners internationally, including Securitas is a good partner of ours. They've been expanding into a number of countries. We have dealers in both Latin America, Europe and Asia. Last quarter, we signed an agreement with ADT International, Johnson Controls, which we think is a great opportunity. It's not the same ADT as ADT in North America. It's a different company, but we think there's a good opportunity with Johnson Controls to expand internationally. So we think international is a growth opportunity for us. And then over the last couple of years, one thing that's been a major driver of growth has been video. Video has been -- the adoption of video has been very strong as the video cameras have really gotten a lot better with the technology. And then the innovations that we've come out with video analytics, where you get smart alerts and it makes the system a lot more smart and provides a lot of value and value to the end subscriber in terms of being able to tell what's happening in your property. So video analytics is a big growth area for us, and an area where we've actually driven a lot of innovation and we continue to innovate in that area. So I think that kind of gives an overview, if you will, of market opportunity. And we think we're in the early stages of a long-term growth cycle for both the Smart Property as well as the security systems. But we think, over the next 10 years, every property will be a Smart Property, given all the features and capabilities. And we're expanding into water. We have a Water Valve+Meter that we recently announced that we think is a great opportunity to protect properties from water damage, which is typically 10x the insurance claim compared to fire. And then we have the other segment as well with EnergyHub at PointCentral. So we have a wide opportunity, if you will, for both -- for the Smart Property and the security system.

Yes. That's a helpful overview, Steve. So a lot for investors to think about there. And I think the way that a lot of investors will simplify it would be to say we've got kind of the core market, how the company started, this kind of residential -- domestic residential market. Then we've got the international opportunity that you talked about. We've got the commercial opportunity that you talked about. And then some of these other things like EnergyHub, et cetera. So I just want to stay on core residential market for a moment, given it's the largest and longest-standing business under the umbrella. You touched on this a little bit, but the go-to-market there is different than some of the smart home products that investors might be more familiar with on the retail side. So just briefly touch on the go-to-market, that service provider channel. And I guess, more specifically, help investors with how the pricing model works for dealers. Why do they choose to partner with Alarm.com? What is pricing for a core residential dealer look like?

Yes. So we, very early on, again, around 2008, 2009, started partnering with the service providers. And we really provide them a lot of support, a lot of training. And so we've invested in a lot of technologies to help the service provider and their technicians to be able to be very efficient, to be able to remotely diagnose if there's a problem later with a service -- with a subscriber system, to be able to have a service provider quickly be able to come up to speed because, again, we provide all the technology. So we host it. So when a service provider becomes a dealer of Alarm.com, they don't have to invest in technologies, they have to invest in training, of course. But we provide the technology, we provide what's called the dealer portal. So a dealer comes online, they actually start adding subscribers into the dealer portal. And the way the economics work -- so we don't charge the dealer for adding a subscriber, we charge the dealer on a per month basis, the ARPU, based upon the configuration of the end subscriber system. So to give you an idea of a residential system, let's say, a dealer has installed an average system into a home, and it might have some smart features like a thermostat and some cameras, the average they might be charging the end customer, the residential customer, might be in the -- anywhere from $50 to $55 per month. Our average ARPU that we charge the dealer is in the mid- to upper $5 per month. And again, it's based -- it's kind of like a cell phone plan, the more features that the end subscriber has, the more we charge the dealer, and the more they charge the end subscriber. And so what we've done is, again, that dealer channel has been [ to us since ], we've not raised prices to the dealers. What we do is we provide incentives to the dealers. As they get more volume, the next million subscribers, they get a little bit of a discount, if you will. But what we've been really focusing on is providing the subscribers more of technology that allows the service provider to charge more and adds more value, an example being video and then video analytics. So if a dealer has a customer that has video, they're probably charging the customer a bit more, and we're probably charging that dealer in the upper end of the $5 range. If they have video analytics, which really provides a lot of value add, and in fact, some dealers are just going standardizing with video analytics because it's so compelling if the customer has video, we might charge the dealer closer to $6 -- $6.50 or $7 a month because we typically charge $0.80 to $1 more to the dealer if the customer has video analytics. So we focus on providing more innovations that allow the dealer to be able to monetize more and allows Alarm.com to charge the dealer more, but the economics work well for everybody, the end subscriber gets a better system and the dealers' able to monetize that, and Alarm.com is able to monetize that. So when you think about Alarm.com, we're really a software company. We provide the SaaS operating system for the Smart Property. And so that's really the area that we focus on. Over 70% of our revenue is recurring SaaS revenue. We do have about 30% of our revenue being hardware. About 65% of that hardware are video cameras, because video has done so well. But our goal really is to drive down the cost of hardware over time so that we drive the high recurring SaaS revenue. And when you think about the historical trend rates in terms of retention, we've talked about in the past of retention, a number of years ago was 92%, and now the retention is 94% in terms of subscribers. And we're actually seeing a continued nice little uptick in retention as the systems become more valuable. And it's -- one of these things where once you have an Alarm.com system, the benefits you have are just so compelling and it's not just the alarm system, it's fire, it's carbon monoxide, but it's also all the smart features being able to have the convenience of being able to let in your housekeeper, your dog walker, opening -- being able to tell if your garage door is open, being able to remotely close the garage door, open the locks to your house, seeing who's around your property. These are things that become very compelling, and you just get used to it and you really don't want to give it up. So it's very sticky for the end subscriber as well with all these features.

Right. And that take rate, so to speak, is fairly light relative to the overall dealer's contract, just $5 or so a month, right? So it makes sense from their standpoint. I want to zoom in on just kind of a near-term debate. You addressed a large dealer's announcement to partner with Google on the last call. We've seen partnerships like this in the past, actually have little material impact to Alarm. Actually specifically a Google partnership with a different dealer really had no impact from Alarm, but it's really -- obviously, we've seen a big pullback in the stock, and investors are concerned about it. So maybe you could just touch on the message there, recap kind of the message. And what could be similar or different about this versus the last time Google tried to do this?

I think that -- well, first of all, the dealer, we don't like to talk too much about our dealers because they're customers, but I would say that this dealer has publicly said that Alarm.com is a great partner of theirs. We partner -- we power over 3 million of their subscribers. And we work closely with this dealer. And so we have a great partnership with them. I can't really comment too much about the Google relationship. So it will be interesting to see. But we're excited about the opportunities with all of our dealers, including this dealer. We think the technology that we have is pretty complex and pretty compelling. As we have to integrate with all these different control panels, with all these different third-party devices, we integrate with like Sonos. We integrate with the garage door opening companies, Rainbow Sprinkler Systems, and that takes a lot of development, a lot of technology. And then when you think -- you multiply that by many different countries, the complexity is really there. And when you think about -- with this specific dealer, we got the relationship with this dealer back in March of 2017 when we acquired the business that was licensing the software to this dealer. And then we started working with them on their new platform that's based -- that is Alarm.com, and that took 2 years to come out with that solution. It's doing really well in the marketplace, by the way. But -- so these are very complex systems. And we're continuing innovations. We're continuing the video analytics capabilities potential. And so we feel we're in a very good position. We have great dealers and great partnerships. And so we'll see, but I think it's too early to tell. But I think if anything it perhaps makes people realize that this is a growth market, right? If a company like Google is looking at this and continuing to make investments, they probably want to have more of their devices in the home, which makes sense. We do integrate with the Nest Thermostat. The Nest Thermostat is actually pretty good. We don't have our own thermostat, but we integrate with that. We don't integrate with the Nest cameras. And I guess, perhaps going forward, we might -- that might be part of the initiative. But I think if anything, it shows that just like we believe and Steve Trundle, from the very early days, said this is going to be a long-term secular growth industry for many, many years. And having a presence in the home is really valuable. And I think that's what Google realizes. And that's -- I'm sure others like Amazon and Apple and Samsung and others and LG are also looking at this, and realizing the same. So I think if anything, it just validates the importance of this market.

Yes. And maybe you could touch on -- I mean it wasn't too long ago that you actually introduced a new software platform product with that specific dealer, the Command and Control platform. It seems like everything that we can hear on the numbers that the dealer reports and stuff like that, and the way that you guys are talking about is that, that platform has been a success. But maybe you want to just quickly touch on how long that took to develop? What kind of uptake that you're seeing there? And do you think that's a product that will continue into -- for some time now?

Yes. So that product, again, was -- the engineering work started on that after we acquired the legacy product, Pulse, that the prior company we acquired was licensing to this dealer. And so that was March '17. And then this dealer came out with their Command and Control about 2 years later in the beginning of '19. So it took 2 years. And that's based on -- that is Alarm.com software. So it took 2 years to be able to take the various look and feel that this dealer wanted for their, what they call, the Command and Control. And that's starting with Alarm.com software. So these are very complex. We had to integrate with different panels. And so it takes quite a bit of work, and there's a lot of complexity there. But yes, I would say that from what everything we've seen, we're very pleased with the success of Command and Control. I think they are also very pleased with the success. It's a very good product. Again, it's Alarm.com software that we host and we operate for this dealer. And it's a little bit different version of what we have for other dealers, but it's still the Alarm.com platform that our other dealers have. It's just that this dealer has a little bit different look and feel and some other different integrations. But other than that, they get the benefit of the Alarm.com technology just like all of our 9,000 other dealers in the video and video analytics capability. The only thing I would say is that for this dealer, we don't sell as much hardware. Typically, they don't get the cameras from us. And so -- which is fine. I mean again, hardware is simply an enabler for SaaS. And the trend over the years is one of the early innovations, again, was the video -- the radio module for making the systems cellular-based versus landline, which was at the earlier systems. And so today, we actually licensed the radio modules to the control panel manufacturers. The control panel is the brains, if you will, that goes into your closet in your home for the security system. And so we don't make those control panels, we provide technology to be able to integrate into that control panel. And then the radio module -- and so again we're licensing that radio module now. So we're selling fewer of the radio modules when we used to sell millions and millions of dollars of radio modules. So we're fine with not having as much hardware revenue.

Getting to an e-mailed question. Obviously, the heart of the question is, understand that the potential headwinds from that announcement with Google. But is there -- maybe stepping back, a bigger picture, where this is showing further investment in the Smart Property in general? And would you expect to see -- rarely do we see Google do something, and then Amazon or Apple, these other big players, not respond. As you kind of think about a crystal ball, and what those other big players could do, how do you think that would develop? And would Alarm.com potentially participate in something like that with them?

Yes. I think that's an interesting question. Again, I can't specifically comment on anything there. But I would say, generally, it's a very logical conclusion that it's -- [ we compete ] to get into the home and the ability to get into the home has been recognized, certainly, by Amazon with Amazon Alexa. They've done quite well. Although I kind of feel that the voice assistants are kind of waning a little bit, where people are maybe not using them as much, but I think the value of being in a home certainly is recognized by Amazon. I got to imagine Apple is looking at this as well, and Samsung, LG. And so I think if anything, like you said, it probably does perhaps get people to look and say, "Oh, what is Google doing here? What should we be doing?" And so I think it just highlights the importance of the industry. And I think Alarm is in a great position. We have a great market position. We have great dealers. We have the lion's share of the market. And these relationships we built -- I mean you think about it, it's been 12 years where we built these relationships with these service providers. They've standardized a lot on Alarm.com because of their technology, because of the complexity. Even those systems are becoming easier to use for the end subscriber, that makes it actually harder, if you think about it, from a technology point of view to be able to make all these innovations and with video analytics. And so I think Alarm.com, given our reputation in the industry of being a great provider, great partner to the service providers, providing great support, we have great support this center in Minneapolis, Minnesota, where we have a dedicated team that all they do, all day long, is answer questions for the service providers. Even if it's about Amazon, Alexa or Google Home, we get on the phone. And when the technician is in the home or the business, we're helping them to make sure if there's any issues. And we're continuing to innovate because, again, a lot of investors don't realize almost half of our software is supporting the dealers and their back-end. And so even this large dealer has dealers who need to have that software and the Alarm.com dealer portal. And so there's a lot of innovations and analytics for the dealer that we've developed over the years, that makes their business operate a lot more smoothly. So yes, I think it just validates that this is a very good growth area, and you want to be in the home. You want to be in the home.

Yes. And keep those questions coming. Again, if you have questions, if you want to e-mail me directly, adam.tindle@raymondjames.com. I'll be happy to get those over to Steve. We've got about 15 minutes left, Steve. I want to see if we tackle international, then commercial, then 2020 near-term stuff. So let's start on international just because we've got kind of an international flavor to this conference, international audience of investors that are largely dialing in here. You recapped earlier kind of the core residential, how it went from 1 million subscribers, to 2 million to 6.8 million and kind of hits this S-curve, so to speak, when you get these next million subscribers take the shorter period, right? So maybe just kind of compare the time line that you saw in residential to what you're currently experiencing in international. And just some of the key milestones that investors should look out for.

Yes. That's a very good point. I think international has taken longer, if you will, because of the -- each of the different countries, we have to establish relationships with different carriers, and then there's different certifications required in those countries. And then, of course, local language support. But today, the good news is we're in over 40 countries. And we've done all that heavy lifting, if you will. There's still, obviously, is a lot of opportunity internationally. We're at the very beginning stages, and we're certainly not hit that inflection point yet in international. We have some -- recently, we signed up ADT International, which is owned by Johnson Controls, and they're a new dealer we announced last quarter. We have Securitas, and we have a number of dealers in different countries. And so we're seeing good opportunities in Europe, Latin America, and just starting to see some opportunities in Asia. We have dealers in Australia and New Zealand. But I would say that international is still at the early stages of -- not hitting that inflection point yet. Prior to COVID, we had a number of new dealers who were launching this year, which has been delayed. So probably international has been more impacted by COVID, and it's more slowed down by COVID because of the lockdown. It was more severe in some of the countries, and that slowed down some of our new dealers who are rolling out the Alarm.com system to their installed base. But we think it's just a matter of time. It's not a -- it's just a slowdown on the implementations. And we're continuing to make those innovations and make those -- add those new subscribers. And so we're just slowing it down a bit. But we think international is such a great opportunity. If you think about over the years, future years, international should be 25% to 30% of our revenue. And today it's only 2% to 3% of our revenue. So we think there's quite an opportunity, but we're not at that inflection point yet for international.